Henningsen v Nolan

HENNINGSEN v NOLAN
[2004] SASC 105
Magistrates Appeal

GRAY J This is an appeal from a decision of a magistrate following a trial.
Background
Barry Henningsen and Brett Colin Henningsen, the plaintiffs and appellants, were the registered proprietors of commercial premises at 25 High Street, Strathalbyn. James Gerald Nolan, the defendant and respondent, was a tenant occupying the premises. Mr Nolan operated an antique business from the premises.
Mr Nolan entered possession of the premises on 23 June 1999 pursuant to the terms of a deed of assignment of a lease that commenced on 1 December 1995 and terminated after five years on 30 November 2000.
The primary issue before the magistrate was whether Mr Nolan was entitled to a lease of the premises for a term of five years commencing from 1 December 2000. The magistrate concluded that Mr Nolan was entitled to a lease for that term. Barry and Brett Henningsen have appealed from that decision.
At trial all relevant facts were agreed. The parties respective contentions centred on the construction of the lease, a deed of assignment by a former lessee to Mr Nolan and the terms of the Retail and Commercial Leases Act1995 (SA).
The agreed facts can be summarised as follows:
-On 1 December 1995 a lease of the premises was entered into for a term of five years. The lease was to expire on 30 November 2000.
-On 23 June 1999 the then tenant by deed of assignment assigned the lessees interest in the 1995 lease to Mr Nolan. As a result Mr Nolan became the lessee of the premises.
-The term of the 1995 lease expired on 30 November 2000.
-On the expiration of the term of the 1995 lease Mr Nolan remained in occupation of the premises with the consent of the lessor thereby holding over.
-On 14 February 2003 the then owners entered into an agreement for the sale and purchase of the premises to Barry and Brett Henningsen. The agreement for sale and purchase recorded the existence of the lease with the following notation:
Tenancies:James Gerald Nolan as tenant of the whole of the land … having accepted an assignment of a previous lease which expired on the 30^th November 2000 and since then occupying the property on a ‘holding over’ basis.
The contract for sale was settled on 11 March 2003. Barry and Brett Henningsen then became the registered proprietors of the premises.
-On 12 March 2003 Barry and Brett Henningsen as owners and lessor caused a notice of termination to be served on Mr Nolan. That notice was in the following terms:
That you occupy the Premises pursuant to a Memorandum of Lease dated 20 December 1995 between certain parties and assigned to you pursuant to a Deed of Assignment dated 23 June 1999 (“the Lease”).
The term of the Lease expired on 1 December 2000.
That pursuant to clause 3.2 of the Lease you occupy the premises under a monthly periodic tenancy (“the Tenancy”).
That pursuant to clause 3.2 of the Lease the Tenancy may be terminated by either party giving the other “not less than one (1) calendar months’ notice in writing”.
That pursuant to clause 3.2 of the Lease the Registered Proprietor hereby terminates the Tenancy and provides you with one calendar months’ notice of termination. The Registered Proprietor will require vacant possession on the close of business on 11 April 2003.
-Mr Nolan claimed that the notice of termination was invalid. Mr Nolan refused to give vacant possession of the premises to Barry and Brett Henningsen.
-Mr Nolan claimed to be in occupation of the premises pursuant to a lease which commenced when Mr Nolan held over with the consent of the lessor following the termination of the 1995 lease on 30 November 2000.
Mr Nolan contended that he was entitled to a lease of the premises for a term of five years commencing on 1 December 2000. It is his claim that this lease arose as a consequence of the provisions of the Retail and Commercial Leases Act and in particular the terms of section 20B.
Barry and Brett Henningsen rejected this claim. It was their case that Mr Nolan had been in occupation of the premises as lessee since 1995 and personally since 23 June 1999. He had been in occupation since 1 December 2000 pursuant to a holding over of the 1995 lease. It was said that Mr Nolan was a monthly tenant. It was contended that section 20B of the Retail and Commercial Leases Act had no application. Consequently the notice of termination of 12 March 2003 was valid.
The Magistrate’s Conclusions
On 31 July 2003 the magistrate entered judgment for Mr Nolan and ordered that Barry and Brett Henningsen be restrained from issuing or acting upon the notice of termination until 1 December 2005. The magistrate concluded:
… I am of the view that Nolan is the person who has the right to occupy the retail shop under a retail shop lease and that he has not done so for at least five years. I do not consider that reference in the definition of ‘Lessee’ to a former lessee (who may be the assignor of the lease to Nolan in this matter) is of any assistance. The definition is inclusive but the primary definition as to its meaning in my view precisely fulfils the description of Nolan. In other words, I am not required and do not think that I am required to add together the period of occupation of the former lessee and Nolan’s time of occupation to come to a period of time which would exceed five years. I believe that in the present case the period of occupation of Nolan (ie since 23 June 1999 until the present day) is the period that I am required to consider and it is that period alone. Nolan assumed occupation of the premises nearly 18 months before the lease expired on 30 November 2000. He has held over since 30 November 2000. There is no fresh lease between the plaintiffs and Nolan.
…
I find that Nolan is entitled to consider that he has a retail shop lease for a period of five years operating from the date of expiry of the original lease and therefore he is entitled to a five year lease operative from 1 December 2000 until 30 November 2005.
The magistrate concluded that Mr Nolan was entitled to a five year retail lease commencing from 30 November 2000, the date of expiration of the first lease.
The Lease
Merrawyn Lorna Harvey, John Ralph Rowe, Wendy Joy Garwood, Neville David Rowe and Susan Rosslyn Alexander, the then owners of the premises entered into a lease with Bruce Gilbert Spilsbury and Amanda Jan Spilsbury for a period of five years from 1 December 1995. The lease defined ‘lessee’:
The “Lessee” means the party or parties described on page 1 of this lease as the Lessee and if more than one then jointly and severally and includes heirs, executors, administrators, successors and permitted assigns.
The parties described on page 1 as the lessee were the Spilsbury’s.
The lease further provided:
3.1 The Term commences at 12.01 am on the first day [1/12/95] and ends at 12.00 pm on the last day [30/11/00] of the Term…
3.2If the Lessee with the consent of the Lessor express or implied remains in occupation of the Leased premises after the expiration of the Term then the Lessee shall be deemed to hold the Leased Premises as a tenant on a monthly basis subject to all the covenants and conditions herein contained and the tenancy may be terminated by either party giving to the other not less than one (1) calendar months’ prior notice in writing expiring on a day necessarily at the end of a normal monthly period provided that the Lessee may hold over for a maximum period of six months only following the expiration of the Term.
The Deed of Assignment
On 23 June 1999 Mr Nolan became the lessee of the premises by deed of assignment. The deed included the following recital and terms:
The Assignor is desirous of assigning its right title estate and interest under the Lease and to the Demised Premises to the Assignee on and from the date set out in Item 3 of the Schedule (hereinafter called “the Assignment Date”) and the Lessor has consented to such assignment subject to and upon the several terms covenants conditions and agreements hereinafter set out.
…
… the Assignor hereby assigns to the Assignee as and from the Assignment Date all of its right title estate and interest under the Lease and in the Demised Premises and the Assignee accepts such assignment subject to and upon the several terms convenants conditions and agreements herein contained.
…
The Assignee hereby covenants and agrees with the Lessor and as a separate and additional covenant with the Assignor that it will on and from the Assignment Date duly punctually and faithfully observe and perform all and singular the terms covenants conditions and agreements in the Lease contained and on the part of the lessee there under to be observed and performed and shall indemnify and forever hold the Assignor harmless from and against any and all liability which the Assignor may incur by reason of the Assignee’s breach of its covenant with the Assignor in this clause contained.
The Statutory Scheme
The Retail Commercial Leases Act is part of a nationwide legislative scheme[1] which seeks to ensure security of tenure to tenants of retail shopping centres.
[1] Retail Leases Act 1994 (NSW), Retail Leases Act 2003 (Vic), Retail Leases Act 2003 (SA), Retail Shop Leases Act 1994 (Qld), Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA), Leases (Commercial and Retail) Act 2001 (ACT), Fair Trading (Code of Practice for Retail Tenancies) Regulations 1998 (Tas)
Legislative changes to the law relating to retail shop leases have occurred in recent years. At the time that the subject lease was entered into, the Landlord and Tenant Act 1936 (SA) was in force. The section relating to the term of a retail tenancy was repealed by the Retail Shop Leases Act 1995 (SA) which came into force on 30 June 1995. Section 17 of the Retail Shop Leases Act provided that the minimum term of a retail shop lease be five years. Section 17 was repealed in 1997 and replaced by section 20B. The name of the Retail Shop Leases Act was changed at that time to the Retail and Commercial Leases Act.
Counsel for Mr Nolan submitted that the legislative intention behind section 20B was to effect security of tenure. It was contended that section 20B was intended to protect people in the position of Mr Nolan who take possession of retail premises part way into the five year term. Security of tenure was undoubtedly an important legislative consideration. However, an extract from parliamentary debate suggests that the legislature did not intend to force parties into a new lease. The second reading speech relevantly provides:
The Bill also now makes clear that holding over beyond an initial minimum five-year period should not, of itself, give rise to a possible further five-year term. The original Bill’s provisions have also been amended to provide for clearer and potentially longer notice of tenant’s applications to extend lease terms.
Sections 20A and 20B of the Retail and Commercial Leases Act provide:
20A(1) The Parliament recognises that conflicts sometimes arise between a lessor's expectation to be able to deal with leased premises subject only to the terms of the lease and a lessee's expectation of reasonable security of tenure.
(2) The objects of this Part are to achieve an appropriate balance between reasonable but conflicting expectations and to ensure as far as practicable fair dealing between lessor and lessee in relation to the renewal or extension of a retail shop lease.
20B(1) The term for which a retail shop lease is entered into must be at least five years.
The term of a retail shop lease is worked out under this section on the assumption that any right or option of renewal or extension under the lease or a collateral agreement will in fact be exercised. However, a right or option of renewal or extension will not be taken into account if it is given after the lease is entered into.
(2) A lease is not invalidated by contravention of this section but the term of the lease is extended to bring the term (or aggregate term) to five years.
If (for example) a lease is entered into for a term of three years, its term is extended by two years to five years. If a lease is entered into for a term of two years with an option for a further one year after that initial two years, the term of the lease is extended to four years (with the option for a further one year after that initial four years).
(3) This section does not apply to a lease if—
(a) the lease is a short-term lease (ie a lease entered into for a fixed term of 6 months or less); or
(b) the lease arises when the lessee holds over after the termination of an earlier lease with the consent of the lessor and the period of holding over does not exceed 6 months; or
(c) the lease contains a certified exclusionary clause; or
(d) the lessee has been in possession of the retail shop premises for at least 5 years; or
(e) in the case of a retail shop lease that is a sublease—the term of the retail shop lease is as long as the term of the head lease allows; or
(f) the lease is of a class excluded by regulation from the ambit of this Division.
Section 3(1) defines the term ‘lessee’:
"lessee" means the person who has the right to occupy a retail shop under a retail shop lease, and includes—
(a) a sublessee; and
(b) a prospective lessee or a former lessee;
The object of section 20B is expressly identified in section 20A. The legislature sought to strike a balance between a lessor’s expectation of being able to deal with leased premises and a lessee’s expectation of reasonable security of tenure. The legislature struck the balance between these reasonable but conflicting expectations by providing that the minimum term of a retail shop lease must be at least five years. In the event of a retail shop lease being less than five years the legislation statutorily extends the term of the lease. Section 20B(2), the sub-section that operates to extend the term of the lease, prima facie applies to all relevant retail shop leases. However section 20B(3) provides that section 20B(2) does not apply to certain leases. The proper construction of section 20B(3)(b) and (3)(d) arise for consideration in this case.
Submissions of Counsel
Counsel for Barry and Brett Henningsen accepted that the 1995 lease pursuant to which it was said that Mr Nolan was holding over was a lease to which section 20B of the Retail and Commercial Leases Act applied. It was submitted that the 1995 lease was for a period of five years and that there had been compliance with the terms of section 20B(1). It was said in these circumstances section 20B(2) had no operation. There was no need to consider the terms of section 20B(3).
Counsel argued in the alternative that if the holding over by Mr Nolan amounted to a retail shop lease within the meaning of section 20B(1) then the operation of section 20B(2) was excluded by the terms of section 20B(3). It was said that on any view Mr Nolan was a lessee who had been in possession of the retail shop premises for at least five years within the meaning of section 20B(3)(d). Counsel contended that as ‘lessee’ was defined to include a ‘former lessee’, the terms of section 20B(3)(d) were satisfied regardless of a change in the personal identity of the lessee. This was said to accord with the basic objective of the Act - to ensure security of tenure for a reasonable term of retail shop leases.
Counsel submitted that the conclusion of the magistrate was in conflict with this general object. It was said that the magistrate, in interpreting the legislation in this way, effectively gave the assignee a new five year lease, a benefit that the original lessee could not have obtained. On this reasoning, there was a possibility that a further assignment during the term of the new lease could create yet another new five year lease term for the next assignee. Counsel for the appellant contended that it could not have been the intention of the legislature to allow such a situation to arise.
Counsel for Mr Nolan acknowledged that Mr Nolan had been a lessee under the 1995 lease. However it was submitted that the 1995 lease terminated on 30 November 2000. It was accepted that Mr Nolan held over, but it was said that this arrangement constituted a new lease of retail shop premises. In these circumstances it was contended that section 20B(2) applied and extended the term of the lease which arose at the commencement of the holding over to a term of five years.
Counsel argued that the period of holding over exceeded the six months specified in section 20B(3)(b) and that consequently section 20B(1) applied to extend the term of the lease to five years. Counsel submitted that the reference to ‘person’ in the statutory definition of lessee indicated a legislative intention to restrict the ‘leesee’ to a particular person. It was submitted that as the section used the language of ‘sub-lessee’ or ‘prospective lessee’ that the intention was not to include an assignee within the definition of lessee. As a result Mr Nolan had been in possession for a period of less than five years and section 20B(3)(d) did not have application.
The Holding Over
Following the expiration of the 1995 lease on 30 November 2000 Mr Nolan remained in occupation of the premises with the consent of the then owners.
‘Holding over’ refers to a period of occupancy that continues after the conclusion of a lease without the parties to the lease entering into an express agreement to do so. The term ‘holding over’ is an ambiguous expression. Herron CJ in Erlington v Judd[2] observed:
…it is an undoubted principle that where a tenant holds over after the expiration of a term and the facts do not exclude an implied agreement to hold upon the terms of the old lease, then the law determines that he impliedly holds subject to all the covenants in the lease which are applicable to the new situation…
…a wide field of obligations has been imposed on tenants who hold over, or, more correctly stated, continue tenancies as periodic tenants…
[2] (1964) 64 SR(NSW) 150 at 153
Asprey J in the same case commented:
In Cole v Kelly the difference in the field of landlord and tenant between a holding-over and a continuance in occupation of the subject premises on new terms agreed upon between the landlord and tenant prior to the expiration of the original term was explained…A holding over occurs where, after the expiration of the term originally granted, the tenant continues in possession with the consent of the landlord but without prior agreement as to the terms upon which the possession of the subject property is to be retained, which situation gives rise to a tenancy at will which tenancy by a subsequent payment of rent or by subsequent agreement may be converted into a tenancy of more fixed duration…Under those circumstances it has been said that in the absence of anything to the contrary agreed to between the landlord and tenant, the terms and conditions of the original lease apply to the new tenancy so far as they are ‘not inconsistent’ with such tenancy. Some of the authorities, which are not uniform on this particular question, state that in these circumstances the tenant holds upon such of the provision of the old lease which are ‘applicable’ to the new situation.
Counsel for Barry and Brett Henningsen argued that the effect of Mr Nolan remaining in possession of the property after the conclusion of the lease was that he held over as a periodic tenant on the same terms as the 1995 lease. No new lease was created as no new terms were agreed.
As earlier observed the 1995 lease contained a six month holding over provision. However, Mr Nolan held over for more than two years following the expiration of the lease. The owners and Mr Nolan continued the holding over arrangement. Nothing new occurred. Mr Nolan paid the previously agreed rent. Matters simply continued.
The Effect of the Assignment

A legal assignment of a lease is a transfer of the interest held by one party to another where the assignee takes over the remaining term of the lease. - JD_245-1530Ftnt7An assignment does not constitute the creation of a new lease.[3] Subject to any express provision to the contrary, the right to assign is part of every estate.
[3] Dileum Pty Ltd v JK Corp Pty Ltd (1989) 1 WAR 244; Thompson v M L Wordsworth Pty Ltd (unreported, Commercial Tribunal (WA), 4 November 1992); Hamatan Pty Ltd v Narracan Nominees Pty Ltd (1993) V ConvR ¶54-471; A Calkos Pty Ltd v Taylors Farms (Aust) Pty Ltd (1998) NSW ConvR ¶55-867; Mason v Harris [1921] 1 KB 653.
The result of an assignment is to alter relationships dependent upon privity of estate - JD_245-1530Ftnt19but not to alter those relationships dependent upon privity of contract. - JD_245-1530Ftnt20http:// - JD_245-1530Ftnt22After transfer, where an assignment is accepted by a lessor, privity of estate exists between the lessor and the assignee. - JD_245-1530Ftnt23
In Debonair Nominees Pty Ltd v J & K Berry Nominees Pty Ltd[4] this court dealt with the issue of assignment. Mullighan J observed:
At common law an assignment of a lease does not create a new lease: Mason, Herring and Brooks v Harris & Anor (1921) 1 KB 653 at 655. It is effectively the transfer of the lease to the assignee who becomes the lessee of the premises: Lang’s Commercial Leasing in Australia 12-030, 12-070. … The position is explained in WD Duncan, Commercial Leases in Australia (3^rd ed, 1998) thus, at 65:
“Upon the creation of a valid lease, there is both privity of contract and privity of estate between lessor and lessee. The former arises from the existence of a contract between the parties and the latter arises from the tenure between the parties. Upon an assignment of the lease, that tenure is broken but the privity of contract remains. After the assignment, whilst there is privity of estate between the lessor and the assignee of the lease, the original lessee remains liable upon the express covenants.”
The continuing liability of the original lessee is for all breaches of covenants throughout the term of the lease, even after assignment because the privity of contract remains: Megary & Wade, The Law of Real Property (5^th ed, 1984) at 750 and R v Teller Home Furnishers Pty Ltd (In Liq) Electronic Industries v Horsburgh [1967] VR 313 at 319-320. This continuing liability is inconsistent with the creation of a new lease.
Mullighan J considered that there was nothing in the Retail and Commercial Leases Act that varied the common law position that an assignment does not create a new lease.
[4] (2000) 77 SASR 261 at 265
The Meaning of “Lessee” in the Retail and Commercial Leases Act
Counsel for Mr Nolan did not challenge the submission that the assignment of the 1995 lease did not create a new retail shop lease from the date of assignment. This concession was rightly made. Mr Nolan became a party to the 1995 lease by assignment. There was no entry into a new lease. Mr Nolan was bound by the terms of the 1995 lease. The 1995 lease terminated on 30 November 2000. There was no early termination of the 1995 lease. Mr Nolan continued as the lessee of the 1995 lease by assignment.
The statutory definition of ‘lessee’ does not refer to a particular person. The definition includes not only the person to whom the lease is granted but may also include such other persons as ‘heirs, executors, administrators, successors and permitted assigns’. The language of the statutory definition is broad enough to encompass those standing in the position of ‘the lessee’ to ‘the landlord’. Such an interpretation accords with the earlier reference to a balance being struck by the legislature. This interpretation is in accord with the definition of ‘lessee’ appearing in the 1995 lease. That definition as earlier noted included permitted assigns. The assignee, Mr Nolan, became the lessor of a lease with a five year term. Mr Nolan in his capacity as lessee of the 1995 lease was a party to a lease that continued for five years. The lessee of the 1995 lease remained in occupation of the premises for five years. Mr Nolan was that lessee.
This conclusion is supported by the decision in Re Rakita’s Application.[5] The court held that the term ‘lessee’ was broad in meaning and could include a person who was not the original lessee. Although the case addressed the terms of an agreement to lease, the underlying rationale remains relevant:
… the word “lessees” means the persons to whom the lease is granted; but it is certainly capable, not only in ordinary language but in a legal instrument, of including, as well the assignees of the lease, those who are lessees by assignment, and who stand in the relation to the landlord of the lessees by assignment, as those who stood in that relation by the original lease…
[5] [1971] Qd R 59 at 65
The language of section 3(1) of the Retail and Commercial Leases Act expressly includes ‘prospective’ and ‘former’ lessees. These inclusions support the conclusion that the lease continues for five years regardless of a change in the particular person leasing the property. Even if the term ‘lessee’ is to be treated as a reference to a particular person in occupation the reference in section 3(1) to ‘former lessee’ picks up the original lessee in the present case. The requirement that a retail shop lease continues for 5 years is not frustrated by an assignment or sub-lease.
The ‘lessee’ of the 1995 lease included the lessee by assignment. The 1995 lease was a five year lease which complied with section 20B(1). The assignment did not affect the term of the 1995 lease. The lessee had been in possession for at least five years section 20B(3)(d) operated.
Conclusion
For these reasons the appeal should be allowed.
JUDGMENT CITATIONS LISTED IN ORDER OF APPEARANCE IN JUDGMENT
1Retail Leases Act 1994 (NSW), Retail Leases Act 2003 (SA), Retail Shop Leases Act 1994 (Qld), Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA), Leases (Commercial and Retail) Act 2001 (ACT), Fair Trading (Code of Practice for Retail Tenancies) Regulations 1998 (Tas).
2Dileum Pty Ltd v JK Corp Pty Ltd (1989) 1 WAR 244; Thompson v M L Wordsworth Pty Ltd (unreported, Commercial Tribunal (WA), 4 November 1992); Hamatan Pty Ltd v Narracan Nominees Pty Ltd (1993) V ConvR ¶54-471; A Calkos Pty Ltd v Taylors Farms (Aust) Pty Ltd (1998) NSW ConvR ¶55-867; Mason v Harris [1921] 1 KB 653.
3 (2000) 77 SASR 261 at 265
4 [1971] Qd R 59 at 65

[2004] SASC 105

14 April 2004