Delford Pty Ltd v Coulter & Others No. DCCIV-94-1261 Judgment No. D3673

[1997] SADC 3673

MELFORD PTY. LTD. v. COULTER & OTHERS

Civil

Judge Burnett:

This action arises from what I might describe in very general terms as the ownership, leasing and subsequent assignment or transfer of lease of the Wombat Hotel at Kadina.

The Plaintiff is the owner of the freehold of the hotel.  The first-named Defendants leased the hotel from the Plaintiff in October, 1989.  In June, 1991, the first-named Defendants (with the consent of the Plaintiff) transferred the lease to Erabase Pty. Ltd.  The second-named Defendants are a firm of solicitors who advised the Plaintiff in connection with the transfer of the hotel lease.  The Third Party is a solicitor who advised the first-named Defendants in connection with the transfer of the lease.

The Plaintiff’s claim against the first-named Defendants is for moneys alleged to be due pursuant to the lease and for related loss and damage.  The Plaintiff’s claim against the second-named Defendants is for damages for alleged professional negligence arising from the transfer of the lease.  The second-named Defendants’ claim against the Third Party is also founded in alleged professional negligence arising from the transfer of the lease.  The Defendants and the Third Party all deny liability.  Erabase Pty. Ltd. is not a party to the proceedings because it was deregistered in August, 1993 and its directors were declared bankrupt in October, 1992.

When the matter came on for hearing before me on 9th July last, it was agreed by all parties that I should resolve a point of construction of a document (the transfer of the hotel lease to Erabase) as a preliminary matter.  As will appear presently, such a course must shorten the length of the case and reduce the overall cost.  It was agreed also that I should proceed with the construction of the document in accordance with D.C.R. 63.01 which reads in part:-

"   Summons for the determination of questions on a document

Any person claiming to be interested under a deed, will or other written document may apply by summons for the determination of any question arising under the document and for a declaration of the rights of the person interested."

That seemed a sensible and practical course to take, by consent, and I proceeded to hear the arguments on the construction point.  These reasons relate to that point only.

At the hearing, Mr. Smith (for the second Defendants) read a statement of facts to me.  That statement is now before me in writing and is entitled "Agreed Facts/Proceedings/Contentions".  With the statement being agreed by all parties, I set it out hereunder in full.  The statement contains information that reveals the essential background to these reasons, the portions of the pleadings involved in the construction point and the basic nature of the arguments which were developed by the parties in connection with the point.  The statement, together with what I have written, is sufficient to demonstrate the background to the point in issue at this stage.

"         AGREED FACTS/PROCEEDINGS/CONTENTIONS

1. Facts

1.1     The plaintiff company is the registered proprietor of premises at 19 Taylor Street Kadina known as the Wombat Hotel (the "premises").

1.2     At all material times the premises have operated at (sic.) a licensed hotel pursuant to the provisions of the Liquor Licensing Act, 1985.

1.3     On or about the 24th day of November 1989 the plaintiff entered into a Memorandum of Lease being registered Lease No. 7124728 (the "lease") (exhibit P1) with the first defendants Peter Robert and Frances Anne Coulter and Robin John and Pamela Anne Lutze (the "Coulters and the Lutzes") for a period of 5 years commencing on the 24th day of October 1989 at a commencing rental of $49,000.00 together with rent reviews as provided in the lease.

1.4     On the 22nd day of March 1991 the Coulters and the Lutzes entered into an agreement in writing with Colin Neil Bishop and Jean McRobbie Smania and/or nominee to sell the business the subject of the lease for the sum of $220,000.00.

1.5     The plaintiff, subject to certain terms and conditions, consented to the assignment of the lease to Colin Neil Bishop and Jean McRobbie Smania and/or nominee.

1.6     The said Colin Neil Bishop and Jean McRobbie Smania nominated Erabase Pty Ltd ("Erabase") as the purchaser of the business the subject of the lease.

1.7     The second defendants ("Wards") were the Adelaide solicitors acting for the plaintiff and were retained to act for the plaintiff in relation to the transfer of the lease from the Coulters and the Lutzes to Erabase.

1.8     In May 1991 the plaintiff by its servant and/or agent Mr Tincknell ("Tincknell") instructed Alison Evenden ("Evenden"), a solicitor employed by Wards, to attend to the transfer of the lease from the Coulters and the Lutzes to Erabase.

1.9     In June 1991 Evenden prepared the Memorandum of Transfer of Lease (the "Transfer") (exhibit P2) and a Deed of Guarantee in favour of the plaintiff from the directors of Erabase, namely Colin Neil Bishop and Jean McRobbie (nee Smania).

1.10   The transfer of the lease settled on the 24th day of June 1991 and on the same day the Liquor Licence was transferred from the Coulters and the Lutzes to Erabase.

1.11   The third party ("Germein") was acting for the Coulters and the Lutzes in relation to the completion of the sale of the hotel business from them to Erabase and was engaged to so act after the agreement was entered into, namely after 22nd March 1991.

1.12   On or about the 12th day of August 1992 due to default of obligations under the lease by Erabase the plaintiff re-entered the premises and until 11th June 1993 operated the business having obtained a transfer of the Liquor Licence to itself.

1.13   In June 1993 the plaintiff entered into a Memorandum of Lease being registered Lease No. 7587534 (the "subsequent lease") with Robert Edward Ward, Joan Ward, Darren James Kowald and Deborah Joy Kowald in respect of the premises for a term of three years commencing on the 11th day of June 1993 at a commencing rent of $36,000 per annum.

1.14   On the 17th day of August 1993 Erabase was deregistered, and on the 26th day of October 1992 Colin Neil and Jean McRobbie Bishop were declared bankrupt.

1. Proceedings

2.1     The proceedings herein were instituted by the plaintiff against the Coulters in October 1994.  Later the Lutzes were joined.

2.2     The defence of the Coulters and the Lutzes pleaded inter alia that they were not liable to the plaintiff by reason of that clause 4 of the Transfer released them from losses incurred as a result of the default of Erabase.

2.3     As a result of the plea in the defence of the Coulters and the Lutzes, the plaintiff amended its Statement of Claim in the proceedings herein in July 1995 to include a claim against Wards for inter alia failing to ensure that the Coulters and the Lutzes remained liable to it pursuant to the terms of the lease.

2.4     Pursuant to an order of this Honourable Court made on the 5th day of August 1996 a third party action was instituted by the Coulters and the Lutzes against Germein claiming inter alia that he negligently failed to secure a release for them in relation to any liability to the plaintiff under the lease arising after the date of the Transfer.

1. Contentions

3.1     Wards contend that on its proper construction the Transfer of Lease does not operate to release the Coulters and the Lutzes from their obligations under the lease.

3.2     The plaintiff challenges the above contention, as do the Coulters and the Lutzes and Germein."

The point of the exercise at this stage (and the question to be resolved) is whether or not Clause 4 of the Transfer of Lease (exhibit P2) operates to release the first-named Defendants from liability and obligations under the lease (exhibit P1).  Counsels’ arguments indicated to me that they accept that the law as it relates to obligations under a lease as between lessor and lessee and when a lease is transferred is settled.  I have researched the point and my research confirmed counsels’ views.  In those circumstances, I see no point in spending a great deal of time on the law as it bears on the situation between the Plaintiff and the first Defendants as lessor and lessee of the hotel.

Unless there is an agreement to the contrary, the transfer of a lease does not relieve the lessee of obligations under the lease in all respects.  That is so because a lease creates between the lessor and the lessee both privity of estate and privity of contract.  The basic position is summarised thus by Norse L.J. in City of London v. Fell (1993) 65 Property Planning and Compensation Reports 229:-

"A lease of land because it originates in a contract gives rise to obligations enforceable between the original landlord and the original tenant in contract, but because it also gives the tenant an estate in the land assignable like the reversion to others, the obligations so far as they touch and concern the land assume a wider influence becoming, as it were, imprinted on the term or the reversion, as the case may be, enforceable between the owners thereof for the time being as conditions of the enjoyment of their respective estates.  Thus, landlord and tenant stand together in one or other of two distinct but equal relationships.  In the first, it is said there is privity of contract between them;  in the second, privity of estate."

The above passage was approved and adopted by Gobbo J. in Haidar and Another v. Blendale Pty. Ltd. [1993] 2 V.R. 524 at p.527.

The assignment of a lease does not, of is own force, affect the privity of contract as between landlord and tenant. Assignment of lease, however, causes privity of estate as between landlord and tenant to cease and a fresh privity of estate arises as between the landlord and the assignee of the lease. See Generally Land Law, 3rd Edition, 350-355, Professor Butt, Commercial Tenancy Law in Australia, 3rd Edition, 217-220, Professor Bradbrook and Dr. Croft and to the authorities referred to in both texts. See also Re Teller Home Furnishers Pty. Ltd. (In Liquidation) Electronic Industries v. Horsburgh [1967] V.R. 313 and J. Lyons and Company, Limited v. Knowles [1943] 1 K.B. 366.

The practical result of the law as it applies in this case is that a lessee is not released from (inter alia) liability to pay rent and carry out repairs under the terms of the lease even though the lease be transferred with the lessor’s consent unless there is an agreement to the contrary.  Whether or not there is such an agreement depends upon the proper construction of Clause 4 of the Transfer of Lease.

Turning next to the question of construction, I commence by referring briefly to the relevant rules of construction which I should apply.  First, I stress that I am looking at a document not a statute.

Mr. Wilkinson (for the Third Party) referred me to the 6th Australian Edition of Cheshire and Fifoot’s Law of Contract, paragraphs 426-430 inclusive.  I am content to adopt the words of the learned authors as my own.  They state the law as I understand it to be and there is nothing in the paragraphs that differs from the submissions that counsel put to me in the case at bar.

The most important rules to follow, I think, are that I should adopt an objective approach to the construction of the document, that I should consider it in context and as a whole and that, as Stephen J. (as he then was) said in Australian Broadcasting Commission v. Australasian Performing Right Association Limited. 129 C.L.R. 99 at p.115: "The approach of courts to the construction of such documents, when they contain no ambiguity nor any other patent error or omission, cannot be other than that of an uncritical rendering of the meaning of the text."

Exhibit P1 appears to be a standard form Memorandum of Lease whereby the Plaintiff (as registered proprietor) leases to the first-named Defendants for a period of five years as from 24th October, 1989, the Wombat Hotel at Kadina for an annual rental of $49,500.00.

Although counsel have told me that nothing specifically turns on the lease itself, I note, in passing, that it contains covenants binding the first-named Defendants (inter alia) to pay the rent duly, to carry out maintenance and repairs (including painting) and to keep the premises in proper condition.  In the absence of agreement to the contrary, such matters (as a result of privity of contract between lessor and lessee) remain the responsibility of the first Defendants if the transferee (Erabase) defaults in its obligations under the Transfer of Lease.  That is precisely what is alleged to have occurred and, as Erabase and its directors are beyond the reach of the Plaintiff, it is an alleged  continuing obligation which the Plaintiff seeks to enforce.

Clause 7 of the lease provides the lessees with the right (subject to the lessor’s consent) to assign the lease.  That is what happened when, on 21st June, 1991, the lease was transferred to Erabase.  That leads me to the crucial document which is the Transfer of Lease (exhibit P2).

The document begins with what I might call a preamble.  However, the last five lines are of potential importance and I therefore set the preamble out in full.  The underlining is mine.

"In consideration of and pursuant to the Memorandum of Agreement referred to in the annexed Transfer of Lease, the Transferor named and described in the said Transfer of Lease, being registered or entitled to be registered as the proprietor of an estate as Lessee under and by virtue of the said Lease in the land therein referred to (of which the Lessor named hereafter is registered as the proprietor of an estate in fee simple), hereby transfers to the Transferee named and described in the said Transfer of Lease, who hereby accepts the same, all the estate and interest of the Transferor in the said land under and by virtue of the said Lease and upon and subject to the several agreements covenants terms and conditions hereinafter set forth"

Clause 1 of the document (which is expressed as an agreement between Transferor (first Defendants), Transferee (Erabase) and Lessor (Plaintiff) goes on to provide some agreed points of construction of the transfer which do not assist in the resolution of this case.  Paragraph 1 then goes on to provide as follows:-

"(b)    The said Transfer of Lease shall be subject in all respects to the execution by the Lessor of this Annexure to the said Transfer of Lease.

(c)    The said Transfer of Lease, if consented to by the Lessor as hereby required, shall take effect as and from the date of the said Transfer of Lease.

(d)    All rent and other payments made or payable under the said Lease by the Transferor shall be adjusted by the Transferor, as between the Transferor and the Transferee, as at the date of the said Transfer of Lease, and any necessary payment shall be made by either the Transferor or the Transferee forthwith thereafter."

The matters to be noted from clause 1 are, first, that it is agreed that the transfer document covers the agreement between the three parties concerned and, second, that there is to be a "cut-off date" for the transfer of the lease and an adjustment of rent and other payments as between Transferor and Transferee as at that date.

Clause 2 of the document reads as follows:-

1. The Transferee and the Lessor hereby mutually acknowledge covenant and agree that the several agreements covenants terms and conditions of the said Lease shall remain in full force and effect."

It is to be noted that clause 2 is as between Transferee and Lessor only.  The clause, in my view, is no more than a restatement of the obligations imposed as a matter of law.  It may purport to perpetuate the privity of estate situation but that does not matter in the context of this case.  Perhaps, as Mr. Smith said, it was good commercial practice to include the clause.  However, in the absence of any other arrangement, the law would have imposed the obligations in any event.

Clause 3 of the document reverts to obligations and rights as between the three parties.  The clause represents an agreement between Transferee and Transferor and Transferee and Lessor.  In essence, clause 3 binds the Transferee to pay the rent duly, to carry out all obligations under the lease and to indemnify both Transferor and Lessor from any claims etc. arising from the lease.  In reality, the clause is not much more than a covenant repeating the obligations created in any event by section 152 of the Real Property Act, 1886, as amended, although the words "as hereby amended" may have significance.

Clause 4 is the crucial paragraph.  I set it out in full.  The underlining is mine:-

1. The Transferor hereby covenants and agrees with the Lessor that the said Transfer of Lease shall not add to or derogate from the liability of the Transferor for the non-performance or non-observance of all or any of the covenants conditions provisos agreements and restrictions contained in or implied by the said Lease and on the part of the Transferor to be observed performed and kept prior to the date of the said Transfer of Lease."

It will be noted first that clause 4 again reverts to rights and obligations as between the Transferor and the Lessor only.  The question is whether the underlined words that conclude the clause operate to exclude any liability on the part of the Transferor for agreements etc. in the lease after the date of the transfer.  Put another way, do those words amount to an agreement which overrides the otherwise obvious liability of the Transferors to the Lessor as a matter of privity of contract and pursuant to clause 2, if that was necessary?  The first Defendants and the Third Party concede that, if those words do not exculpate the first Defendants, then they (the first Defendants) at least are liable to the Plaintiff.  Quantum, of course, is another matter.  If the first Defendants are exculpated by clause 4, then they and the Third Party would, of necessity, be dismissed from the action.

Mr. Smith argued, if I might say so, succinctly but with force and clarity.  Reduced to its essentials, the second Defendants case is this.  Clause 4 is no more than an exclusion of any suggestion that, by consenting to the transfer of lease, the Plaintiff agreed to a waiver of pre-transfer obligations owed by the first Defendants.  The suggestion that clause 4 had greater import is really a non sequitur because it is illogical to argue "that because a provision is made concerning pre-transfer liabilities with nothing at all said about post-transfer obligations, that the latter are released".  That proposition, it is contended, is supported by clause 3 which clearly recognises ongoing obligations attaching to the Transferor under the lease.

There are other aspects of the argument put forward by Mr. Smith to which I will not refer but have not overlooked.  I believe that I have distilled his main contentions.

I will refer to the arguments put forward by Mr. Beazley (for the Plaintiff) and Mr. Wilkinson (for the Third Party) together.  Essentially, their arguments and the interests of their clients at this stage are the same.  They do not seek to hold the first Defendants liable.  I acknowledge (as I did with Mr. Smith) the assistance that Mr. Beazley and Mr. Wilkinson gave me.

In essence, the Plaintiff and the Third Party contend that the transfer of lease methodically sets out the rights and obligations of the parties to the document.  Clause 3(c) states that the transfer document amends the lease.  The careful expression of rights and liabilities is exemplified by the methodology of the draftsman in indicating parties who are affected by the various clauses.  Clause 1 relates to all three parties.  Clause 2 relates to the Transferee and the Lessor.  Clause 3 relates to all three but essentially spells out the Transferee’s obligations to the others.  Clause 4 relates only to the Transferor and the Lessor.  The words at the end of clause 4 clearly have work to do and that is to release the Transferor from liability to the Lessor after the date of the transfer.  Or as Mr. Coulter (who spoke for the first Defendants who were not represented) put it:-

"We just believed that once we sold the business that was it.  We were finished, the whole thing was finished."

The argument is that the rights and responsibilities of each party are plainly and progressively set forth and that process is completed by the last few words of clause 4 which sets a limit to the first Defendants’ liability.

I have given very careful thought to what has been put.  I have read and re-read the document (exhibit P2) many times.  I have kept in mind the principles of construction to which I have referred.  I have reached the conclusion that the contentions of the Plaintiff, the first Defendants and the Third Party are correct.  What they contend requires no straining of the language of the document, it gives effect to what is written and it also reflects what is really the plain meaning of what is written.  Accordingly, I declare that, upon the proper construction of the Transfer of Lease (exhibit P2), the first Defendants are released from liability to the Plaintiff under the terms of the lease (exhibit P1) after the date of the Transfer of Lease.

I will hear counsel and Mr. Coulter further as to matters that arise from the declaration that I have made.