Heggies Bulkhaul Ltd v Global Minerals Australia Pty Ltd - [2003] NSWSC 851

No judgment structure available for this case.

Reported Decision:
59 NSWLR 312

Supreme Court

CITATION: Heggies Bulkhaul v Global Minerals Australia [2003] NSWSC 851

HEARING DATE(S): 10/12/01, 11/12/01, 12/12/01, 13/12/01, 14/12/01, 22/04/02, 24/04/02, 02/05/02, 06/05/02, 25/06/03, 26/06/03, 27/06/03, 01/07/03

JUDGMENT DATE:
19 September 2003

JURISDICTION:
Equity Division

JUDGMENT OF: Austin J

DECISION: Specific performance and declarations granted; cross-claim dismissed.

CATCHWORDS: REAL PROPERTY - leaseholds - when lessor's obligations run with the reversionary estate under s 118 - meaning of reversionary estate - scope of s 118 - relationship of s 118 with indefeasibility rules - whether registered proprieter holds land subject to equitable tenant's interest

LEGISLATION CITED: Conveyancing Act 1919 (NSW) ss 6, 116, 117, 118, 122, 127
Real Property Act 1900 (NSW) s 40, 42, 53

CASES CITED: Alcova Holdings Pty Limited v Pandarlo Pty Ltd (1988) 15 NSWLR 53
Amalgamated Investment & Property Co Ltd v Texas Commerce International Bank Ltd [1982] 1 QB 84
Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) 16 NSWLR 582
Bahr v Nicolay (No 2) (1988) 164 CLR 604
Barnes v City of London Real Property Co [1918] 2 Ch 18
Barry v Heider (1914) 19 CLR 197
Batiste v Lenin [2002] NSWSC 233
Bickford v Parson (1848) 5 CB 920
Bigazzi v Brandigo Pty Ltd (1981) 2 BPR 9341
Blane v Francis [1920] 2 KB 1 6
Breams Property Investment Co Ltd v Stroulger [1948] 2 KB 1
Breskvar v Wall (1971) 126 CLR 376
Burnside Sub-branch RSSILA Inc v Burnside Memorial Bowling Club Inc (1990) 58 SASR 324
Caboche v Ramsay (1993) 1 119 ALR 215
Chaisumdet v Ming On Trading Pty Ltd (1990) NSW ConvR para 55-518
Cole v Kelly [1917] 1 KB 252
Commonwealth v Verwayen (1990) 170 CLR 394
Con-Stan Industries Pty Ltd v Norwich Winterthur Insurance (Aust) Ltd (1986) 160 CLR 226
Dabbs v Seaman (1925) 36 CLR 538
Davies v Town Properties Investment Corpn Ltd [1903] 1 Ch 797
Dillwyn v Llewelyn (1862) 4 De GF & J 517
Dockrill v Cavanagh (1944) 45 SR(NSW) 78
Eslea Holdings Ltd v Butts (1986) 6 NSWLR 175
Foran v Wight (1989) 168 CLR 385
Frazer v Walker [1967] 1 AC 569
Friedman v Barrett [1962] Qd R 498
Fuller v Happy Shopper Markets Ltd [2001] 1 WLR 1681
Gilbert J McCaul (Aust) Pty Ltd v Pitt Club Limited (1959) 59 SR 122
Giumelli v Giumelli (1998) 196 CLR 101
Greer v Kettle [1938] AC 156
Hayes v Gunbola Pty Ltd (1986) 4 BPR 9247
Heggies Bulkhaul Ltd v Global Minerals Australia Pty Ltd [2002] NSWSC 410
Hilton Hotels (Aust) Pty Ltd v Sunrise Resources (Aust) Pty Ltd (2000) 9BPR 97,811
Junghenn v Wood (1958) 58 SR(NSW) 327
Kenneth Allison Ltd v AE Limehouse & Co [1992] 2 AC 105
Lee v Ferno Holdings Pty Ltd (1993) 33 NSWLR 404.
Leros Proprietary Limited v Terara Proprietary Limited (1992) 174 CLR 407
Loke Yew v Port Swettenham Rubber Co Ltd [1913] AC 491
Mercantile Credits Ltd v The Shell Company of Australia Ltd (1976) 136 CLR 326
Mills v Stokman (1967) 116 CLR 61
Noyes v Klein (1984) 3 BPR 97,178
Ory & Ory v Betamore (1993) 60 SASR 393
Pioneer Quarries (Sydney) Pty Ltd v Permanent Trustee Co of NSW Ltd (1970) 2 BPR 9562
Platt v Ong [1972] VR 197
Plimmer v Wellington Corporation (1984) 9 App Cas 699
Ramsden v Dyson (1866) LR 1 HL 129
Re Hunter's Lease [1942] Ch 124
Republic of India v India Steamship Co Ltd [1998] AC 878
Riches v Hogben [1985] 2 Qd R 292
Rickett v Green [1910] 1 KB 253
Riseda Nominees Pty Ltd v St Vincent's Hospital (Melbourne) Ltd [1998] 2 VR 70
Rye v Purcell [1926] 1KB 446
Silovi Pty Ltd v Barbaro (1988) 13 NSWLR 466
Snowlong Pty Limited v Choe (1991) 23 NSWLR 198
Standen v Christmas (1847) 10 QB 135
Stieper v Deviot Pty Ltd (1977) 2 BPR 9602
Thomson v Cross [1954] VLR 635
Walsh v Lonsdale (1982) 21 Ch D 9
Waltons Stores (Interstate) Limited v Maher (1988) 164 CLR 387
Wedd v Porter [1916] 2 KB 91
Weg Motors Ltd v Hales [1961] Ch 76
Wykes v Samilk Pty Ltd [1998] Aust Contract R 90-097

PARTIES :
Heggies Bulkhaul Limited (P, XD)
Global Minerals Australia Pty Limited (D, XC)

FILE NUMBER(S): SC 2810/01

COUNSEL: A. J. Meagher SC with J. D. Smith (P)
D. H. Murr SC with D. P. Robinson (D)

SOLICITORS: Pricewaterhouse Coopers Legal (P)
Williams Oates Lawyers (D)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

Austin J

19 September 2003

2810/2001 HEGGIES BULKHAUL LIMITED v GLOBAL MINERALS AUSTRALIA PTY LIMITED

JUDGMENT

1 HIS HONOUR: Heggies Bulkhaul Ltd ("HBL") is in possession of and currently operates a gravel and sand mining facility known as Penrose Quarry on land held under the Real Property Act 1900 (NSW) by Global Minerals Australia Pty Ltd ("Global"). The land comprises lots 1, 2, 3, 4 and 5 in Deposited Plan No 253462. HBL was in possession of the quarry under a registered lease No 691505 ("the old lease") for a term of five years terminating on 9 November 2000. The old lease contained three options to renew for periods of 11 years each. The lessor was Australian Machinery Equipment Sales Pty Ltd ("AMES"), but it transferred the land to Global by memoranda of transfer dated 8 December 1999, registered on 2 May 2000.

2 By its fourth further amended summons filed on 25 June 2003, HBL seeks relief of four kinds. First, it seeks declaratory orders as to the existence of, and an order for specific performance of, an agreement for a new lease of the quarry for a further term of 11 years commencing on 10 November 2000 on substantially the same terms as the old lease (subject to minor variations specified in the summons). It does so on two alternative grounds: first, it contends that an agreement for a new lease arose because it validly exercised the first option to renew under the old lease; secondly, it argues that in fact there was an agreement for a new lease made on or about 20 September 1999. In either event, HBL contends that it has an equitable interest as lessee under an agreement for a new lease, although a new registered lease has not been granted to it.

3 Secondly, HBL seeks declarations that Global is not entitled to re-enter the land or terminate the agreement for the new lease or its equitable interest as lessee under that agreement. Specifically, it contends (contrary to the allegations of Global) that it is not in breach of any obligations under the old lease or the agreement for a new lease with respect to:

4 Thirdly, in the event that it is found to have breached any of its obligations under the old lease or the agreement for a new lease, HBL seeks to be relieved from forfeiture. Fourthly, HBL seeks to recover the sum of $295,778.73.

5 Global has made a cross-claim, but on the final day of the hearing, 1 July 2003, some of the relief it previously sought was abandoned. The cross-claim current at the time of the final hearing was the amended cross-claim filed on 17 May 2002. Global there sought a declaration that the purported exercise of the option by HBL was invalid; and also declaratory relief and other orders on the ground that if the agreement for a new lease were otherwise enforceable against it, HBL breached the terms of the agreement, and that as a result of these breaches Global was entitled to re-enter the property and to recover damages. The breaches alleged in the cross-claim were:

6 The summons and cross-claim raised nine issues, which I articulated at the beginning of the hearing in December 2001:

1. Did HBL validly exercise the first option to renew the old lease?

2. Did HBL enter into a valid and enforceable agreement for a new lease of the quarry on about 20 September 1999?

3. Did HBL fail to pay royalties due under the old lease or (if there is one) the agreement for a new lease?

4. Did HBL fail to carry out restoration and rehabilitation works to the site, as required by the old lease or the agreement for a new lease?

5. Did HBL fail to comply with Council requirements either by mining in unauthorised areas or by carrying out mining works in a manner not authorised by the Council and in breach of the relevant development consents, contrary to the requirements of the old lease or the agreement for a new lease?

6. Did HBL fail to comply with other miscellaneous requirements of the old lease or the agreement for a new lease?

7. Assuming there is an agreement for a new lease, is Global entitled to re-enter the land and determine HBL's interest in the agreement, and to claim damages?

8. If so, is HBL entitled to relief against forfeiture?

9. Is HBL entitled to recover from Global the sum of $295,778.73 [as revised in June 2003]?

7 The case has had an unfortunate history. It first came before me in the Expedition List in June 2001, and after various directions hearings, I set it down for final hearing before me for a period of five days in December 2001, relying on the estimate of counsel. As the case developed at the hearing in December 2001, the estimate of counsel proved substantially inaccurate, and it was necessary to adjourn the case, part heard, to April 2002.

8 In April and May 2002 there were developments more fully described in my judgment published on 10 May 2002 (Heggies Bulkhaul Ltd v Global Minerals Australia Pty Ltd [2002] NSWSC 410). Although more may have to be said later, when I come to deal with the question of costs, for present purposes it is enough to say that Global claimed to have discovered, in the days before the hearing resumed in April 2002, that HBL had given it inaccurate information pertaining to the calculation of royalties, pursuant to orders made by the Court in October 2001. It appeared that substantial quantities of clay may have been removed from the quarry and supplied to Wingecarribee Shire Council, without payment of royalties.

9 Eventually, after hearing evidence about the "clay issue", and evidence about some other discrepancies relating to weighbridge dockets, I granted Global's application to vacate the remaining hearing dates, and I made orders for the appointment of a court expert under Part 39 of the Supreme Court Rules to report on stated questions. The expert reported in December 2002, and after further directions hearings, the case returned to me, for resumption of the part-heard final hearing, on 25, 26 and 27 June and 1 July 2003.

10 Final submissions were presented under the nine headings that I had set out in December 2001. However, it emerged from Global's final submissions that the only issues remaining in contention were numbers (1), (2), (3) (but only in limited respects), (7) (but only in the sense that, according to Global's final submissions, HBL is in occupation under a tenancy at will determinable upon one month's notice, and in those circumstances a right of re-entry does not arise), and (9). Global contended in its final submissions that issue (8) did not arise, and it conceded that no breach by HBL had been established in respect of its restoration and rehabilitation obligations, in respect of unauthorised activities, and in respect of the other miscellaneous matters raised in the cross-claim. The concessions are very significant, because a great deal of the evidence at the various components of the final hearing had been directed towards Global's allegations of breaches of those kinds.

11 Consequently the issues that I must now determine are within a relatively narrow focus. I shall do so, following the headings articulated in December 2001. However, at the hearing the submissions under heading (2) identified two separate questions, namely whether HBL entered into a valid agreement for a new lease with AMES in 1999, and whether, if it did, it can now enforce that agreement against Global. I have altered the heading to reflect those two questions.

Ownership and control of AMES and Global

12 The directors of AMES at all relevant times were Wayne Stafford, his brother Garry Stafford, and George Kekatos. The shareholders were Wayne and Garry Stafford, Wayne's wife Rhonda Stafford, Wayne's father, and Mr Kekatos. The directors of Global were, until recently, Susan Stafford (Garry's wife), Rhonda Stafford and Voula Kekatos (George's wife), although George Kekatos has recently replaced Susan Stafford as a director. Wayne Stafford had the day-to-day management of Global until very recently, when Global was placed in receivership and voluntary administration. Mr Kekatos was the chief financial officer of Global.

13 Wayne Stafford has had a close and long-standing involvement in the operation of the quarry. With his brother and his father he commenced operations at the quarry in the 1980s. After the land was leased to HBL in 1995, Wayne Stafford assisted HBL in its operations by developing new products, increasing the customer base and also assisting with the Eagle Classifying Plant. Such was Mr Stafford's involvement that it is appropriate to infer, and I do infer, that any knowledge that came to him at any time relevant to this proceeding was knowledge of AMES; and in the period commencing on 8 December 1999 when the land was transferred to Global, any knowledge of Mr Stafford was knowledge of Global.

Did HBL validly exercise the first option to renew the old lease?

14 By Clause 2 of the old lease, the Lessor devised the Land to the Lessee for the Term in consideration of the payment of the Royalties by the Lessee payable pursuant to the Lease, and granted the Lessee various rights and privileges for working the land as a quarry. Clause 3 of the old lease required HBL to pay the Lessor Royalties calculated in the manner set out in the clause. Clause 3.03 prescribed an annual Minimum Royalty for each of the five years of the Term of the Lease. Clause 3.04 provided for a New Rate to be determined by a review conducted on each of the Review Dates during the Term of the Lease, to be the greater of the Basic Royalty and an amount representing 12.5% of the average sale price of Minerals. Each of the words beginning with a capital letter is a defined term, but it is unnecessary to explore the definitions for present purposes.

15 Clause 8 of the old lease, dealing with the first option to renew the old lease, was in the following terms:

16 On 7 September 1999 Mr Kekatos wrote on behalf of AMES to Phillip Breeze, as managing director of HBL. The letter was headed "Exercise of Option Lease No 691505 Penrose Quarry". Mr Kekatos referred in the letter to clause 8.01, and proceeded:

"However the Lessor hereby confirms and agrees that it hereby waives the restriction on the early exercise of the Option of Renewal contained in Clause 8.01 of the Lease and hereby consents to the said earlier exercise of the Option for Renewal."

17 The letter also referred to the rent review provisions of clause 8.02 of the lease, and confirmed that there would be no increase in the current rate of royalty payment upon the exercise of the option of renewal, for the first year of the term of the renewed lease. The letter invited HBL to forward a formal notice of exercise. Wayne Stafford, who was a director of AMES, gave evidence that AMES requested the early exercise of the option, so that it could tell its bank that it had a further long-term lease of the property.

18 On 17 September 1999 Mr Breeze on behalf of HBL wrote to Mr Kekatos of AMES, saying:

"Following your agreement to waive Clause 8.01 and allow the Option to be exercised at today's date, HBL hereby gives notice of exercise of the first option to renew."

19 The letter did not specifically refer to the proposal regarding clause 8.02, but since Mr Breeze's letter was in reply to AMES' letter of 7 September and purported to take up the offer to exercise the option early, it is appropriate to infer (and I do infer) that the letter of 17 September accepted AMES' offer regarding clause 8.02.

20 Mr Breeze wrote to Mr Kekatos again on 20 September 1999, referring to his letter of 17 September and confirming "full details of our discussions and subsequent agreement". The letter asserted that (1) agreement had been reached to waive clause 8.01, allowing HBL to give notice of exercise of the first option at 17 September, and (2) in clause 3.04(b) the reference to 12.5% was to be replaced with 11%. The letter then said:

"Subject to your written confirmation of the second point, HBL gives notice of exercise of the first option to renew effective from November 2000."

21 On 20 September 1999 Mr Kekatos wrote to Mr Breeze referring to Mr Breeze's letters of 17 and 20 September (incorrectly designated "June") and confirmed "the Company's acceptance of the that exercise" [sic]. The letter said that AMES would instruct its solicitors to prepare and submit the renewal lease in due course. The letter continued:

"Further the Company hereby confirms that in consideration of the above early exercise of the Option of Renewal [and provided that your company continues to observe all the terms and conditions of the lease from the date hereof including the continuing obligation to pay the royalty reserved in accordance with the lease] then the Company agrees to the amendment of Clause 3.04(b) of the lease by the removal of '12.5%' in that clause and replacement with '11%' effective from this date forth."

22 It will be seen that in this correspondence, the parties to the old lease departed from the provisions of clause 8.01 concerning the exercise of the option to renew. They did so in three respects:

23 Global submitted that in light of these departures, the arrangement the parties reached was not exercise of the option contained in the old lease; rather, it was an arrangement under which the parties, by a process of counter-offer and acceptance, reached a new agreement for lease. I agree with this submission.

24 In Gilbert J McCaul (Aust) Pty Ltd v Pitt Club Limited (1959) 59 SR 122, an option to renew a lease was expressed to be conditional upon punctual payment of rent during the term. The lessee had frequently failed to pay rent punctually, but nevertheless purported to exercise the option for renewal. The Full Court of the Supreme Court of New South Wales held that the option had not been validly exercised. Their Honours said (at 123-4):

"In the present case the lessor irrevocably offered to grant a lease. Its offer prescribed the time and manner for acceptance. Only by performing the conditions prescribed could it be accepted and result in an agreement for lease. A purported acceptance without performance of the prescribed conditions would not and could not be an acceptance of the offer. It would in reality be a counter offer by the original offeree requiring acceptance by the original offeror if an agreement were to result."

25 (These observations assumed the "irrevocable offer" theory of options, but it seems to me that the outcome would be the same if the "conditional agreement" theory were applied.)

26 In my opinion a similar analysis applies where a lessee purports to exercise an option subject to a condition to the effect that the terms of the new lease be different from what is prescribed in the option clause. The lessee's notice cannot be acceptance of the lessor's offer to grant a new lease (or satisfaction of the conditions of the agreement to do so), and must in reality be a counter-offer which the lessor is free to accept or reject.

27 For present purposes a distinction between two situations must be borne in mind. In the first situation, the parties to a lease validly amend the terms of the lease and then the lessee exercises the option to renew the amended lease. There has been a valid exercise of the option to renew the lease, although the lease which is renewed has been amended. In the second situation, the lessee purports to exercise an option to renew the lease conditionally upon the lessor agreeing to an amendment that will apply in the renewed term. The lessor agrees to the amendment and to the renewed term. In the second situation, the correct analysis is that there has been no renewal of the lease, but instead, the lessee has offered to take a new lease on terms not identical with the lease that would arise upon exercise of the option. The lessor has accepted the lessee's offer to take a new lease on those different terms, and so an agreement to grant a new lease has arisen.

28 In my opinion the present facts contain elements of, and variations to, those two situations. The offer to allow early exercise of the option and keep to the current royalty rate for the first year of the renewed term came from AMES, by its letter of 7 September 1999. HBL was given the opportunity to agree to the variation of clause 8.01 prior to exercising the option under the varied clause. By its letter of 17 September, HBL purported to accept the variation of clause 8.01 to allow early exercise, and then forthwith to give notice of exercise of the option pursuant to the amended clause. By implication, it accepted the offer to vary clause 8.02 to maintain the current royalty rate for the first year of the renewed term.

29 Thus, it appears from these two letters that the parties agreed to vary the terms of the existing lease prior to the exercise of the option, and immediately thereafter the option was exercised. If there were nothing more to the facts, this would be an example of the first situation, and there would have been a valid exercise of the first option to renew the old lease (as varied prior to exercise).

30 However, it appears that there were some additional discussions, confirmed in HBL's letter of 20 September but not appearing in its letter of 17 September. The additional discussions led to an agreement between HBL and AMES to vary clause 3.04(b) for the renewed term, by replacing 12.5% with 11%.

31 It is not clear from the evidence whether the arrangements to alter the percentage royalty rate in clause 3.04(b) were reached, in discussions, before or after HBL's letter of 17 September, though clearly enough to discussions reached their conclusion before HBL's letter of 20 September. If the discussions were concluded before 17 September, then HBL's letter of that date did not completely reflect the arrangements between the parties and may not have amounted to a valid exercise of the option to renew at the unamended royalty rate. If the discussions about the royalty rate were not concluded until after 17 September, then the letter of 17 September would appear to have been a valid exercise of the option to renew the lease at the old royalty rate.

32 It seems to me, however, that it does not matter whether the discussions about the revised royalty rate were concluded before or after the letter of 17 September. If the letter of 17 September gave rise to a valid exercise of the option to renew at the old percentage royalty rate, that renewal was revoked by the correspondence of 20 September. HBL's letter of 20 September, properly construed, was an offer to exercise the option upon a new basis, namely the basis that the percentage royalty rate in clause 3.04(b) be amended from 12.5% to 11%. That letter was not an offer to amend the agreement for a renewed lease that had arisen out of the prior exercise of the option, because in its terms, the letter offered a fresh exercise of the option to renew, subject to AMES' agreement to the amended percentage royalty rate as well as to early exercise. It was that new offer that AMES accepted by its letter of the same date.

33 Thus, on 20 September 1999 there was an offer of a new lease on certain terms by HBL to AMES, and acceptance of that offer, creating an agreement for a new lease. Notwithstanding some of the language of HBL's letter and later correspondence, there was no exercise of the existing option for renewal.

Did HBL enter into a valid agreement for a new lease of the quarry on about 20 September 1999, and if so, is the agreement now enforceable against Global?

34 Global conceded that the correspondence summarised above gave rise to a new agreement for lease, though it was not an exercise of the option contained in the old lease. So much is clear from the terms of the correspondence itself.

35 The new agreement for lease was between HBL and AMES. It was an agreement for a lease for 11 years, commencing 10 November 2000, on the same terms and conditions as if HBL had exercised the option, subject to replacing 12.5% with 11% in clause 3.04(b). It was in writing, and there is no reason to suggest that it would not have been enforceable by HBL against AMES, assuming there was no breach by HBL entitling AMES to terminate. The more difficult question is whether the new agreement is now enforceable by HBL against Global, as the present registered proprietor of the land.

36 Later in these reasons for judgment I shall consider some evidence to the effect that HBL and AMES agreed to vary the payment terms of the old lease during its currency. These agreements were to the effect that:

· the lessor would not be entitled to any royalty is in respect of "clay" sold by HBL to Wingecarribee Shire Council;

· the Standard Quantity of Minerals, after which the Further Royalty was payable, would be increased from 250,000 tonnes to 350,000 tonnes (referred to in some evidence as the "holiday tonnes" arrangement); and

· the reduction in the percentage royalty rate payable under clause 3.04(b) from 12.5% to 11%, agreed in connection with the new lease, would take effect during the term of the old lease.

37 The agreement for a new lease incorporated the variations to payment obligations that had been agreed between AMES and HBL. As with the obligation to grant a new lease, there is a difficult question whether any of these variations agreed between HBL and AMES are enforceable against Global.

38 AMES transferred its reversionary interest in the property to Global on 8 December 1999. The transfers were registered on 2 May 2000. Wayne Stafford gave evidence explaining that the transfers were made after the National Australia Bank had called up a loan to AMES which had been guaranteed by the directors and shareholders.

39 There are analytically two grounds of upon which HBL contends that the agreement for a new lease, incorporating variations of the payment terms, is enforceable against Global. First, HBL says that s 118(1) of the Conveyancing Act 1919 (NSW) permits it to enforce AMES' contractual obligation to grant a new lease against Global, notwithstanding the law of privy of contract. Secondly, HBL submits that Global holds its interest in the land subject to HBL's unregistered equitable interest under the agreement, having regard to principles of priority between competing interests and proprietary estoppel, or that it is prevented from denying HBL's claim to a new lease by an estoppel by convention. I shall consider these two grounds in turn.

40 The two grounds are not entirely unrelated, although their connection is difficult. Problems arise because s 118 stems from 16th century English legislation operating in a system of common law title, upon which the more modern concept of title by registration under the Real Property Act has been superimposed, and subsequently the old provision has been substantially re-enacted without clarification of its role in the registered title system.

Section 118

41 Section 118(1) is in the following terms:

"The obligation of a covenant entered into by a lessor with reference to the subject-matter of the lease shall, if and as far as the lessor has power to bind the reversionary estate immediately expectant on the term granted by the lease, be annexed and incident to, and shall go with that reversionary estate, or the several parts thereof, notwithstanding severance of that reversionary estate, and may be taken advantage of and enforced by the person in whom the term is from time to time vested by conveyance, devolution in law, or otherwise, and if and as far as the lessor has power to bind the person from time to time entitled to that reversionary estate, the obligation aforesaid may be taken advantage of and enforced against any person so entitled."

42 Subsection (2) makes it clear that the section applies to leases made after the commencement of the Act.

43 Section 6(1) of the Conveyancing Act states that "except as hereinafter provided, this Act, so far as inconsistent with the Real Property Act 1900, shall not apply to lands, whether freehold or leasehold, which are under the provisions of that Act." However, there is a more specific provision in s 116, which overrides s 6(1) for present purposes. Section 116 states that "the provisions of this Part [Part 8, which includes s 118] shall apply to leases and sub-leases of land under the provisions of the Real Property Act 1900, notwithstanding anything in that Act contained."

44 The implications of s 116 will be explored later. At this stage it should be noted, however, that s 40(3) of the Real Property Act replicates s 118 to a certain extent. It provides, inter alia, that the registered proprietor is to be regarded as being seized of the reversion expectant upon any registered lease, and is subject to the covenants and conditions expressed to be performed on the part of the lessor. Section 118 seems to have a wider operation in two respects, as regards Real Property Act land: first, it is not ex facie confined to registered leases; and secondly, it extends the right of enforcement to an assignee or other person in whom the term is vested.

45 Section 118 derives from the statute 32 Hen VIII c 34, s 2 (the Grantees of Reversions Act 1540). The common law did not allow a covenant to run with the reversion, except to the extent that the assignee of the reversion was permitted to sue upon those implied covenants that resulted from the fact of demise: Wedd v Porter [1916] 2 KB 91. The statute of 1540 altered the common law, giving lessees and their assigns the same rights and remedies against grantees of the reversion, for breach of any covenant or condition of the lease, as they might have had against the lessor: see GP Stuckey, The Conveyancing Act 1919-1969 with Annotations (2nd ed, 1970), p 248. But the section gave rise to a number of difficulties. It was held to apply only where the original lease was by deed, on the principle that agreements by parol are not covenants and cannot run with the land: Standen v Christmas (1847) 10 QB 135; Bickford v Parson (1848) 5 CB 920. This problem has been held to be overcome by the wording of the successor provisions to the 1540 Act, as noted below. Another difficulty with the old statute was that upon severance of the reversion, covenants could not be enforced by the assignee of part of the reversion. This problem has been overcome by the introduction in the modern statute of the words "or the several parts thereof, notwithstanding severance of that reversionary estate": see Woodfall's Law of Landlord and Tenant (28th ed, 1978 by VG Wellings), Volume 1, p 455.

46 The most important limitation on the scope of the 1540 Act was that it applied only to covenants that "touched and concerned" the land: see Davies v Town Properties Investment Corpn Ltd [1903] 1 Ch 797; Barnes v City of London Real Property Co [1918] 2 Ch 18. The modern provision refers to an obligation "with reference to the subject-matter of the lease", a phrase that is, at least potentially, less restricting. In Breams Property Investment Co Ltd v Stroulger [1948] 2 KB 1, at 7, Scott LJ (with whom Bucknill and Asquith LJJ agreed) said:

"The phrase 'subject-matter of the lease' was, as we know, substituted for the ancient expression 'touching and concerning the land.' Professor Cheshire's elucidation of its meaning on pp.214-5 of the 5th ed. of his book on 'Modern Real Property,' in my respectful opinion, supplies the true test. 'If a simple test,' he says, 'is desired for ascertaining into which category a covenant falls, it is suggested that the proper inquiry should be whether the covenant affects either the landlord qua landlord or the tenant qua tenant. A covenant may very well have reference to the land, but, unless it is reasonably incidental to the relation of landlord and tenant, it cannot be said to touch and concern the land so as to be capable of running therewith or with the reversion.'"

47 Their Lordships held that a provision in an agreement between landlord and tenant restricting the landlord's right to give a notice to quit satisfied Professor Cheshire's test and ran with the land, and was therefore enforceable against a transferee from the landlord.

48 Global has made an impressive submission as the scope of s 118(1), that deserves to be set out in full:

The Law of Real Property

49 [The submission then addresses the question of priority between the equitable interest of a tenant under an agreement for lease and the legal or equitable interest of a transferee from the lessor. I consider that point below.]

50 Interesting though this submission is, my view is that it misconceives the operation and effect of s 118. It is undoubtedly correct that, where the holder of an estate in fee simple grants a lease, the reversionary estate during the term of the lease is that part of the estate in fee simple that the lessor has not disposed of by granting the lease. However, s 118 does not purport to annex the lessor's covenant obligation solely to the lessor's reversionary estate during the term of the lease. It annexes the lessor's obligation to "the reversionary estate immediately expectant on the term granted by the lease" [emphasis supplied]. In a simple case where the lessor is the holder of the fee simple not subject to any other intermediate interests, the reversionary estate to which the section applies includes both the lessor's reversionary estate during the term of the lease, and the full fee simple upon the expiration of the term of the lease. Upon the expiration of the term, the fee simple becomes the estate immediately expectant on the term granted by the lease. The lessor's obligations then run with the fee simple, although (being obligations by covenant of the lessor qua lessor to the lessee qua lessee) they remain obligations connected to the former lease. Section 122 of the Conveyancing Act, which was referred to by counsel for Global in oral argument, is not of assistance, being equally open to the construction urged by Global and the construction preferred by me.

51 If Global's submission were correct, the original lessor would have no obligation to an assignee of the original lessee once the lease had been terminated, even in respect of breaches of covenant that occurred prior to termination. Indeed, it would be in the lessor's interests, once the lease had been assigned by the original lessee (to whom, alone, the lessor's obligations were owed in contract) to achieve early termination. If the termination itself involved a breach of obligation, the assignee of the lease would be unable to enforce the obligation or take advantage of it against the lessor. A similar analysis would apply in a case where the original lessee remained in possession, but the lessor assigned the freehold. Those undesirable conclusions should be reached only if the statutory language demands that outcome. It does not do so, in my view, because the reversionary estate identified in the section is not only the lessor's reversionary interest during the term of the lease, but also its reversionary interest expectant on the lease upon its termination.

52 Global did not cite any cases which specifically support its construction of the section. Moreover, its construction of the section is inconsistent with the outcomes in decided cases, although the cases to which I have been referred do not expressly consider the meaning of the words "reversionary estate immediately expectant on the term granted by the lease". It has been held that a covenant to renew a lease runs with the reversion under the section and is therefore enforceable against a successor in title of the lessor - a rule that became firmly established by judicial decisions early this century: see Alcova Holdings Ltd v Pandarlo Pty Ltd (1988) 15 NSWLR 53, at 61 per Bryson J; note also Re Hunter's Lease [1942] Ch 124. In Weg Motors Ltd v Hales [1961] Ch 76 (cited with approval in Mercantile Credits Ltd v The Shell Company of Australia Ltd (1976) 136 CLR 326) the English Court of Appeal held that the UK section applies to permit a lessee to obtain specific performance, against a successor in title of the lessor, of an agreement for lease arising out of the exercise of an option agreement that had been entered into contemporaneously with the lease. Although the lessee's writ was filed before the expiration of the term of the original lease, the hearings at first instance and on appeal occurred, and relief was granted, after the term had expired. Chaisumdet v Ming On Trading Pty Ltd (1990) NSW ConvR para 55-518, if correctly decided (see the discussion below), would also be contrary to Global's submission.

53 To assess the application of s 118 in the present circumstances, it is useful to begin with its application to a simple case of option to renew. The following propositions may be stated:

54 Here, however, there has been no exercise of an option but instead, the parties to an existing lease have, during the term of the lease, varied the payment obligations in certain ways, and they have also entered into an agreement by correspondence for the grant of a new lease. Does s 118 apply so as to bind the transferee to the obligations that have arisen under the variations of the existing lease and the agreement for a new lease, to which it was not party, so that the lessee can enforce these obligations against the transferee? This question raises three issues of construction of s 118:

· first, whether the words "the obligation of a covenant" apply where the obligation arises out of an agreement under hand but not under seal;

· secondly, whether the wording of s 118, which literally applies to any "obligation … entered into by a lessor with reference to the subject-matter of the lease", should be held to apply to agreements to vary payment obligations in an existing lease, and to an agreement between lessor and lessee during the term of the lease, but not forming part of the lease, with respect to the creation of a new lease on partially different terms;

· thirdly, given that the land in the present case is held under the Real Property Act, and the transferee has become the registered proprietor of the land, whether the operation of the section is subject to the statutory rules of priority under the Real Property Act.

55 As to the first issue, the Conveyancing Act of New South Wales does not assist us by offering an extended definition of "lease" (compare Thomson v Cross [1954] VLR 635, where Sholl J relied (at 644) on definitional provisions to hold that the Victorian equivalent of s 118 extended to any tenancy in writing, though not to a parol tenancy; and as to the definitions relevant to the present English provisions, see Woodfall's Law of Landlord and Tenant, op cit, p 455-6. The position in this State is, in my opinion, governed by some English cases, which have decided that the words "the obligation of a covenant" should be construed so as to take into account the rule in Walsh v Lonsdale (1982) 21 Ch D 9, under which equity will treat a lessee in occupation under a written lease or written agreement for lease as equivalent to a legal lessee, where specific performance is available. Thus, in Weg Motors Ltd v Hales, where an option to renew was granted under an agreement in writing but not under seal, Lord Evershed MR and Harman LJ said ([1961] Ch at 73):

"It is next objected that the option contract is under hand only. We have been unable to see the force of this. The lease itself would have taken effect in equity if under hand only, and we do not think that the word 'covenant' in section 142 [of the Law of Property Act 1925, not materially different from s 118] is limited to covenants under seal."

56 Donovan LJ reached the same conclusion (at 76).

57 There were earlier decisions to the same effect, dealing with the predecessor to s 142 of the Law of Property Act, namely s 10 of the Conveyancing Act 1881. While it was held in Blane v Francis [1920] 2 KB 1 6 that the section did not apply where the agreement was merely verbal, in Rickett v Green [1910] 1 KB 253, at 259, Darling J said that although a lease for a term exceeding three years, not under seal, was void at law, "still in equity it is looked upon as a lease, and in my judgment must be treated, as between the parties, as if it were a lease under seal." Then in Cole v Kelly [1917] 1 KB 252 it was held that the section applied where both parties signed letters embodying a bargain for the continuation of a tendency. In Rye v Purcell [1926] 1KB 446, at 452, McCardie J extended the latter decision to a case of a verbal agreement confirmed by letter signed on behalf of lessor only.

58 I see no reason for declining to follow the English cases in the construction of s 118 of the New South Wales Act. The principles reflected in the cases were established before the enactment of the Conveyancing Act, and may be taken to have been before the draughtsman of the New South Wales legislation.

59 As to the second issue (whether s 118 applies to the lessor's obligation to accept reduced payments under agreements to vary payment obligations in an existing lease) and its obligation to grant a new lease under an agreement between lessor and lessee for a new lease, there are some relevant observations in Weg Motors Ltd v Hales. The full facts of the case were complicated, but the only facts relevant to the present case may be stated briefly. Two parties entered into an agreement under hand that in consideration of one of them (the lessee) taking a lease from the other (the lessor), "executed after these presents", the lessee would have an option to renew on specified terms. The lease was executed immediately after that agreement, on the same day, and the lessee went into possession under it. One of the questions was whether the option to renew could be exercised and enforced by the lessee against a transferee of the reversion, having regard to s 142 of the Law of Property Act 1925 (UK).

60 The application of the section to the instant facts raised an issue that does not arise in the present case. There the option agreement was entered into before the lease. The English Court of Appeal held that the relationship of lessor and lessee came into existence when the option agreement came into force, because the option agreement did not commence until, in consideration of lessor's promise to grant an option, the lessee executed the lease (at 69 and 73 per Lord Evershed MR and Harman LJ, and at 76 per Donovan LJ). Consequently the lessor's obligation to grant a renewed term on exercise of the option was properly described as an obligation of a covenant entered into by the lessor with respect to the subject matter of the lease.

61 On the question whether the section applies to a covenant not contained in the lease itself, Lord Evershed MR and Harman LJ said (at 73):

"Next, it is said that this covenant, like the covenants referred to in the preceding section 141 which deals with the benefits of a lessee's covenants, only applies to covenants contained in the lease. That is so in the case of section 141 but in this section 142 the language is different. It is 'entered into by a lessor with reference to the subject matter of a lease.' We take 'subject matter' to mean the demised property. This contract satisfies those words and we see no reason why, provided the relationship of lessor and lessee exists, a covenant to renew should not be included in an independent document."

62 Donovan LJ said (at 76):

"The section does not in terms require a covenant for renewal to be in the lease itself. In this respect it differs from the Statute of Henry VIII and section 141 of the Act, and the difference seems to me to tell as much in favour of the plaintiffs [the lessees, who were seeking to enforce the promise to renew] as the defendants. The argument would be stronger if it were true that when the option agreement was signed the relationship of lessor and lessee of the premises affected had not been brought into being, but I think it had."

63 It appears to me that the agreements to vary payment obligations in the old lease fall within the wording of s 118, on the authority of the Weg Motors case. They were entered into by the lessor, AMES, with reference to the subject matter of the lease They satisfy Professor Cheshire's exposition of the meaning of s 118, adopted by the English Court of Appeal in Breams Property Investment Co Ltd v Stroulger. They are arrangements entered into by the lessor and lessee at the time, qua landlord and qua tenant respectively.

64 However, the position regarding the agreement for a new lease is not so straightforward. The agreement is not an agreement to grant an option, but it is nevertheless (being an agreement to grant a new lease on partially different terms from the existing lease) capable of being regarded as an agreement creating an "obligation … entered into by an existing lessor with reference to the subject-matter of the lease" in favour of the lessee.

65 The difficulty is that an agreement between lessor and lessee for a new lease upon the expiration of the existing term does not appear to fit within Professor Cheshire's exposition of the meaning of s 118. When a lessor agrees to grant a new lease in circumstances where there is no question of exercise of an option to renew, it is not doing so qua landlord but qua holder of the fee simple (or any other estate capable of supporting the intended lease). The agreement is not made with the tenant qua tenant, but with a person whose existing capacity as tenant is not a prerequisite to the agreement.

66 In my opinion, however, Professor Cheshire's test is satisfied in the special circumstances of the present case. One starts with the proposition that the test is satisfied where the lessor is obliged to grant a new lease because an option for renewal contained in the existing lease has been exercised. In such a case the covenant to grant a new lease is found in the option clause in the original lease, and is therefore a covenant affecting the landlord qua landlord and the tenant qua tenant. Next, the Weg Motors case is authority for the proposition that the test is satisfied where the option for renewal is not in the lease, but is found in an agreement which is expressed to operate upon commencement of the lease and is between the lessor and lessee as parties. The mere fact that the option agreement is separate from the lease does not, in those circumstances, prevent it from being said that the lessor's obligation under the option agreement is an obligation undertaken by the lessor qua landlord in favour of the lessee qua tenant.

67 Now, the present case is not so very different from that situation. This is not a case where a lessor and a lessee have commenced their negotiation for a new lease by turning to a blank page. Here, there was an option for renewal in the lease instrument itself. The negotiations were not conducted in isolation from the option clause. Rather, they were specifically directed to the exercise of the option, subject to three amendments. Although in law the agreement that emerged was not an agreement arising out of exercise of the option, it was an agreement based on the existing option clause, modifying its effect only to a limited degree. I have no difficulty in concluding, on the special facts of this case, that the lessor's obligation to grant a new lease under this agreement is as much an obligation of the lessor qua landlord to the lessee qua tenant as was the obligation in the Weg Motors case.

68 As to the remaining ingredients of s 118, it is not disputed that in the present case, the lessor had the power to bind the reversionary estate to the obligation to vary the payment obligations. Nor can be disputed that the lessor had the power to bind the reversionary estate to the obligation to grant a new lease, because it was at the time the registered proprietor of the estate in the simple, seeking to extract a commitment from the lessee to a new lease in order to satisfy its mortgagee's requirements.

69 Section 118 allows the lessee or its assigns to enforce the obligation against a subsequent holder of the reversionary estate only "if and as far as the lessor has the power to bind" that person. It seems to me that a lessor who negotiates a variation to the lessee's payment obligations during the term of the lease has the power to do so in a manner that binds any subsequent taker of the reversionary estate. It would be irrational for s 118 to apply so as to restore the original unvaried lease terms upon every change in the identity of the holder of the reversionary estate. The position is more difficult where the lessor's obligation creates an equitable interest in the lessee, because at general law the equitable interest will be defeated by a bona fide purchaser of the residuary estate for value without notice, and so it is arguable that the lessor has no power to bind every subsequent holder of the residuary estate. That raises the general question of priority between the person seeking to enforce the obligation, and the present holder of the residuary estate.

Section 118 and priority between competing equitable proprietary interests

70 Section 118 operates to create a statutory exception to the doctrine of privity of contract, in two ways. First, it allows an assignee of a lease from the original lessee to enforce the lessor's obligation. Second, it allows the lessor's obligation to be enforced against a subsequent holder of the residuary estate. The section does not, in terms, confer upon the person entitled to enforce the lessor's obligation any proprietary interest in the residuary estate or the land. The question whether the lessor's obligation creates any proprietary interest in the person entitled to enforce it depends upon proper analysis and characterisation of the lessor's covenant.

71 There is a distinction, important in the present case, between an obligation of the lessor that is merely personal although running with the residuary estate under s 118, and an obligation of the lessor that gives the lessee a proprietary interest.

72 One can envisage many examples of an obligation of former kind - for instance, an obligation by the lessor to reimburse the lessee for certain specified kinds of expenditure made in respect of the demised premises. The right to enforce the obligation is not a proprietary right, and so (for example) if the person owing the obligation becomes bankrupt or goes into liquidation, the person entitled to enforce the obligation ranks as an unsecured creditor. And yet an assignee from the lessee may enforce such an obligation under the section; and the statutory right may, according to s 118, be enforced against the person who takes the residuary estate from the original lessor, because the obligation is annexed to the estate.

73 In the present case, the lessor's obligation to accept reduced payments in consequence of agreements to vary payment obligations under the old lease falls within this category. The payment reduction arrangements are annexed by s 118 to the residuary estate. They are as binding on the lessor's successor in title as any of the personal covenants of the lessor under the original lease. There is no separate proprietary interest created by the variation, which simply becomes an incident of the leasehold relationship. No further question of priority needs to be considered.

74 An obligation of that kind is to be contrasted with the lessor's obligation under, say, an option to the lessee to purchase the demised premises, or an agreement between the lessor and the lessee for a new lease. In such a case the lessor's covenant, being specifically enforceable in equity, gives the lessee an equitable proprietary interest in the demised premises. The interest will prevail over the interest of a later holder of the residuary estate if the applicable priority rules say so. The competition between the two interests is determined by the priority rules and it is unnecessary to have recourse to s 118.

75 Nevertheless, if it is read literally, s 118 might appear capable of overriding the normal priority rules, so that the person entitled to enforce the lessor's obligation may enforce it as a right annexed to the residuary estate, even by a decree of specific performance, and even in circumstances where his proprietary interest does not have priority over the interest of the subsequent taker of the residuary estate. It is important to note, however, that s 118 creates a general rule, which applies to all lessor obligations, regardless of whether the obligation creates a proprietary interest. Whatever may be the position for old system land, the High Court has held, in Leros Proprietary Limited v Terara Proprietary Limited (1992) 174 CLR 407, that the indefeasibility provisions of the Torrens system (especially the provision that is s 42 of the Real Property Act of New South Wales) set up special rules for priority between competing proprietary interests in Torrens land, and in so doing they override the general rule created by s 118. The High Court's reasoning applies even though s 116 says that s 118 applies to leases of land under the provisions of the Real Property Act "notwithstanding anything in that Act contained".

76 In the Leros case the respondent was the assignee of an unregistered lease for five years, with an option to renew for a further seven years. There were two subsequent transfers of the land, and then a transfer to the appellant. The question was whether the respondent could assert its interest under the unregistered lease against the appellant as the present registered proprietor of the land, having regard to the effect of certain caveats.

77 Mason CJ, Dawson and McHugh JJ (with whom Deane and Gaudron JJ agreed on this point) referred (at 417) to the Western Australian provisions broadly corresponding with s 118 (s 78, found in Part VII of the Property Law Act) and s 42 (s 68 of the Transfer of Land Act). There was also a provision (s 69 of the Property Law Act) equivalent to s 116, which they noted. After observing that an unregistered lease of land held under the Transfer of Land Act is a lease for the purposes of s 78 (s 118 in NSW), and consequently the option to renew ran with the reversion, they added:

"But this is not to say that Part VII of the Property Law Act overrides the specific provision made in the concluding words of s 68 of the [Transfer of Land] Act with respect to the invalidity of an option to renew. It would not be right to attribute to the general words of s 69 of the Property Law Act an intention to repeal the specific provision in s 68 of the [Transfer of Land] Act."

78 The relevant part of s 42 is as follows:

79 According to the High Court, s 42 overrides s 118 to the extent that s 118 would produce a different outcome. But that does not mean that s 118 is irrelevant. For example, it would be open to a tenant in occupation under a one-year lease in writing to enforce a provision of the lease for an option to renew for two years, against a transferee who became registered as proprietor with notice of the lease and option, on the basis that:

80 In Snowlong Pty Limited v Choe (1991) 23 NSWLR 198, at 204, Wood J put forward a different analysis. He expressed the opinion that s 118 should be read as confined to registered leases, and to have the same effect as s 40(3) of the Real Property Act has for such leases. His Honour observed that s 118 "cannot have the effect of displacing the indefeasibility provisions of the Real Property Act, or of elevating an unregistered lease taking effect as a tenancy at will, determinable on one month's notice, to a lease for a term of years, with an option for renewal, which registration would have secured".

81 Wood J's judgment was delivered before the High Court decided the Leros case. In light of the High Court's decision, I respectfully disagree with Wood J's analysis of the scope of s 118, although not with his Honour's conclusion that s 118 did not apply to the facts before him. There is nothing in s 118, or any other provision of the Conveyancing Act, to suggest that s 118 should be confined to registered leases. Section 116 states that the provisions of Part 8, which includes s 118, apply to leases and sub-leases of land under the provisions of the Real Property Act, without suggesting any such limited construction. The fact that if it were confined to registered leases, s 118 would have the same effect as s 40(3) is an argument against such a construction, rather than in favour of it. His Honour's concern that s 118 must not be regarded as displacing the indefeasibility provisions of the Real Property Act is adequately addressed by the application of the High Court's observations in the Leros case, according to which the special priority rules of the Real Property Act override the more general provisions of s 118. His concern about elevating a tenancy at will to a lease for a term of years does not seem to take into account that an unregistered lease or agreement for a lease may be enforceable in equity.

82 I therefore conclude that s 42 overrides s 118 in circumstances where they are both otherwise applicable and would produce inconsistent outcomes, but s 118 is still capable of applying where it does not operate inconsistently with s 42. Thus, for example, it operated to permit HBL to enforce against Global, during the term of the old lease, the promises by AMEZ to accept reductions in royalty payments.

83 Counsel for Global contended that, once it is recognised that s 42 operates to override s 118, Global is entitled to assert the indefeasibility of its registered proprietorship against HBL's claim to specific performance of the agreement for a new lease for a term of 11 years, since a lease for so long a term is outside the limited exception to indefeasibility recognised in sub-paragraph (d).

84 Global relied on some observations by Bryson J in Alcova Holdings Pty Limited v Pandarlo Pty Ltd (1988) 15 NSWLR 53. There the plaintiff was a tenant of Torrens land, in possession under a lease, that was unregistered and not in the approved form, for a term of two years, which contained an option to renew for a further two years. After the plaintiff exercised the option, the term of the original lease expired but no new lease was granted, although the plaintiff remained in possession. At that point the lessor transferred the land to the defendant, who sought to resist the plaintiff's application for specific performance of the renewed lease. Bryson J held that the plaintiff was in possession under an equitable leasehold interest for the renewed term of two years, since the option had been validly exercised; and that interest was protected by s 42(1)(d), since the defendant had notice of the plaintiff's interest prior to the transfer.

85 The defendant submitted that it had priority under s 42 because the plaintiff had nothing more than an unregistered agreement for lease, and therefore no "tenancy" other than a tenancy at will determinable by one month's notice. After carefully considering the history and proper construction of s 42, Bryson J concluded (at 59 and 63) that a tenant in possession under an agreement for lease has a "tenancy" for the term of the agreement. Where the tenancy is for a term not exceeding three years, it is protected by s 42(1)(d) against a registered proprietor who subsequently takes with notice.

86 Although the decision in Alcova Holdings is distinguishable from the facts before me, because here the term of the agreed new lease is to be 11 years, it is helpful as to general principles, when read in conjunction with Jordan CJ's well-known exposition of the law relating to the creation of legal leasehold interests, in Dockrill v Cavanagh (1944) 45 SR(NSW) 78. Bryson J's reasoning confirms that for statutory purposes such as s 42(1)(d), a tenancy arises where there is an immediate entitlement to possession (at 60G), whether the entitlement arises out of a formal grant or an agreement.

87 A tenant in possession of Real Property Act land under a written agreement to grant a lease for a term in excess of three years, which has not been performed by the grant of a lease in the approved form as required by s 53(1) of that Act, is at law a tenant at will, having regard to s 23B-23E of the Conveyancing Act, whose tenancy is determinable by one month's notice under s 127 of the Conveyancing Act. But the agreement may be enforced as an agreement in writing to confer an interest in land, in view of s 54A of the Conveyancing Act. Assuming the agreement to be specifically enforceable, occupation under the agreement gives the tenant an equitable interest satisfying the requirement of writing in s 23C(1)(a) and corresponding to the legal interest that the tenant would have had if the agreement had been performed. Bryson J's observation (at 57), that the "claim for a legal interest … rests in agreement and equitable estate, not in a legal interest", encapsulates the tenant's true position.

88 In September 1999 HBL obtained, as against AMEZ, a specifically enforceable agreement for a new lease. It continued in possession on and after 10 November 2000 in reliance on the agreement, and in the expectation that a new lease would be granted by Global in accordance with the agreement. HBL cannot rely on sub-paragraph (d) of s 42(1) to give priority to its equitable interest over Global as registered proprietor, because its equitable interest relates to an agreement for a term longer than the three-year term permitted by sub-paragraph (d). Unless the exception for fraud can be invoked, or HBL can make out some equity directly against Global, s 42(1) will have the effect that Global as registered proprietor holds the land absolutely free of HBL's unregistered interest.

89 Counsel for Global placed reliance on a passage in Bryson J's judgment in Alcova Holdings (at 57), where his Honour agreed with the proposition that the plaintiff's position would have been "hopeless" under s 42 if the transfer had been registered prior to the exercise of the option. Further, he said (at 63) that "if the freehold had been transferred during the first two years", then "registration would have defeated the option". I respectfully agree with his Honour's observations, and I take them to mean that if, at the time of registration of the transfer, the plaintiff had been in occupation under the initial two-year term, and had subsequently validly exercised the option, the plaintiff would have failed to obtain specific performance of the agreement for the extended term arising out of the exercise of the option. This is no doubt because the additional term, when added to the original term, would exceed the three-year period allowed by subparagraph (d) of s 42(1). But Bryson J expressly refrained from considering whether the plaintiff could have enforced the original term against the new registered proprietor (at 63), and he emphasised (at 57) that the plaintiff had not invoked the exception for fraud. I therefore do not regard these observations by his Honour as inconsistent with the case presented to me by HBL.

90 Chaisumdet v Ming On Trading Pty Ltd is out of line with the analysis presented so far. In that case the lease was of property held under the Real Property Act, for a term of three years, to the defendants as lessees, containing an option for renewal for a further term of three years. The plaintiffs were the purchasers of the reversion from the original lessor. They purchased subject to existing tenancies listed in a schedule to the purchase contract, including the defendants' lease. They were even allowed a fee for registration of the lease on settlement of the purchase. The lease was never registered. The defendants purported to exercise the option for renewal, after the plaintiffs had become registered proprietors. The plaintiffs refused to recognise this, and sought possession. The defendants cross-claimed, seeking specific performance.

91 The plaintiffs relied on s 42 of the Real Property Act and their registered title, contending that in the absence of fraud, their title was free of the lease because, the combined term of the lease and option exceeding three years, s 42(1)(d) did not apply. The defendants contended that the plaintiffs' conduct amounted to fraud, on the authority of Bahr v Nicolay (No 2) (1988) 164 CLR 604, but Lusher AJ does not appear to have decided the case on the basis of fraud. He held it was open to the defendants to assert that they had validly exercised their option to renew the lease, and that equity would grant specific performance of the agreement to grant a new lease for a further three years. He then said (at 58,868):

"The plaintiffs answer this approach by submitting that the plaintiffs are not parties to the original lease containing the option and there was no assignment, and there is no privy of contract between them, hence there is no equity raised against the plaintiffs. However ss 117 and 118 of the Conveyancing Act 1919 in my opinion operate, particularly s 118, to enable the defendant lessees to enforce the option covenant against the plaintiff lessors. That section expressed shortly enables the obligation of a covenant by a lessor may be taken advantage of and enforced by the person in whom the term is vested against the person from time to time entitled to the reversion expectant on the lease. Both sections apply to land under the Real Property Act."

92 If s 42 had been applied, the plaintiffs as registered proprietors would have held their title, except in the case of fraud, absolutely free of the unregistered leasehold interest asserted by the defendants, because the option for renewal, when added to the original term, exceeding three years and therefore the exception in s 42(1)(d) would not have applied. Since it appears that fraud was not relied upon, and no personal equity was asserted against the plaintiffs, the facts that the plaintiffs had notice of the defendants' unregistered interest, received an allowance for a registration fee on settlement, and subsequently received rent from the defendants, would not have altered the outcome. His Honour's decision in favour of the defendants, in reliance on s 118, therefore allowed s 118 to override the statutory priority rule of s 42.

93 In the Snowlong case Wood J expressed the opinion that Chaisumdet was not correctly decided, insofar as it allowed s 118 to displace the indefeasibility provisions of the Real Property Act. I respectfully agree. The Chaisumdet case is contrary to the proposition subsequently adopted by the High Court in the Leros case, that the particular provision in s 42 overrides the general provision in s 118. It is contrary to the reasoning in Bryson J in Alcova Holdings, to the extent that his Honour asserted (at 57 and 63) that the tenant could not have obtained specific performance of the option if the freehold had been transferred during the original term - in Chaisumdet, as in Alcova Holdings, the option was for an additional term which, when added to the original term, exceeded three years and was therefore not protected by sub-paragraph (d).

94 In summary, s 118 cannot be used in the present case to give priority to HBL's equitable interest over Global's title as registered proprietor, unless there is fraud, or some other circumstances that would entitle HBL to assert its unregistered interest against Global as registered proprietor.

Equitable claims against the registered proprietor

95 It is first necessary to consider the principles governing the fraud exception to s 42, and governing the other circumstances in which an unregistered interest may be asserted against the registered proprietor.

96 Several propositions are clear. First, there is no fraud for the purposes of s 42 if a person does no more than to acquire title and become the registered proprietor with notice of a prior unregistered interest, and assert that his title is free of that interest: Mills v Stokman (1967) 116 CLR 61, at 78 per Kitto J; the Leros case, 174 CLR at 418 per Mason CJ, Dawson and McHugh JJ; Friedman v Barrett [1962] Qd R 498. Secondly (though not directly applicable here), once the unregistered interest is defeated by registration of an inconsistent dealing in favour of a new proprietor, it is extinguished for all purposes and cannot be asserted against any later proprietor: the Leros case, 174 CLR at 418-9 per Mason CJ, Dawson and McHugh JJ. Thirdly, ss 42 and 43 do not prevent an equitable claim being made against the registered proprietor based on the assertion that the conduct of the registered proprietor has given rise to the equity: Barry v Heider (1914) 19 CLR 197; Breskvar v Wall (1971) 126 CLR 376; Frazer v Walker [1967] 1 AC 569.

97 There is some uncertainty about the scope of the fraud exception to s 42. One view is that it is confined to fraud relating to the circumstances in which the person against whom the unregistered interest is asserted became the registered proprietor. Another view is that fraud for the purposes of s 42 extends to the registered proprietor's subsequent conduct. In Bahr v Nicolay (No 2) (1988) 164 CLR 604 the Bahrs sold land to Mr Nicolay, who leased it back to them for three years. Their contract provided, in clause 6, that on the expiration of the lease, the Bahrs would enter into a contract to re-purchase the land. Mr Nicolay sold the land to the Thompsons by a contract containing a provision (clause 4) by which the Thompsons acknowledged the existence of the re-purchase provision of the earlier contract. The Thompsons became the registered proprietors and informed the Bahrs that they recognised the re-purchase clause and would agree to re-sell the land on the terms of that provision. But they subsequently refused to do so.

98 The High Court held that the Bahrs were entitled against the Thompsons to specific performance of the agreement to re-sell the land. All members of the Court took the view that the agreement between Mr Nicolay and the Thompsons, especially clause 4, involved more than a mere acknowledgement of the existence of the rights of the Bahrs under clause 6 of their contract. This was therefore not a case of a person becoming registered proprietor merely with notice of an unregistered interest. From that point the reasoning of the members of the High Court was not uniform.

99 Mason CJ and Dawson J held (at 618-9) that the Thompsons' acknowledgement created an express trust by which they held the land subject to the rights of the Bahrs under the first contract. Wilson and Toohey JJ held (at 638-9) that when they took a transfer of the land knowing of and accepting the obligation to re-sell, the Thompsons became subject to a constructive trust in favour of the Bahrs, and they remained bound by their undertaking to hold their title subject to the rights of the Bahrs notwithstanding registration of the transfer.

100 Mason CJ and Dawson J also held that the conduct of the Thompsons in repudiating their recognition of the Bahrs' equitable interest constituted fraud for the purposes of the provisions of the Transfer of Land Act of Western Australia, equivalent to ss 42 and 43 of the Real Property Act. They expressed the view that fraud, for the purpose of the statutory exception to indefeasibility, is not confined to fraud in obtaining a transfer or securing registration of it. They said (at 615):

Loke Yew

Loke Yew v Port Swettenham Rubber Co Ltd

156 The estoppel evidence, when considered together with the evidence of the AMES/Global relationship and the letter of 16 December 1999, establishes that HBL, AMES and Global have, at all times since execution of the instruments of transfer of 8 December 1999, conducted their relations with one another on the basis of an assumed state of affairs. The assumed state of affairs is that Global is bound by the variations to the payment obligations agreed between HBL and AMES, and by the arrangements for a new lease made in September 1999 - in other words, that Global came to occupy the same position vis-a-vis HBL, and had the same rights and obligations in that respect, as AMES had before the transfer.

157 In my opinion the evidence brings the present case within the doctrine of estoppel by convention, both with respect to the arrangements for variation of the payment obligations, and with respect to the arrangements for the new lease. Therefore Global is estopped against HBL from questioning the truth of that assumed state of affairs.

158 Consequently estoppel by convention provides a basis, additional to s 118, for HBL to require Global to adhere to the variation of payment arrangements agreed between it and AMES. Whereas under s 118 it is entitled to an order for, in effect, specific performance of the agreement to vary the old lease in these ways, the estoppel may entitle it to nothing more than an injunction to restrain Global from acting inconsistently with the assumed state of affairs. But the distinction in remedial outcomes may have no practical significance.

159 The position regarding its obligation to grant a new lease is somewhat different. HBL has established an entitlement to an order for specific performance of the agreement by Global, on two grounds: first, a combination of the principles set out in Bahr v Nicolay(No 2) and s 118; and second, proprietary estoppel. Although estoppel by convention is also available, the weaker injunctive relief to which it naturally leads seems insufficient to vindicate HBL’s rights. So estoppel by convention is best seen as a “fallback” ground, as regards the obligation to grant a new lease.

Did HBL fail to pay royalties due under the old lease or the agreement for a new lease?

160 When the final hearing commenced in December 2001, there were many issues between the parties with respect to the payment of royalties. HBL sought declarations that Global was not entitled to re-enter the land or terminate the old lease or the new lease agreement on grounds of any alleged failure by it to pay royalties to Global under the leases. HBL also contended that it had overpaid royalties by a substantial amount. On the other hand Global sought declarations that HBL had breached the lease from 1 December 1996 to date, both by failing to keep proper records in certain respects, and by failing to pay $1 million for royalties payable under the lease. Global also contended that it was an implied term of the lease that HBL was liable to Global for any Minerals removed from the land but not accurately weighed at the weighbridge. It sought declarations that HBL unlawfully removed Minerals from the land without its consent and that this conduct constituted a repudiation of the lease. A focus of attention in the latter respect was the clay sold by HBL to Wingecarribee Shire Council in 2000 and 2001.

161 Allegations about the "clay" issue and other claimed discrepancies in weighbridge dockets led eventually to my appointment of a court expert under Part 39 of the Supreme Court Rules. The expert, Dr Ferrier, reported in December 2002. His task was to provide his opinion on a list of matters with respect to the period from 10 November 1995 to 30 April 2002, relating to tonnage of material extracted and passing over the weighbridge and the average sale prices of that material, the amounts charged by HBL, and royalty payments by HBL. Dr Ferrier reported on these matters to the extent that he was able to do so, and on stated assumptions, he expressed his opinion as to the annual underpayment or overpayment of royalties for that period.

162 He found that the overall underpayment or overpayment depended upon the resolution of four matters, which he understood to be in dispute between the parties, which he expressed as follows:

163 Noting that there were 16 possible combinations of these four variables, he prepared a "royalty model" summarising his opinion of the overpayment or underpayment for each possible combination of the four variables. Scenario 1 assumed that no royalty was payable in respect of sand imported from the Joannou Quarry or in respect of clay, that "holiday tonnes" should be allowed to HBL, and that the royalty rate from 20 September 1999 should be reduced to 11%. On those assumptions, there was in Dr Ferrier's opinion an overpayment of $295,778.73 by HBL during the period from 10 November 1995 to 30 April 2002. Dr Ferrier then worked through the remaining 15 scenarios, finishing with scenario 16, in which royalties were payable on the Joannou sand and clay, no holiday tonnage was allowed, and there was no reduction in the 12.5% royalty rate. That produced a net underpayment for the period of $121,472.61. I should note that the first 10 scenarios produced overpayments of royalties for the period, though each subsequent scenario produced a figure less than scenario 1, and the last six scenarios produced underpayments, the highest being in scenario 16.

164 Dr Ferrier's royalty model was prepared on the assumption, reflecting the questions put to him by the Court as settled between the parties to the proceeding, that amounts owing by or to the lessor could be netted off over the whole of the period from November 1995 to April 2002, notwithstanding the change in the identity of the registered proprietor on 2 May 2000.

165 As to whether material extracted from the Penrose Quarry might not have passed over the weighbridge, Dr Ferrier reported that it was apparent during his review of the internal controls in place at the Penrose Quarry that it would be quite possible for material to be taken without going over the weighbridge. However, he said, during the course of his review he did not become aware of any information that would confirm that any material was sold or given away by HBL that did not pass over the weighbridge.

166 When the final component of the hearing began, in light of Dr Ferrier's report, counsel for HBL handed me some full and detailed written submissions, prepared on the assumption that all issues between the parties about the payment of royalties were still in play. However, in his final submissions, on the last hearing day, counsel for Global abandoned many of the contentions that had been made by his client at earlier stages of the hearing. On the question of HBL's alleged failure to pay royalties, Global abandoned its contention about the Joannou sand, but maintained its position with respect to the "clay" issue, the "holiday tonnes" issue and the question whether the royalty payment rate had been reduced to 11% as from 20 September 1999. It added the contention that HBL was not entitled to net off the positions of Global and AMES as if they were one entity.

167 In summary, the only remaining royalty issues are:

Royalties on "clay"

168 Global contended that the material removed from the quarry and sold to Wingecarribee Shire Council, often referred to in evidence as "clay", was a Mineral for the purposes of the definition in clause 1.06 of the lease. Wayne Stafford gave evidence on behalf of Global that the material was in fact decomposed basalt (basalt being expressly mentioned in the definition). Mr Rankin gave evidence on behalf of HBL that royalties were not paid on the material because it was not a "Mineral" under the lease. Then in final submissions HBL accepted that the clay was a Mineral for the purpose of the lease. In the last analysis, the issue whether the "clay" was a Mineral as defined does not matter, because I am satisfied on the balance of probabilities that there was an agreement between AMES and Global, respectively, and HBL, under which HBL was at liberty to sell this material to the Council without paying royalties under the lease.

169 HBL relied on the evidence of Brenda Egan, Keith Dunbier and Narlissa Briggs, as well as documentary evidence.

170 Ms Egan was the group credit manager of HBL. She gave evidence that early in 2000, she received a telephone call from Wayne Stafford in which he made a number of complaints about rates, something that was not uncommon for him to do. She went to Mr Breeze, then the managing director of HBL, and they both spoke to Mr Stafford on a conference call (although she said in cross-examination that she was not in the room for the whole conversation). During the conversation, Mr Stafford said:

"We've got a new job with the Council to cap one of its tips. This is great because we can get rid of the clay to get to the basalt and I'll get commission on it."

171 Ms Egan said that the question of royalties on the clay was raised, and although she could not recall whether it was Mr Breeze or Mr Stafford who spoke, she recalled that the words spoken were to the effect, "royalty will not be paid on this job." She recalled that there was no disagreement with this statement.

172 Mr Dunbier was manager of the Penrose Quarry for HBL until August 2000. He dealt extensively with Wayne Stafford, whom he regarded as having the day-to-day control of the quarry. He gave evidence that in about March 2000 he put forward a spreadsheet proposal for the extraction of the clay and its supply to the Council, with the assistance of Mr Stafford. The proposal involved purchase of an excavator and payment of a royalty of $1 to the lessor. Mr Breeze rejected the proposal, and then subsequently the extraction of the clay went ahead, using one of the quarry's existing machines. Mr Dunbier expressed the opinion that Wayne Stafford was aware at all times that the clay was being excavated and sold to the Council.

173 He said that on the morning of 22 April 2002, he received a telephone call from Mr Stafford, and they had a conversation to the following effect:

174 Ms Briggs was employed by HBL as a trainee manager at the Penrose Quarry from 2000 to March 2001. Early in 2000 Wayne Stafford trained her in management matters. She was involved in the delivery of clay to the Council, and she identified various documents created in connection with that work. The documents included a purchase order from the Council dated 2 March 2000 for the supply and delivery of "clay"; a job master form which she created on 13 September 2000 for internal processing by HBL; a report she prepared for Mr Stafford analysing the Penrose Quarry product sold in the calendar year 2000, including an entry for "clay"; a weekly production report for Mr Stafford which summarised tonnes sold and hours worked; and a daily tonnage summary, prepared on a weekly basis for Mr Breeze, copied to Mr Stafford, identifying tonnage of clay. Some of these reports were prepared and given to Mr Stafford after 2 May 2000, when Global became registered proprietor of the quarry.

175 Wayne Stafford gave evidence denying that there was any arrangement under which royalties would not be paid on material sold to the Council. He said he thought royalties were being paid on that material, which he said was always referred to as "decomposed basalt".

176 In my opinion the evidence of HBL's witnesses is to be preferred to the evidence given by Wayne Stafford, to the extent of the inconsistencies. His evidence that the material was always referred to as "decomposed basalt" was specifically contradicted by Ms Briggs, who took instructions directly from him, and was inconsistent with the documents identified by Ms Briggs, including reports provided to Mr Stafford. Eventually Mr Stafford accepted under cross-examination that the material was referred to as "clay" in HBL's records as well as in documents prepared by Mr Stafford himself.

177 Mr Stafford's evidence that he thought royalties were being paid on clay was contradicted by other evidence. First, it was contradicted by Ms Egan's evidence of the telephone conference of Mr Breeze, Wayne Stafford and herself early in 2000. Global attacked Ms Egan's evidence because it was evidence of only part of a conversation. In my opinion Ms Egan gave clear and truthful evidence, to which she adhered consistently in cross-examination. The fact that she was not able to recall the whole of the conversation did not, in my view, undermine the evidence she gave about the parts she remembered. Her evidence was to the effect that during the telephone conference, it came to be understood between Mr Breeze (who is no longer the managing director of HBL)and Mr Stafford that there would be no royalty paid on the material supplied to the Council. I do not regard the absence of evidence directly from Mr Breeze as an impediment to my finding that the conversation took place as deposed to by Ms Egan, given the strength of her evidence.

178 Secondly, Mr Stafford’s evidence was contradicted by Mr Dunbier's evidence of his telephone conversation with Mr Stafford on the morning of 22 April 2002, from which it appears that, at least by 22 April 2002, Mr Stafford was aware of HBL's position with respect to the clay. Mr Stafford denied Mr Dunbier's version of that conversation, but I prefer Mr Dunbier's evidence because of the weaknesses in Mr Stafford's evidence.

179 Thirdly, it was contradicted by Mr Dunbier's evidence that he prepared the spreadsheet proposal early in 2000 with assistance from Mr Stafford, to the extent that Mr Dunbier's evidence suggests that Mr Stafford was involved in the process of negotiation with the Council.

180 Fourthly, it was contradicted by an e-mail dated 21 November 2000 from Mr Rankin to Mr Stafford. In that e-mail, Mr Rankin provided Mr Stafford with tonnage figures to challenge Mr Stafford's claim to payment of additional royalties. The figures provided by Mr Rankin included figures for clay. Mr Stafford conceded in cross-examination that the difference between his calculation and the figures in the e-mail could be explained by the absence of royalties on materials supplied to the Council.

181 My conclusion is that an agreement was reached between Mr Breeze on behalf of HBL and Mr Stafford early in 2000, according to which royalties would not be charged on the material supplied to the Council. Mr Stafford was at that time in a position to bind AMES, still the registered proprietor of the quarry, because he was a director and was actively involved in the management of AMES. In my opinion the agreement made in early 2000 was intended to be, and was, binding upon AMES.

182 Mr Stafford also had day-to-day management of the business of Global, and was in a position to bind it to the agreement. Global was at that time the unregistered transferee of the land. In my opinion, when Mr Stafford agreed with Mr Breeze on the telephone that royalties would not be charged on materials supplied to the Council, he did so on behalf of both the registered proprietor and transferor of the land, and on behalf of the unregistered transferee. Any doubt about whether Global was bound by the arrangement is removed by consideration of the documentary evidence, from which it was clear that Mr Stafford, in his position of manager of the business of Global, received reports after 2 May 2000 which made it clear that HBL was continuing to extract and supply clay to the Council. Having made the arrangement with Mr Breeze early in the year 2000, Mr Stafford must have realised that if clay was still being supplied to the Council, the extraction was occurring on the same basis.

183 My conclusion is that neither AMES nor Global is entitled to royalties in respect of the clay extracted from the quarry and sold to the Council.

Increase in the Standard Quantity to 350,000 tonnes ("holiday tonnes")

184 The lease provided that HBL was to pay royalties comprising the Minimum Royalty and the Further Royalty. The Minimum Royalty was payable in respect of amounts of Minerals up to the Standard Quantity. The lease defined the Standard Quantity as 250,000 tonnes.

185 On 29 May 1998 AMES wrote to HBL, expressing its willingness "to help HBL with a goodwill gesture to help finance the Penrose upgrade". The letter set out an agreement under which HBL would go ahead with the proposed upgrade, and:

"Provide [sic] that HBL continues to pay all Royalties due and payable in accordance with clause 3.1 of the lease of 13th November 1995, then AMES will for a period of 34 months, or up to 13 November 2000, not require HBL to pay excess royalties to the amount of 350,000 tonnes. Any tonnes above 350,000 tonnes will be treated as excess royalty and be paid in accordance with the lease."

186 The letter set out some conditions, which are no longer relevant. It was signed by Wayne and Garry Stafford as directors of AMES, and countersigned by Max Dunbier and Terry Fordham as directors of HBL.

187 On 8 July 1998 Mr Breeze on behalf of HBL wrote to Mr Kekatos confirming that the "renegotiated royalty arrangement dated 29 May 1998" had been tabled at an HBL board meeting, the minutes of which recorded the changes in the royalty arrangement between 250,000 and 350,000 tonnes. On 18 July 1998 Mr Kekatos wrote to Mr Breeze confirming that the agreement set out in the letters of 29 May and 8 July 1998 was not conditional as stated in the letter of 29 May, and consequently "the agreement may be treated in all respects as a variation of the terms of the royalty agreement being registered number 0691505 and therefore in all respects the royalty agreement as now varied represents the basis of your companies [sic] use and occupation of the Penrose Quarry". On 31 August 1998 Mr Breeze wrote to AMES on behalf of HBL stating that the details set out in the letter of 18 July were acceptable to HBL. There was no registered variation of the old lease.

188 Global submitted that these arrangements constituted an agreement between HBL and AMES, which was operative for the period of 34 months from 13 January 1998 to 13 November 2000; but on 2 May 2000 Global became the registered proprietor of the land and was not subject to the contractual variation contained in the letter. According to Global's submission, it was entitled to disregard the holiday tonnes arrangement and seek payment of the Further Royalty for Minerals extracted in excess of 250,000 tonnes.

189 In my opinion Global's submission fails for two reasons, earlier discussed: namely, the contractual obligation by AMES not to seek payment of the Further Royalty up to 350,000 tonnes is enforceable by HBL against Global under s 118; and there is an estoppel by convention operating against Global to prevent it from relying on the terms of the original lease that were varied by the agreement.

Commencing date for increased Further Royalty rate

190 The first mention in correspondence of the agreement to alter the percentage royalty rate from 12.5% to 11% was in HBL's letter to AMES dated 20 September 1999. That letter confirmed the details of an agreement in two parts. The first part was the agreement to waive clause 8.01 to permit early notice of exercise of the first option. The second part was the agreement to alter the percentage royalty rate.

191 Global submitted that the terms of HBL's letter suggested an intention that the amended rate would take effect in the renewed lease. I disagree. Although HBL's letter does not stipulate that the alteration of the percentage royalty rate was to commence immediately, that is a natural construction of the letter, given that the other part of the agreement commenced on that day. There is nothing commercially irrational in such an arrangement. HBL was agreeing to give early notice of exercise of the option at the specific request of AMES and to suit AMES' circumstances, and in such a case it would not be surprising that the party agreeing to the concession would expect to receive an immediate benefit in return.

192 In my opinion, the matter is put beyond doubt by the terms of the letter of confirmation written by Mr Kekatos on behalf of AMES to Mr Breeze of HBL on the same day, 20 September 1999. The letter confirmed that AMES agreed to the amendment of clause 3.04(b) by replacement of 12.5% with 11% "effective from this date forth". The quoted words are crystal clear. They have the effect that at the next Review Date (apparently 10 November 1999), when the percentage rate was to be employed, the rate to be used was 11% rather than 12.5%. Once again there was no registered variation of the old lease.

193 In its submissions Global drew attention to some additional words of the AMES letter, namely the words "provided that your company continues to observe all the terms and conditions of the lease from the date hereof including the continuing obligation to pay the royalty reserved in accordance with the lease". Global submitted that this proviso could not apply to a single act (namely the amendment of the current lease) that was to take effect immediately. Again, I disagree. The proviso, if effective, may have allowed AMES to insist upon the greater percentage rate as a kind of penalty rate in the event of non-compliance by HBL with the terms of the lease, but there is nothing in the proviso that would render it inconsistent with the new percentage royalty rate becoming operative forthwith.

194 Global also reiterated, in this context, its submissions that the higher rate of 12.5% should apply as from registration of the transfer in its favour on 2 May 2000, because on that date it took the land subject to the registered lease but not subject to any contractual variation of it. Once again, I disagree with that submission on the grounds relating to s 118 and estoppel by convention.

Overpayments to AMES

195 Global submitted that it was entitled, after it became registered proprietor on 2 May 2000, to royalties on all Minerals in respect of which payments accrued after that date, without any deduction or set-off of royalties (if any) overpaid by HBL to AMES. It drew attention to clause 4.01.1 of the lease, according to which HBL covenanted to "pay the Royalties on the days and in the manner aforesaid clear of all deductions except such as by the law the Lessee is compelled to make notwithstanding agreement to the contrary."

196 Global submitted that the words "clear of all deductions" operate to prevent HBL from deducting or setting off any overpayments to AMES. It referred to Batiste v Lenin [2002] NSWSC 233, where Bryson J construed the words "without deductions" literally, and submitted that the words "clear of all deductions" should be construed in the same fashion. An appeal from Bryson J's judgment was unanimously dismissed by the Court of Appeal: [2002] NSWCA 316.

197 In developing this submission, Global made the following points:

Junghenn v Wood

Fuller v Happy Shopper Markets Ltd

Ory & Ory v Betamore

198 As I understood his submissions, counsel for HBL conceded this point. He said:

"In relation to the question of principle, we accept that in order to recover over-payments of rent from Global, we have to identify over-payments made to Global because we are not suing upon any covenant. It is, in effect, a restitutionary claim."

199 As he was instructed to do, Dr Ferrier made calculations for the whole period from 10 November 1995 to 30 April 2002 as if the lessor were a single entity. In light of HBL's concession, it will be necessary to separate the calculations for scenario 1 so as to identify that part of the total figure representing overpayments to Global.

Is Global entitled to re-enter the land and determine HBL's interest in the agreement, and to claim damages?

200 Global submitted that HBL is in occupation of the Penrose Quarry as a tenant at will under s 127 of the Conveyancing Act, on the terms of the expired lease, apart from the terms relating to duration of the lease and others unsuitable to an implied holding over tenancy (citing Redfern & Cassidy, Australian Tenancy Practice & Precedents, vol 1, [3065]). It submitted that a right of re-entry (for example, for non-payment of rent) is unsuited to a tenancy at will determinable on a month's notice, and a term giving such a right would not be implied into such a tenancy: Bigazzi v Brandigo Pty Ltd (1981) 2 BPR 9341. Accordingly, Global submitted, it is in a position to terminate the tenancy at will without needing to have recourse to a right of re-entry, simply by giving the one month's notice required under s 127. The question whether HBL is entitled to relief against forfeiture does not arise, according to Global's analysis.

201 I agree that if one were to consider only the strict position at law, disregarding the agreement for a new lease, HBL would be in occupation of Quarry as a tenant at will, determinable under s 127 of the Conveyancing Act on one month's notice. My view, however, is that Global is under an equitable obligation, reinforced by s 118, to perform the agreement for a new lease entered into between HBL and AMES on 20 September 1999. HBL is in occupation under the agreement for a new lease, and is to be treated as if it had the tenancy that would be conferred upon it by performance of the agreement, under the rule in Walsh v Lonsdale. Global should be ordered to perform the agreement and should be restrained from exercising its legal right to determine the tenancy.

202 The evidence does not establish any entitlement on the part of Global to resist specific performance of the agreement on the ground that HBL is in breach of any of the obligations that the new lease would impose on it. In final submissions, Global did not contend for any breach of the terms of the old lease or the new agreement for lease, or of any other tenancy, except by non-payment of the full amount of royalties alleged to be due to it. I have decided against each of the submissions made by Global on this subject. Therefore there is no breach available to Global.

If so, is HBL entitled to relief against forfeiture?

203 The issue of relief against forfeiture was addressed comprehensively by HBL in written submissions, before the extent of Global's concessions on allegations of breach I came evident. I was taken in some detail to the principles governing relief against forfeiture, set out in such cases as Pioneer Quarries (Sydney) Pty Ltd v Permanent Trustee Co of NSW Ltd (1970) 2 BPR 9562; Platt v Ong [1972] VR 197; Stieper v Deviot Pty Ltd (1977) 2 BPR 9602; and Hayes v Gunbola Pty Ltd (1986) 4 BPR 9247.

204 In view of Global's concessions with respect to breaches and my decision under the last heading, the question of relief against forfeiture does not now arise. In final submissions counsel for Global, after submitting that the issue of relief against forfeiture did not arise, said:

"I will make this express concession that if your Honour were against us as to the nature of the tenancy and held that it was a tenancy in respect of which forfeiture were appropriate, then there is nothing in the facts of this case which would provide your Honour with a basis for refusing to exercise your discretion in favour of granting relief against forfeiture."

205 Nevertheless, it is appropriate to observe, in case the matter goes further, that if Global had succeeded in establishing that it was entitled to recover additional payments from HBL because of the "clay" issue, or its ability to escape the arrangements made by AMES with respect to holiday tonnes and the reduced percentage royalty rate, or because it could resist any deduction of overpayments to AMES, HBL's breach would not be of a kind that would lead the Court to deny relief against forfeiture, assuming HBL were to tender the amount found to be owing to Global. Specifically, the evidence would not support any finding that any such breaches were wilful. Although, as Hope J remarked in the Pioneer Quarries case (at 9572), a lessee is not entitled to relief against forfeiture as of right, and the Court has a discretion in the matter, re-entry is regarded as security for the payment of rent, and if the landlord is able to obtain payment of his rent, relief to the tenant is refused only in very special circumstances.

Is HBL entitled to recover from Global the sum of $295,778.73 [as revised in June 2003]?

206 My opinion is that HBL is entitled to recover from Global whatever amount is established as the overpayment of royalties made by HBL to Global (as opposed to AMES), according to the principles that I have adopted. My findings, coupled with concessions by Global, mean that scenario 1 of Dr Ferrier's royalty model applies and there is a net overpayment, but the amount will be less than the figure of $295,778.73, because that includes overpayments to AMES. HBL has made out its case for judgment in its favour for whatever amount is properly calculated. I shall give directions for HBL to calculate the overpayment to Global.

207 My provisional view is that overpayments made after 16 December 1999 should be treated as overpayments to Global. That was the date upon which AMES notified HBL that the quarry had been transferred to Global. But I am prepared to receive submissions at or before the next directions hearing should either party contend for a different date.

Conclusions

208 HBL has made out its entitlement to declaratory orders as to the existence of the new agreement for the lease of the quarry, and that Global holds its interest as registered proprietor subject to that agreement. It is entitled to an order that Global specifically perform the agreement by granting it a new lease of the Quarry for further term of 11 years, otherwise subject to the terms and conditions of the previous lease (including the option to renew for two further terms of 11 years each), subject to the modifications that were agreed between HBL and AMES according to my findings, to the extent that they are relevant to the renewed term. Global is also entitled to the declarations it has sought to the effect that it is not in breach of any obligations under the old lease or the agreement for the new lease with respect to stated matters, and that Global is not entitled to re-enter the land or terminate the agreement for the new lease or its equitable interest as lessee under that agreement. There is no occasion to make any order by way of relief against forfeiture, but an order should be made restraining Global from terminating HBL's tenancy or occupation of the quarry pending the grant of the new lease.

209 Global's cross-claim has failed, except on the technical point that there was no valid exercise of the option to renew the lease, there being instead a valid new agreement for lease. The appropriate course is for the cross-claim to be dismissed.

210 HBL has succeeded in establishing an entitlement to recover overpayments from Global, but the amount of the overpayments is still to be quantified. I shall direct HBL to prepare and submit to Global and my associate a document setting out the amount for which it claims to be entitled to enter judgment against Global in respect of overpayment of royalties, and I shall stand the proceedings over for subsequent directions. I shall direct HBL to bring in short minutes of the other orders for consideration on that later occasion. I shall also hear the submissions of the parties with respect to costs. I shall consider, at the directions hearing, whether it will be necessary to find another hearing day to deal with these various matters.

**********

Last Modified: 10/03/2003

Citations

Heggies Bulkhaul Ltd v Global Minerals Australia Pty Ltd [2003] NSWSC 851

Most Recent Citation

Cases Citing This Decision

91

Despot v Registrar General of New South Wales [2016] NSWCA 5

Gerard Cassegrain & Co Pty Ltd v Cassegrain [2013] NSWCA 453

Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407

Cases Cited

23

Statutory Material Cited

2

Heggies Bulkhaul v Global Minerals [2002] NSWSC 410

Mercantile Credits Ltd v Shell Co of Australia Ltd [1976] HCA 9

Cited Sections

Actions

Download as PDF Download as Word Document

CITATION:	Heggies Bulkhaul v Global Minerals Australia [2003] NSWSC 851
HEARING DATE(S):	10/12/01, 11/12/01, 12/12/01, 13/12/01, 14/12/01, 22/04/02, 24/04/02, 02/05/02, 06/05/02, 25/06/03, 26/06/03, 27/06/03, 01/07/03
JUDGMENT DATE:	19 September 2003
JURISDICTION:	Equity Division
JUDGMENT OF:	Austin J
DECISION:	Specific performance and declarations granted; cross-claim dismissed.
CATCHWORDS:	REAL PROPERTY - leaseholds - when lessor's obligations run with the reversionary estate under s 118 - meaning of reversionary estate - scope of s 118 - relationship of s 118 with indefeasibility rules - whether registered proprieter holds land subject to equitable tenant's interest
LEGISLATION CITED:	Conveyancing Act 1919 (NSW) ss 6, 116, 117, 118, 122, 127 Real Property Act 1900 (NSW) s 40, 42, 53
CASES CITED:	Alcova Holdings Pty Limited v Pandarlo Pty Ltd (1988) 15 NSWLR 53 Amalgamated Investment & Property Co Ltd v Texas Commerce International Bank Ltd [1982] 1 QB 84 Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) 16 NSWLR 582 Bahr v Nicolay (No 2) (1988) 164 CLR 604 Barnes v City of London Real Property Co [1918] 2 Ch 18 Barry v Heider (1914) 19 CLR 197 Batiste v Lenin [2002] NSWSC 233 Bickford v Parson (1848) 5 CB 920 Bigazzi v Brandigo Pty Ltd (1981) 2 BPR 9341 Blane v Francis [1920] 2 KB 1 6 Breams Property Investment Co Ltd v Stroulger [1948] 2 KB 1 Breskvar v Wall (1971) 126 CLR 376 Burnside Sub-branch RSSILA Inc v Burnside Memorial Bowling Club Inc (1990) 58 SASR 324 Caboche v Ramsay (1993) 1 119 ALR 215 Chaisumdet v Ming On Trading Pty Ltd (1990) NSW ConvR para 55-518 Cole v Kelly [1917] 1 KB 252 Commonwealth v Verwayen (1990) 170 CLR 394 Con-Stan Industries Pty Ltd v Norwich Winterthur Insurance (Aust) Ltd (1986) 160 CLR 226 Dabbs v Seaman (1925) 36 CLR 538 Davies v Town Properties Investment Corpn Ltd [1903] 1 Ch 797 Dillwyn v Llewelyn (1862) 4 De GF & J 517 Dockrill v Cavanagh (1944) 45 SR(NSW) 78 Eslea Holdings Ltd v Butts (1986) 6 NSWLR 175 Foran v Wight (1989) 168 CLR 385 Frazer v Walker [1967] 1 AC 569 Friedman v Barrett [1962] Qd R 498 Fuller v Happy Shopper Markets Ltd [2001] 1 WLR 1681 Gilbert J McCaul (Aust) Pty Ltd v Pitt Club Limited (1959) 59 SR 122 Giumelli v Giumelli (1998) 196 CLR 101 Greer v Kettle [1938] AC 156 Hayes v Gunbola Pty Ltd (1986) 4 BPR 9247 Heggies Bulkhaul Ltd v Global Minerals Australia Pty Ltd [2002] NSWSC 410 Hilton Hotels (Aust) Pty Ltd v Sunrise Resources (Aust) Pty Ltd (2000) 9BPR 97,811 Junghenn v Wood (1958) 58 SR(NSW) 327 Kenneth Allison Ltd v AE Limehouse & Co [1992] 2 AC 105 Lee v Ferno Holdings Pty Ltd (1993) 33 NSWLR 404. Leros Proprietary Limited v Terara Proprietary Limited (1992) 174 CLR 407 Loke Yew v Port Swettenham Rubber Co Ltd [1913] AC 491 Mercantile Credits Ltd v The Shell Company of Australia Ltd (1976) 136 CLR 326 Mills v Stokman (1967) 116 CLR 61 Noyes v Klein (1984) 3 BPR 97,178 Ory & Ory v Betamore (1993) 60 SASR 393 Pioneer Quarries (Sydney) Pty Ltd v Permanent Trustee Co of NSW Ltd (1970) 2 BPR 9562 Platt v Ong [1972] VR 197 Plimmer v Wellington Corporation (1984) 9 App Cas 699 Ramsden v Dyson (1866) LR 1 HL 129 Re Hunter's Lease [1942] Ch 124 Republic of India v India Steamship Co Ltd [1998] AC 878 Riches v Hogben [1985] 2 Qd R 292 Rickett v Green [1910] 1 KB 253 Riseda Nominees Pty Ltd v St Vincent's Hospital (Melbourne) Ltd [1998] 2 VR 70 Rye v Purcell [1926] 1KB 446 Silovi Pty Ltd v Barbaro (1988) 13 NSWLR 466 Snowlong Pty Limited v Choe (1991) 23 NSWLR 198 Standen v Christmas (1847) 10 QB 135 Stieper v Deviot Pty Ltd (1977) 2 BPR 9602 Thomson v Cross [1954] VLR 635 Walsh v Lonsdale (1982) 21 Ch D 9 Waltons Stores (Interstate) Limited v Maher (1988) 164 CLR 387 Wedd v Porter [1916] 2 KB 91 Weg Motors Ltd v Hales [1961] Ch 76 Wykes v Samilk Pty Ltd [1998] Aust Contract R 90-097
PARTIES :	Heggies Bulkhaul Limited (P, XD) Global Minerals Australia Pty Limited (D, XC)
FILE NUMBER(S):	SC 2810/01
COUNSEL:	A. J. Meagher SC with J. D. Smith (P) D. H. Murr SC with D. P. Robinson (D)
SOLICITORS:	Pricewaterhouse Coopers Legal (P) Williams Oates Lawyers (D)