Fallon Street Properties Pty Ltd v Steel & Stuff Pty Ltd - [2006] NSWCA 296

NEW SOUTH WALES COURT OF APPEAL

CITATION: FALLON STREET PROPERTIES PTY LTD v STEEL & STUFF PTY LTD [2006] NSWCA 296

FILE NUMBER(S):
40946/05

HEARING DATE(S): 19 September 2006

DECISION DATE: 02/11/2006

PARTIES:
Fallon Street Properties Pty Ltd - Appellant
Steel & Stuff Pty Ltd - Respondent

JUDGMENT OF: Santow JA Basten JA Hunt AJA

LOWER COURT JURISDICTION: Supreme Court

LOWER COURT FILE NUMBER(S): SC 4998/04

LOWER COURT JUDICIAL OFFICER: Palmer J

COUNSEL:
S. Gagler SC/B. J. Sharpe - Appellant
H.J.A. Neal - Respondent

SOLICITORS:
JL & Sons, Sydney - Appellant
Dick & Williams, Albury - Respondent

CATCHWORDS:
LEASE – Land leased with partly completed development – reduced rent payable – whether lease subject to implied term that landlord should complete the building in accordance with the interim occupation certificate under the Environmental Planning and Assessment Act 1979 (NSW) within a reasonable time
DAMAGES – relocation to new premises – whether cost of relocation so far in excess of costs for completing building that it was not reasonable compensation – whether period for costs of additional rent should not extend beyond the date of termination of existing lease

LEGISLATION CITED:
Environmental Planning and Assessment Act 1979 (NSW), ss 109M, 121B

DECISION:
(1) Allow the appeal in part and set aside order 5 made in the Equity Division on 11 November 2005 and entered on 6 December 2005
(2) In lieu thereof, give judgment for the Respondent (the plaintiff below) in the sum of $342,824
(3) Otherwise dismiss the appeal
(4) Order the Appellant to pay the Respondent's costs of the appeal
(5) Grant the Respondent a certificate under the Suitors’ Fund Act 1951 (NSW) in respect of that part of the appeal on which it was unsuccessful, if not disqualified pursuant to s 6(7).

JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40946/05
SC 4998/04
SANTOW JA
BASTEN JA
HUNT AJA
2 November 2006

FALLON STREET PROPERTIES PTY LTD v STEEL & STUFF PTY LTD

In May 2003, the Respondent leased premises from the Appellant for the manufacture, storage and sale of steel products. The building on the land was uncompleted, but the consent authority under the Environmental Planning and Assessment Act 1979 (NSW) had issued an “interim occupation certificate”. At the time the lease was negotiated the building, being incomplete, was unsuitable for use as a sale room. Accordingly, pursuant to an oral agreement, the Respondent occupied the premises on the understanding that only half the monthly rental would be payable until the building and its curtilage were completed. The Appellant did not complete the building and the Respondent suffered losses. After further disputes, the Respondent secured alternative premises.

In September 2004 the Appellant demanded possession of the premises on the basis that the Respondent had, without justification, set off moneys owing to it in respect of the premises against the rent and was in breach of the lease. The Respondent cross-claimed to prevent the Appellant disturbing its right of quiet possession of the premises and sought damages for breach of the lease. Judgement was given in favour of Respondent in its proceedings. The present proceeding was an appeal against that judgment and orders.

The issues for determination by the Court of Appeal were:

whether the lease was subject to an implied term that the Appellant would carry out the building work identified in the interim occupation certificate within a reasonable time;

whether the costs for removal to a new location and increased rent was so far in excess of the costs for completing the construction work on the premises, that the damages did not constitute reasonable compensation for the breach by the Appellant;

whether the period for which the additional rent was payable should not have extended beyond the date of termination of the current lease;

who should bear the costs of the appeal?

Held in relation to (i):
Per Basten JA (Santow JA & Hunt AJA agreeing)

Support for the implied term was found in the oral agreement as to the temporary rent reduction until the building works were completed and the statutory context of the development of the premises: at [33] –[34].

The effect of the implied term was to require the Appellant to take steps necessary to ensure that the occupation of the building under the lease was lawful and in accordance with the conditions or the development consent. A term in that form was not merely reasonable and equitable, but necessary to give business efficacy to the lease and was a term of which it could properly be said that its inclusion “goes without saying”. Such a term is not inconsistent with the express terms of the lease, but rather is necessary to allow them their proper scope of operation: at [35].

Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337, applied

Held in relation to (ii):
Per Basten JA (Santow JA & Hunt AJA agreeing)

There is a clear distinction between an assessment of the extent of the breach of the lease, for the purpose of concluding that the premises were not reasonably fit for the uses identified in the lease and, on the other hand, assessing whether rectification of the deficiencies would cost less than the acquisition of alternative premises, with the result that it was unreasonable to relocate to alternative premises: at [46].

The Appellant did not rely on the unreasonableness of relocating to alternative premises as a defence at trial when the Respondent could have led evidence to support its position. The Appellant should not be allowed to agitate the issue now: at [49].

Coulton v Holcombe (1986) 162 CLR 1, applied.

Held in relation to (iii):
Per Basten JA (Santow JA agreeing)

An inference could be drawn that the Respondent could not have obtained a lease for a shorter period. However no allowance was made for certain matters in calculating loss, nor was there any clear evidence as to the likely needs of the Respondent after the lease terminated. The costs of such leasing, absent any breach of the existing lease, was highly speculative: at [52] – [53].

Recovery of expense incurred for a period beyond the termination date would place the lessee in a better position than would have been achieved if the contract had been performed. Where the innocent party chose (albeit reasonably) a more expensive remedy, extension of that remedy beyond that which was strictly necessary to compensate for a loss directly incurred, may properly be resisted, as not reflecting the true value of that which the lessee had lost as a result of the breach. Accordingly, the appropriate element of damages for increased rent should be restricted to the unexpired term of the lease with the Appellant: at [53].

Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64; Lock v Furze (1866) LR 1 CP 441, applied.

While this challenge should have been raised at trial, the Respondent is not prejudiced by having to address it now as it does not turn upon evidence which might have been adduced by the Respondent. The argument clearly had reasonable prospects of success; it involved a discrete point which took little time to argue; it did not render past proceedings futile; it was in the interests of justice to allow it to be raised and determined on an appeal by way of rehearing.

Multicon Engineering Pty Ltd v Federal Airports Corporation (1997) 47 NSWLR 631; Iyer v Minister for Immigration and Multicultural Affairs [2000] FCA 1788, applied.

Hunt AJA (dissenting):

A further inference should be drawn that the lease was the shortest lease of suitable premises available to the Respondent. The view should not be litigated for the first time on appeal. There was no evidence of any choice between a more expensive and less expensive remedy. The basis of the claim made by the Appellant should be rejected. However the quantum of the Respondent’s claim for increased rent should be returned to the trial judge to consider issues afresh in accordance with the matters raised for the first time on appeal: at [63]–[65].

Held in relation to (iv):
(Santow JA and Hunt AJA)

The Appellant should pay the whole of the Respondent’s costs of the appeal.

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40946/05
SC 4998/04
SANTOW JA
BASTEN JA
HUNT AJA
2 November 2006

FALLON STREET PROPERTIES PTY LTD v STEEL & STUFF PTY LTD

Judgment

SANTOW JA: I agree with Basten JA save that I do not agree that the respondent should be denied recovery from the appellant of any part of its costs on appeal. The circumstances in which the appellant sought to raise the matter in its appeal for the first time on which it did succeed militate strongly against such a cost result. To that extent only, I would agree with Hunt AJA’s observations in the concluding paragraph of his judgment, I would therefore require the appellant to pay 100% of the respondent’s costs of the appeal, not 75%.
BASTEN JA: By a lease commencing on 1 May 2003, the Appellant, Fallon Street Properties Pty Ltd, leased premises at 49 Fallon Street, Albury (“the premises”) to the Respondent, Steel & Stuff Pty Ltd. The Respondent needed the premises for the manufacture, storage and sale of steel products. However, at the time it negotiated the lease with the Appellant, the building on the premises was not complete and, until the construction was completed, it was not suitable for use as a sale-room. Accordingly, pursuant to an oral agreement, the Respondent occupied the premises on the understanding that only half the monthly rental would be payable, until the buildings and its curtilage were completed.
The Appellant did not complete the construction of the building and, in mid-October 2003 there was a theft of materials and equipment from the premises, access apparently having been effected because the panelling at the side of the roller doors had not been completed. The materials and equipment taken were valued at $10,382. In November 2003, four roller doors were removed by the supplier, on the basis that the Appellant had not paid for them.
The cost to the Respondent of security prior to the replacement of the roller doors, together with the cost of replacing the doors, amounted to some $31,035.
Disputes as to the responsibility for various payments and the amount of the rent payable, together with the inability of the Respondent to use the premises for the sale its products, led it, in June 2004, to secure alternative premises in Albury. On 10 September 2004 the Appellant demanded possession of the premises, apparently on the basis that the Respondent had, without justification, set off moneys owing to it in respect of the premises against the rent and was, the Appellant claimed, in breach of the lease. On the same date, the Respondent commenced proceedings seeking to prevent the Appellant disturbing its right of quiet possession of the premises and seeking damages for breach of the lease.
The proceedings brought by the Respondent resulted in a judgment in its favour on 4 November 2005, pursuant to which it obtained the relief it sought, including judgment in an amount of $442,738 by way of damages for breach of the lease by the Appellant. The present proceedings are brought by way of appeal against that judgment and orders: see Steel & Stuff Pty Ltd v Fallon Street Properties Pty Ltd [2005] NSWSC 1148: see also orders entered on 6 December 2005.
The trial judge, Palmer J, found that “the lease was subject to an oral term that the full rent stipulated would not be payable until the building work was completed”: at [18]. He was satisfied that the building work had never been completed and that, accordingly, the plaintiff had never been obliged to pay more than one-half of the rent stipulated in the lease: at [20]. Neither of those findings is challenged.
The trial judge also found that there was “a term implied in the lease that the defendant would carry out the building work required to complete the building to the extent stipulated in the Development Consent and in the Interim Occupation Certificate”: at [30]. His Honour concluded that the Appellant was in breach of that term, by the beginning of June 2004. The Appellant challenges the existence of any such implied term. It contends that the Respondent was not only aware of the state of the premises at the time it took up occupation, but negotiated a 50% reduction in rent, without seeking any written undertaking or express oral agreement to the effect that the Appellant would complete the construction works. In those circumstances, it says that there can be no additional implied obligation in the form his Honour found.
The Respondent seeks to uphold the existence of the implied term, but further seeks to support the conclusion reached below by reliance on cl 7.4 of the lease, breach of which it says gave rise to the same damages as flowed from breach of the implied term.
The Appellant brings separate challenges to the calculation of damages, on the basis that it is unsuccessful in challenging the breach of the lease. The challenges are twofold. The first is that the cost of completing the construction works was accepted by the director of the Respondent as an amount ”in excess of $130,000”, which the Appellant is prepared to concede as $150,000. It also concedes that the Respondent was entitled to recover an amount of $41,418.51 on account of security and replacement costs arising from the removal of the doors and the separate theft of its materials and equipment. Nevertheless, it says that the amount recovered for removal to a new location and for increased rent on a new lease, being $425,508, was so far in excess of the costs of completing the construction work on the premises, that the damages so assessed did not constitute reasonable compensation for the breach by the Appellant of its obligations under the lease.
Secondly, the Appellant challenged an aspect of the calculation of loss resulting from the new lease entered into by the Respondent in respect of alternative premises, commencing on 1 July 2004 and continuing until 30 June 2009. Assuming that the Respondent was indeed entitled to recover the increased rental under the new lease (contrary to its first challenge to the assessment) it says the period for which the additional rent was payable should not have extended beyond the date of termination of the lease of the premises, namely 30 April 2008. If correct, this contention would reduce the amount of the damages by $99,914.
Lessor’s obligation to complete construction
It is convenient to deal first with the terms of the lease and to consider together the finding as to the implied term and, in the alternative, the scope and operation of cl 7.4 of the lease, as executed.
His Honour accepted the Respondent’s argument that there should be an implied term, to the effect set out at [8] above, for two reasons. The first, and primary reason, was based upon pre-contractual discussions between Mr Atkinson, the managing director of the Respondent and Mr Colquhoun, the managing director of the Appellant, in mid-April 2003. His Honour accepted Mr Atkinson’s evidence of the conversation, in the following terms, at [23]:
“Me: ‘What I am looking for is a display, administrative offices and outlet centre and somewhere I can relocate my roll forming machines and make retail sales from.’
Colquhoun: ‘When it’s complete my building should be ideal for those purposes. It appears that my deal with the tenant I was proposing to lease the building to may shortly fall through so we should be able to do a deal. When would you want to take it on?’
Me: ‘As soon as possible.’”
From this conversation his Honour concluded that the Respondent made known to the Appellant that it “required the Premises not only for the manufacture and storage of goods and materials, but also for the sale of goods to the public. In order that the Premises be suitable for the sale of goods for the public, clearly they had to be of a sufficient standard of completeness, safe and convenient for access by the public.”
The Appellant challenged reliance upon this material. It argued that the primary judge had been happy to infer from a conversation which took place in mid-April 2003 (that is later than the conversation relied upon for present purposes) that the parties had reached agreement for a reduction of rent because the building was not complete. Part of the conversation which his Honour accepted included the following statement by Mr Colquhoun, set out in the trial judgment at [9]:
“… I am happy for you to pay half the full rental until the building is finished. I will do that as soon as my financier allows further drawdown of funds. I am hopeful this will be soon.”
The Appellant complained that, if the trial judge were not prepared to infer from that conversation an express agreement to complete the construction of the building, within a reasonable time, then it formed no basis for an implied term. Indeed, because the conversation went to the very issue of completion of the building, without allocating responsibility or a time for the work to be done, it is not open to conclude that the term was so obvious that “it goes without saying”, being a necessary criterion accepted in Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 355 (Mason J).
The second matter upon which the trial judge relied was a term of the contract with respect to use of the property. That term was said to support the conclusion that the conversation to which Mr Atkinson deposed in the terms set out at [13], took place. However, the reasoning also suggests that the existence of the term was seen as direct support for the implied term, and not merely as giving credence to the pre-contractual negotiation. The relevant contractual term was set out by his Honour at [24].
“That this conversation occurred as alleged is borne out by the fact that Clause 6.1 of the lease provides as follows:
‘USE
How must the property be used?
6.1 The tenant must -
6.1.1 use the property for the purpose stated in item 17 in the schedule and not for any other purpose.
6.1.2 open for business at times usual for a business of the kind conducted by the tenant.”
Item 17 in the schedule to the lease provides as follows:
‘Permitted use: The manufacture, storage and sale of steel related products and associated activities, including (cl 6.1) the fabrication of buildings and the manufacture of roll forming and associated products.’”
His Honour drew the following conclusions from those contractual provisions at [25]:
“It is clear from the terms of the lease that the use of the Premises which the [Respondent] intended included not only manufacture and storage of goods, but sale of goods. It seems to me that the positive requirement contained in the lease that the [Respondent] not only use the Premises for the stated purpose but actually keep them open for business at times usual for a business of the kind conducted by the [Respondent], means that the Premises must be in a condition to permit the [Respondent] to do just that and therefore to comply with its contractual obligations in the lease.”
The Appellant took issue with this reasoning. Despite the mandatory language of cl 6.1, it argued that its real purpose was revealed by the final words of cl 6.1.1, namely that the premises be used for the specified purposes and “not for any other purpose”. Consistently with that reading, item 17 referred to “permitted” uses, rather than required uses. Finally, the permitted uses were drafted generically so that it cannot have been intended that the Respondent was required to carry out each named use.
At [28], the trial judge took the matter one step further stating:
The positive requirement in the lease that the [Respondent] use the Premises in a specified way mean[s] that a term must necessarily be implied that, insofar as it is within the power of the [Appellant] to do, the [Appellant] is obliged to put the Premises in a state in which that use can be effectuated by the [Respondent].”

That reasoning was no doubt logically consequent upon the approach adopted his Honour, but the conclusion, which extends well beyond the requirement to undertake works required by the interim occupation certificate, may be said to demonstrate the limitations of the approach adopted. It invites attention to the specific obligations in the lease with respect to repair and maintenance.
Clause 7 of the lease is headed “Condition and repairs” and commences with the question:
“Who is to repair the property?”
Clause 7.1 reads:
“The Landlord must -
7.1.1maintain in a state of good condition and serviceable repair the roof, the ceiling, the external walls and external doors and associated door jambs, and the floors of the property and must fix structural defects;
7.1.2 maintain the property in a structurally sound condition; and
7.1.3 maintain essential services.”
The tenant has the usual obligations of maintenance other than those imposed on the landlord, and subject to fair wear and tear. Clause 7.4, which is relied upon by the Respondent in its notice of contention, provides as follows:
“7.4If an authority requires work to be done on the property and it is structural work or work needed to make the property safe to use then the Landlord must do the work unless it is required only because of the way the tenant uses the property. But if it is any other work or is required only because of the way the tenant uses the property then the tenant must do the work.”
Clause 7 then provides remedies where the tenant fails to do any work required under the clause, but makes no provision in a case of failure by the landlord.
There are difficulties with finding in cl 7.4 an express contractual basis for the obligation of the lessor to complete the construction of the premises. Further, and as a practical matter, the trial judge made no findings in relation to what works which were required under the interim occupation certificate were structural and what might qualify as work needed to make the property safe to use. The notice of contention did not identify any particular factual findings required in this Court and the matter was dealt with in a cursory fashion in written submissions (and indeed in oral argument), with the suggestion that “at least some of the outstanding works were needed to make the property safe” and without any concerted attempt to identify necessary works which might qualify as structural.
In terms of legal principle, both parties accepted the need to apply the principles stated by Mason J in Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337. The Appellant argued that the implied obligation sought to be imposed upon it to complete the construction work might have been a reasonable term to imply, but it was not “necessary to do to give business efficacy to the contract”: ibid at 346. The term may also be capable of clear expression, but its implication is not so obvious that it “goes without saying”: ibid at 347.
Furthermore, the Appellant relied upon the established principle that it is “the business of the tenant, if he does not protect himself by an express warranty, to satisfy himself that the premises are fit for the purpose for which he wants to use them”: Edler v Auerbach [1950] 1 KB 359 at 374 (Devlin J). As Lord Millett explained in Southwark London Borough Council v Tanner [2001] 1 AC 1 at 17-18:
“In the absence of statutory intervention, the parties are free to let and take a lease of poorly constructed premises and to allocate the cost of putting them in order between themselves as they see fit. The principle applies whether the complaint relates to the state and condition of the demised premises themselves or, as in the cases cited, of other parts of the building in which the demised premises are located. … The tenants accordingly accept that, in the absence of a statutory or contractual obligation to such effect, they cannot compel their landlords to install sound insulation.”
The Appellant sought to draw support from the judgment of Balmford J in Carbure Pty Ltd v Brile Pty Ltd [2002] VSC 272, a case in which a tenant sought to have the landlord of a guest house known as Lorne Chalet carry out repairs of a structural nature. Although the tenant was not required to undertake structural repairs, the lease envisaged that if the premises were destroyed or damaged or rendered unfit for the permitted use, the obligation to pay rent might be suspended, or the lease might be terminated. However the lease expressly stated that the landlord “shall not be obliged to reinstate the premises”: Judgment at [7]. The judgment provides a helpful analysis of the relevant legal principles, including a discussion of the decision of the English Court of Appeal in Barrett v Lounova (1982) Ltd [1989] 1 All ER 351 in which an implied condition to keep the outside of premises in good repair was imposed on the landlord as necessary in order to allow the tenant to conform to its obligations to keep the inside of the premises in good repair. Doubt about the authority of Barrett were given careful consideration. However, in Carbure itself, her Honour declined to imply a term requiring that the landlord undertake the relevant repairs.
No case was drawn to the attention of the Court in which the possibility of an implied obligation to complete construction of premises had been discussed. The Appellant argued that the absence of any such authority militated against the conclusion that such an implied term was appropriate, particularly in circumstances where the parties had negotiated with respect to the anticipated failure to complete before the commencement of the lease.
Taken separately, the complaints raised by the Appellant in relation to each stage of the argument accepted below, or now presented for the Respondent, have weight. In relation to reliance on the contractual terms, that is because the lease appears to be based upon an assumption that the construction of the building had been completed and, as a result, the premises were suitable for the purposes identified in the lease. If that assumption is so, the express terms do not cover completion of construction work, but the assumption may support the implication of a term to give effect to it. That does not deal with the separate complaint relating to the pre-contractual negotiations.
Further, the Appellant argues, the Respondent took a lease of the premises in a condition which was well understood by it. It negotiated a 50% reduction in rent to apply until the building was completed. The premises were used by the Respondent in the state in which they were leased for more than a year and, indeed, the Respondent continues to use the premises and actively resisted proceedings brought by the Appellant for possession. In those circumstances, there is no room, the Appellant argued, for an implied obligation to complete the construction of the premises.
Although the Court should be slow to imply a term into a contract such as a lease, in the circumstances set out above, and especially where the result might be seen as inconsistent with general law principles as to the extent of the obligations imposed on lessors and lessees, this is not a case involving the maintenance of existing facilities, nor the extent of obligations to repair such facilities. Those obligations are dealt with in express terms in the lease, particularly in clauses 6 and 7. It is for that reason that clauses 6 and 7 do not, in their terms, cover the present dispute: as a result, the Respondent’s reliance by way of a notice of contention, on the express terms of cl 7.4 should not succeed.
On the other hand, the terms of cl 7.4 and the matters relied upon by the trial judge, as set out above, are relevant factors to be weighed in the balance in determining whether a term should be implied and what its content should be. However, the critical factor in favour of an implied term, with the content identified by the trial judge, lies in the express oral agreement with respect to rent. There was no dispute at trial as to the fact of an agreement, allowing the Respondent to pay a reduced rent; the dispute at trial related to the period and purpose of the indulgence. Significantly, neither party contended that it was to be permanent. Mr Colquhoun (for the Appellant) contended that he had agreed to allow the Respondent “to pay half rent until I think you are fully operational”: [2005] NSWSC 1148 at [10]. That evidence was not accepted, the trial judge preferring Mr Atkinson’s evidence set out above, which was corroborated by a receipt signed by Mr Colquhoun on or about 12 May 2003 for “rent being an interim rent until the building is ‘complete’”. Thus, both parties expected that the construction work would be completed. Nor was there any doubt as to which party was expected to complete it. Thus, as his Honour found at [14]:
“… on 31 March 2004 Mr Colquhoun gave Mr Atkinson a document setting out a list of work still to be done to complete the Premises. The document concluded, "On satisfactory completion of the list above full lease rent is to be paid less $1,000 per month as part payment for the goods supplied by Steel & Stuff".
There is other material consistent with the Appellant’s acceptance of its responsibility for the cost of construction work carried out during the course of the lease, including its agreement to pay for the replacement of the roller doors. Thus the only question is whether there was an implied obligation upon the Appellant to carry out the construction works as identified in the interim occupation certificate, within a reasonable time, or whether the Appellant was undertaking works from time to time to that end for its own purposes and without legal obligation to the Respondent. The terms of the oral agreement as to the temporary rent reduction, until the building works were completed, provides powerful support for the implied term.
Support for an implied legal obligation may be found not only in the express oral agreement, and the factors identified above, but also in the statutory context of the development of the premises. Thus, pursuant to s 109M(1) of the Environmental Planning and Assessment Act 1979 (NSW) (“the EP&A Act”) a person must not “commence occupation or use of the whole or any part of a new building … unless an occupation certificate has been issued”. A penalty is imposed for contravention of that prohibition. Although the City of Albury Council gave what was described as an “interim occupation certificate”, apparently on 13 June 2003, that certificate required “outstanding works to be completed within sixty (60) days from the date of this Certificate”. It is common ground that the bulk of that work was not carried out within the period specified. Although the response was somewhat dilatory, on 14 March 2005 the Council gave notice to the Appellant of an intention to serve on it an order under s 121B of the EP&A Act requiring completion of the works within 30 days and the obtaining of a “Final Occupation Certificate”. The reason given in the notice was that the conditions in the development consent had not been complied with, the interim occupation certificate had expired and the building was, therefore, currently being occupied without an occupation certificate, the result of which might be “detriment to the health and safety of the occupants of the building and the environment”. That situation, it may be inferred, had existed from mid-August 2003.
The effect of the implied term was to require the Appellant to take steps necessary to ensure that occupation of the building under the lease was lawful and in accordance with the conditions of the development consent under which the building had been constructed, prior to the negotiation of the lease. A term in that form was not merely reasonable and equitable, but necessary to give business efficacy to the lease and was a term of which it could properly be said that its inclusion “goes without saying”. Such a term is not inconsistent with the express terms of the lease, but rather is necessary to allow them their proper scope of operation. The principles explained in Codelfa Construction are satisfied. It follows that the challenge to his Honour’s conclusion with respect to the implied term should be rejected.
Damages
(a) Limiting loss to cost of completing construction
The major challenge to the award of damages was that it is unreasonable to allow the Respondent to recover the cost to the Respondent of a new lease over other premises, when the cost of completing the building works on the premises was a far smaller sum.
The Appellant did not put its case in terms of failure to mitigate loss because, as counsel accepted in the course of the hearing, no such defence had been raised below, a fact which had been expressly conceded in the course of argument at the trial. Accordingly, the challenge to the award was identified in terms of “reasonableness”, although the basis of the unreasonableness was not identified with particularity. No doubt it could be said that the Respondent had two courses of action open to it by the time, in May 2004, when it became clear that the Appellant was not able or willing to comply with its obligation to complete the construction of the premises. (That was not merely completing the building, but also the construction of paved areas and parking bays on the surrounding land.) It could either take a lease over other equivalent premises or it could undertake completion of the building work at its own expense. In either case, it would no doubt be entitled to look to the Appellant to recoup the expense incurred.
Mr Atkinson, for the Respondent, was questioned as to whether he had asked the Appellant to complete the work and whether he had himself obtained costings of the work which needed to be done. The following exchange took in his cross-examination (Tcpt, 3 November 2005, pp 28-30):
Q. If the issues that you were complaining about which you say caused you to move to another factory were so important, why didn’t you just fix them up yourself?
A. I guess we had no certainty of being recouped for a lot of items that were part of the original requirement for the building and specified in the interim documentation or the interim occupancy documentation from the Council so they were originally part of the building that was to be completed by the landlord and as such, we really expected those to be completed by the landlord … .
His Honour … Q. Have you got in your evidence anywhere any evidence of your requests to the landlord to finish all this work?
A. We regularly requested. While I haven’t put it – we haven’t got it in the document bundle, in the diary that’s used for the details of the transport, there is a section where Mr Colquhoun advised that he would carry out certain works and he continually said he would do certain tasks and when we got to the date, they never happened. We had regular meetings. … I don’t think there are any specific documents that just relate to that. There was considerable discussion.
…
Counsel: Q. So, did you at any time arrange a costing of the works to be done at the premises which was so important for you to be done?
A. Up until the time that we moved the equipment, no, there were costings subsequently done to sort out the problems.
Q. That was after you had moved to the new factory?
A. That’s correct.
…
Q. I put to you that items you wanted done would have cost no more than 20 to $30,000?
A. No, it is totally incorrect. The figures that we have had subsequently are in excess of $130,000.
Q. Did you ever give that estimate to Mr Colquhoun?
A. I believe Mr Colquhoun has those figures from another matter – a copy of those figures from another matter.”
The document referred to was not in evidence, and no questions were asked of Mr Colquhoun in relation to it.
At the time the Respondent entered into the lease of the premises at 49 Fallon Street, it had an existing lease of premises at Metry Street, Albury. It sought to expand its operation into 49 Fallon Street and use those premises for many of its operations, including sales to the public. When, due to the breach of the lease by the Appellant, it was unable to use the premises as it had intended, it sought an alternative location. The rent of the new location was almost double the combined rent of Metry Street and full rental payable on the premises at 49 Fallon Street, the subject of the lease. As a result, the Respondent claimed loss due to the incurring of extra rental at a figure of $7,137 per month, for the term of the new lease.
The new premises were larger and more expensive than the combination of Metry Street and 49 Fallon Street. An issue might have arisen as to whether it was reasonable for the Respondent to obtain larger premises, at the expense of the Appellant: c.f. Grosvenor Hotel Company v Hamilton [1894] 2 QB 836, at 840-841 (Lindley LJ), and Erica Vale Australia Pty Ltd v Thompson & Morgan (Ipswich) Ltd (1994) 29 IPR 589, 613 (Brownie J). Anticipating that challenge, the Respondent had sought to put on evidence that there were no other premises available which suited its needs at lesser expense. However, that challenge was not mounted and the proposed evidence was not admitted: Tcpt, 3 November 2005, p 14. A different sort of challenge was raised by the Appellant. It called in its case a Mr Clarke, a builder, who had apparently sworn an affidavit which was admitted without objection (but which is not contained in the appeal books): Tcpt, 3 November 2005, p 49. Counsel for the Appellant sought to lead from Mr Clarke evidence that the work required to be done at the premises was relatively minor. Counsel for the Respondent took objection to this evidence in the following terms (Tcpt, p 50):
“Could I be heard in relation to the cost issue if it is going to be continued through this affidavit. I’m in a position where there was no evidence served about cost and if my learned friend is going to make submissions at the end of the day that we should have done this work and it would only have us $10 …
His Honour: No, I am not going to entertain that submission. As I understand it, as I am presently minded, an estimate of cost may reflect on the degree to which the building was incomplete. …
But I will not entertain a submission that it would have cost $30 to $40,000 to do this work – I know you say a different amount – and it was incumbent upon the lessee to do that work instead of moving out, or if there was no breach involved because of the $30,000, whereas there may have been a breach if it was $20,000 worth of work.”
There was a further exchange between his Honour and counsel for the Respondent, following which counsel for the Appellant stated (p 51):
“The only reason is just to indicate that it is a small job, that’s all; that was the only purpose. In other words, it is consistent with the [Appellant’s] claim that these items of unfinished things were absolutely no reason to move.”
Shortly thereafter, there was a further exchange between counsel and the trial judge. His Honour indicated that he was not greatly assisted in having the builder’s views as to what was a minor job and what was more major. He stated:
“To a tenant who is expected to operate in that building in the condition it is the defects may be regarded as major for all I know because of the effect that it has on that tenant’s operations.”
In response, counsel for the Appellant suggested that the tenant’s view “would have to at least be reasonable in that regard”.
In final submissions, the Respondent identified the relevant issue as one of causation, namely that the Respondent was compelled to find other premises, because of the breach of the lease: Tcpt, 4 November 2005, p 97. In response, the Appellant submitted that the damages which might be recovered if there were a breach of contract, were “the cost of doing the work as it was entitled to do by clause 7.6 of the lease … or, alternatively, claim the difference in value to the plaintiff of the premises in its present state of repair, compared to the state it should have been in”: Tcpt, p 107. He argued that the difference in value was reflected in the reduction of rent.

The reference to cl 7.6, by itself, takes the matter no further. That clause provided:
7.6The tenant must not make any structural alterations to the property. Any other alterations require the landlord’s consent in writing (but the landlord cannot withhold consent unreasonably).
That provision is not directed to the tenant making good work which landlord should have done, nor to the recovery of costs if that step were taken. As noted above, there is no provision in the lease to that effect.
In submissions in reply, the Respondent accepted that there was an issue of “causation”. He contended (Tcpt, p 111):
“There’s no failure to mitigate pleaded. It’s never been an issue in this case that we acted unreasonably in entering into the lease of the factory. The only issue is causation.”
There is a clear distinction between an assessment of the extent of the breach of the lease, for the purpose of concluding that the premises were not reasonably fit for the uses identified in the lease and, on the other hand, assessing whether rectification of the deficiencies would cost less than the acquisition of alternative premises, with the result that it was unreasonable to relocate to alternative premises. The former issue concerns whether something needs to be done; the latter involves a choice between alternative solutions.
It is clear that the parties both directed attention to the former issue, particularly through the evidence of Mr Atkinson (for the Respondent) in his affidavits and in the course of his cross-examination. However, the Respondent did not call evidence from Mr Atkinson as to his estimate of the cost of work required at the premises, nor as to his decision-making process in seeking to obtain a lease of alternative premises, rather than complete the construction work required at 49 Fallon Street. The evidence of cost now relied upon by the Appellant was a figure extracted by counsel for the Appellant in cross-examination of Mr Atkinson. The Appellant itself put on no evidence of cost.
In these circumstances, the Respondent complains that it is not open to the Appellant to rely by way of defence on the second issue identified above, by asking the Court to infer that the Respondent’s choice of solutions was unreasonable.
That objection should be sustained. It is not a recent complaint but was clearly raised at the trial and accepted by the trial judge as valid. If the Appellant had wished to approach the matter differently it should have made clear to the trial judge that this was a basis of its challenge to the damages claimed by the Respondent. Had it done so, the Respondent would undoubtedly have sought to lead evidence of the likely cost of the construction works and from Mr Atkinson in relation to his reason for seeking alternative premises, rather than carrying out the works in question. To allow the Appellant to agitate the issue at this stage would contravene the well-established principle explained in Coulton v Holcombe (1986) 162 CLR 1. This aspect of the Appellant’s challenge should be rejected.
(b) Extension of period of lease
The second challenge to the quantum of damages falls within a more confined compass. Accepting a breach of the lease and accepting that the Respondent was entitled to find alternative premises with the result that any increase in cost could be claimed by way of damages, the Appellant nevertheless says that the claim must be limited to the period for which the lease between it and the Respondent had still to run. The assessment in fact undertaken contravened that principle because it allowed recovery for a period of 14 months after the termination of the lease of the premises, which was due to expire, on 30 April 2008. The new lease taken out by the Respondent continued to 30 June 2009. The damages claimed for the extension period amounted to $99,914.
The Respondent defends its right to damages for the period of the extension on the basis that there was no challenge at trial to the reasonableness of the period of the new lease; in other words, it was not put to Mr Atkinson that he could have obtained a new lease for a period equal to the balance of the existing lease, namely 3 years and 10 months. That complaint should be accepted, in the sense that it should be inferred that he could not have obtained a lease for the shorter period. However, there remains a question as to whether the loss flowing from the breach of the existing lease extends to the rental difference for the period of the extension.
The exercise undertaken at trial, in calculating this aspect of loss, was somewhat mechanical. Thus, no allowance was made for the present value of lease payments which would not be made by the Respondent for several years. Nor was any allowance made for the fact that, under the existing lease, the Respondent would have been subject to a rent review on 1 November 2005, with a possible increase in the amount of the rent payable for the remainder of the five year term, if the building works had been completed. Nor was any reference made to the existence of the options to renew for further five year periods. On the other hand, there was evidence that the Respondent’s business was expanding and that the building on the existing lease was inadequate for the Respondent’s needs. It had proposed certain extensions to be carried out in the future.
There was no evidence before the Court as to the length and terms of the lease at Metry Street, nor was there any clear evidence as to the likely needs of the Respondent after 30 April 2008. No doubt the Respondent’s business would have required it to lease premises beyond that date, but the cost of such leasing, absent any breach of the existing lease, becomes highly speculative. It may be that the likely cost of premises would, by then, have been close to, or at least closer to, the cost of the new lease, so that the calculation of loss based on a continuation of the existing disparity could not be justified. Further, as a matter of principle, recovery of any expense incurred for a period beyond the termination of the existing lease would place the lessee in a better position than would have been achieved if the contract had been performed: c.f. Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64, 82 (Mason CJ and Dawson J) and 99 (Brennan J). Furthermore, where there are two possible remedies, and the innocent party choses (albeit reasonably) the more expensive remedy, extension of that remedy beyond that which is strictly necessary to compensate for a loss directly incurred, may properly be resisted, as not reflecting the true value of that which the lessee had lost as a result of the breach: see Lock v Furze (1866) LR 1 CP 441. Accordingly, the appropriate element of damages for increased rent should be restricted to the unexpired term of the lease with the Appellant.
The Respondent resisted this diminution of its judgment, in part because this element, in common with the last challenge, had not been raised at trial. However, this aspect of the appeal does not turn upon evidence which might have been adduced by the Respondent in support of its case, in any practical sense. It is based on an assumption that the Respondent could not reasonably have obtained a new lease for a period coterminous with the existing lease. The complaint is rather that, as a matter of principle, recovery of rent for a period beyond the termination of the existing lease is too remote and too speculative. No doubt this challenge should have been raised at trial. Nevertheless, because it did not call for a factual response, the Respondent is not prejudiced (except in costs) by having to address it now. The argument clearly has reasonable prospects of success; it involves a discrete point which took little time to argue; it did not render past proceedings futile; it is in the interests of justice to allow it to be raised and determined on an appeal by way of rehearing: see Multicon Engineering Pty Ltd v Federal Airports Corporation (1997) 47 NSWLR 631 at 645-646 (Mason P, Gleeson CJ and Priestley JA agreeing) and Iyer v Minister for Immigration and Multicultural Affairs [2000] FCA 1788 (Full Court).
In my view, that the amount of damages awarded at trial should be reduced by the amount of $99,914, leaving a judgment for $342,824.
Costs
In the Court below, the Appellant not only resisted the claim for damages brought by the Respondent, but cross-claimed seeking an order for possession, on the basis that the Respondent had failed to pay the rent properly due under the lease. That claim was pursued on the appeal, until abandoned by counsel in the course of the hearing of the appeal. (Seven out of 19 grounds were abandoned.)
The major issue addressed on the appeal was the correctness of the trial judge’s conclusion as to the implied term of the lease. On that ground, the Appellant has failed. It has also failed in respect of the major complaint in relation to the calculation of damages, as addressed both in the notice of appeal and in its written submissions. It has succeeded in relation to a lesser complaint on a basis which was not run at trial and which was barely discernible from the notice of appeal and the written submissions. There should be no interference with the costs order made below (against the Appellant), nor should the Appellant receive its costs of the point upon which it has succeeded. On the other hand, the Respondent is entitled to receive the proportion of its costs referable to the aspects of the appeal on which it succeeded. The Appellant should pay the Respondent 75% of its costs of the appeal.
To the extent it has been unsuccessful, the Respondent should have a Suitors’ Fund Act certificate: see Wyong Shire Council v MCC Energy Pty Ltd (No 2) [2005] NSWCA 196.
Orders
I would propose the following orders:
(1)Allow the appeal in part and set aside order 5 made in the Equity Division on 11 November 2005 and entered on 6 December 2005.
(2)In lieu thereof, give judgment for the Respondent (the plaintiff below) in the sum of $342,824.
(3) Otherwise dismiss the appeal.
(4)Order the Appellant to pay to the Respondent 75% of its costs of the appeal.
(5)Grant the Respondent a certificate under the Suitors’ Fund Act 1951 (NSW) in respect of that part of the appeal on which it was unsuccessful, if not disqualified pursuant to s 6(7).
HUNT AJA: There was no challenge to the findings by the primary judge that the lease was subject to an oral term that the full rent stipulated would not be payable until the building work was completed, that such work had never been completed by the defendant, and that the plaintiff was therefore required to pay only one half of that rent.
There is a challenge to the findings by the judge that there was an implied term of the lease that the defendant would within a reasonable time carry out the building work required to the extent stipulated in certain Council documents, and that there had been a breach by the defendant of that term. This issue has been argued on appeal on a somewhat more extensive basis than it was argued before the judge. For example, reliance was placed on various provisions of the lease as to the defendant’s obligation as lessor to repair the premises. In my view, those obligations may in some cases be relevant to, but they certainly do not control, the existence and nature of the defendant’s obligation to complete the building work. I agree with Basten JA that this challenge should be rejected.
I respectfully do not, however, agree with Basten JA that the whole of the difference between the increased rent payable by the respondent pursuant to its new lease for the period after the lease from the defendant would have terminated should be deducted from the judgment entered by the judge.
I agree that the inference should be drawn that the respondent could not have obtained a new lease limited to the period which remained of the lease from the defendant. Because the hearing at first instance proceeded on the basis that there was no challenge to the reasonableness of the plaintiff’s move to the new premises, I would go further and draw the inference that the new lease was the shortest lease of suitable premises available to the respondent within the appropriate area of Albury. In my view, that issue should not now be litigated for the first time on appeal.
Basten JA (at par [53]) has reached his conclusion in favour of the defendant on the basis that, where there are two possible remedies, and the innocent party choses (albeit reasonably) the more expensive remedy, the claim for the additional cost incurred does not reflect the true value of that party’s loss. I do not myself see in the evidence any choice which was open to the plaintiff in this case. I would therefore reject the basis of the claim now made for the first time by the defendant.
I do, however, agree with Basten JA that the calculation of this aspect of the plaintiff’s case should be revisited, but on severe terms because of the way the case was conducted at first instance. I would order that the issue of the quantum of the respondent's claim for that increased rental be returned to the judge to consider that issue afresh in accordance with the matters raised for the first time on appeal and referred to by Basten JA at par [52] of his judgment.
For the same reason, I would also order the appellant to pay 100% of the respondent's costs of the appeal, despite its small success on one issue which had not been litigated at first instance. The costs of the further hearing before the primary judge should be left to that judge’s discretion.

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LAST UPDATED: 02/11/2006