Italia Ceramics International Super Pty Ltd v CM Corporation Pty Ltd - [2019] SASCFC 54

SUPREME COURT OF SOUTH AUSTRALIA
(Full Court)
ITALIA CERAMICS INTERNATIONAL SUPER PTY LTD & ANOR v CM CORPORATION PTY LTD & ANOR
[2019] SASCFC 54
Judgment of The Full Court
(The Honourable Chief Justice Kourakis, The Honourable Justice Parker and The Honourable Justice Lovell)
21 May 2019
LANDLORD AND TENANT - RENT - BREACH OF COVENANT TO PAY - ACTIONS TO RECOVER RENT OR DAMAGES - ACTION TO RECOVER RENT
LANDLORD AND TENANT - RENT - ABATEMENT
LANDLORD AND TENANT - LEASES AND TENANCY AGREEMENTS - CONSTRUCTION AND INTERPRETATION
LANDLORD AND TENANT - RESIDENTIAL TENANCIES LEGISLATION - OBLIGATIONS, PROHIBITED MATTERS AND PROTECTION FOR LESSEES - INSPECTION AND REPAIR
The appellants entered into a lease agreement in which the first respondent became the lessee of premises owned by the appellants. The premises sustained storm damage in September 2015, which was not repaired until December 2015. The first respondent had paid rent in full and in advance of the months of September and October 2015, but failed to pay rent for the months of November and December 2015. The appellants issued a Notice to Remedy Default on 20 November 2015, and, after the first respondent did not remedy the breach, a Notice of Re-Entry, Termination and Demand on 7 December 2015. One day later, the appellants re-entered the premises and took possession.
The Trial Judge dismissed the appellants’ claim against the respondents for outstanding rent and associated expenses, and awarded the respondents an abatement of rent for the period of 16 September 2015 to 4 December 2015, during which the premises’ useability was reduced by 50 per cent.
Held per Kourakis CJ (Parker and Lovell JJ agreeing) dismissing the appeal:
1. Section 40 of the Rental and Commercial Leases Act 1995 (SA) (the Act) allows an abatement to be credited against future rent charges. An objective construction of this section increases certainty, which in turn encourages efficient resolutions of disputes.
2. The word ‘liability’ in s 40 of the Act includes a liability to pay rent for a period in which the useability of the premises was diminished even though that liability has been discharged.
3. The diminution in the useability of the premises is to be measured against the use which the lessee would have made of the premises. The first respondent was entitled to a diminution of its rental liability on the basis of the loss of floor area determined by the Judge.
4. The email and attached statement of the respondent, on which the appellant relies as evidence of the respondent’s purported repudiation of the lease, appear to be an attempt to negotiate terms. They are not expressed in the unequivocal terms which are necessary to support a claim that the respondent had expressed an intention not to pay if the attempt to negotiate failed.
Rental and Commercial Leases Act 1995 (SA) s 40, referred to.
Edex International Holdings Pty Ltd v Marmalade Films Pty Ltd (2003) 56 NSWLR 63, distinguished.
Shevill v Builders Licensing Board (1982) 149 CLR 620; Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17, discussed.

WORDS AND PHRASES CONSIDERED/DEFINED
"liability", "outstanding rent", "lease agreement"

ITALIA CERAMICS INTERNATIONAL SUPER PTY LTD & ANOR v CM CORPORATION PTY LTD & ANOR
[2019] SASCFC 54
Full Court: Kourakis CJ, Parker and Lovell JJ

KOURAKIS CJ: This is an appeal from a judgment of the District Court dismissing the appellants’ claim against the respondents for outstanding rent and associated expenses.
Background
The appellants, Italia Ceramics International Super Pty Ltd and Italia Ceramics Super Pty Ltd (Italia Ceramics), are the joint owners of a commercial premises located at 155 Payneham Road, St Peters (the premises). On 16 June 2014, Italia Ceramics granted the first respondent, CM Corporation Pty Ltd (CM Corporation), a lease to use the premises for a period of five years commencing on 1 July 2014 (the lease). The second respondent, Cain Rumbelow, was a guarantor of CM Corporation’s performance of the lease. Under the lease, rent was payable monthly in advance on the first day of the month.
The premises were described by the Judge as follows:[1]
[3]It is a large, relatively modern commercial building. It presents a two‑storey‑high façade to the street, with massive glass windows. Inside is a large, two-storey‑high showroom. Staircases at each side of the showroom lead from the ground floor to a mezzanine. Behind the showroom were two warehouse areas, each occupying approximately one-third of the floor area.
…
[5]During the first year of the tenancy, with the permission of Italia Ceramics, CM installed a floor in the middle warehouse space, creating two floors in the middle third of the building, effectively doubling the area of the mezzanine on the first floor. The rear third of the building remained a two-storey‑high warehouse space.
[1] Italia Ceramics International Super P/L & Anor v CM Corporation P/L & Ors [2018] SADC 8 at [3], [5].
A severe hailstorm hit Adelaide on 16 September 2015. Hail blocked the gutters of the premises and water flowed onto the mezzanine and ground floors. There was water damage to the ceiling, electrical, air conditioning, and lighting systems of the premises. The total cost of the repairs was $32,444.32.
Italia Ceramics’ letting agent, Ms Maas, attended the premises on the morning of the storm. She arranged to have water, which was six inches deep on the ground floor, pumped out. An electrician was called in to make the premises safe. Electricity to the mezzanine was cut off. She told Mr Rumbelow not to undertake a fit-out of the mezzanine floor until repair work arranged by the insurer was completed. The Judge found (believing that it was common ground) that the repairs were completed on 4 December 2015.
Prior to the September hailstorm, CM Corporation had paid rent to Italia Ceramics for the month of September 2015. After the storm it also paid the rent for the month of October 2015 in advance and in full.
However, CM Corporation experienced financial difficulties in October and it failed to make its rental payment due on 1 November 2015. On 20 November 2015, Italia Ceramics served a Notice to Remedy Default (the Default Notice) on CM Corporation, asserting that CM Corporation had failed to pay rent and outgoings in the sum of $14,537.16 and requiring it to rectify the default within 14 days.
CM Corporation did not meet the demand made in the Default Notice. CM Corporation also failed to pay the monthly rent and outgoings which were due on 1 December 2015. Italia Ceramics then served a Notice of Re-Entry, Termination and Demand (the Re-Entry Notice) on 7 December 2015. The Re‑Entry Notice asserted that CM Corporation had failed to pay a total of $36,194.28, and terminated the lease. One day later, on 8 December 2015, Italia Ceramics physically re-entered the premises, took possession and evicted CM Corporation.
Italia Ceramics brought an action against CM Corporation and Mr Rumbelow for the unpaid rent in 2015, for lost rent and outgoings in the period after it re-entered the premises, and for related losses. The Judge dismissed the appellants’ claim. His Honour held that CM Corporation was entitled, pursuant to s 40 of the Retail and Commercial Leases Act 1995 (SA) (the Act), for the loss of use of the premises in the months of September and October 2015, and to have that abatement credited against future rent charges, even though CM Corporation had paid rent in those months. Italia Ceramics accepts that if CM Corporation is entitled to a credit against future charges for the rent paid in September and October, based on an abatement proportionate to the area the Judge found was affected by the damage, then no rent was due when the Default Notice was served. I would construe s 40 of the Act to allow an abatement to be credited against future rent charges. I would reject the appellants’ contention that the diminution in the useability of the premises is to be measured against the use which the lessee would have made of the premises. The diminution must be measured objectively by reference to the floor space affected by the damage. I would therefore uphold the decision of the Judge on that issue. I would also reject Italia Ceramics’ contention that CM Corporation had otherwise repudiated the lease, entitling Italia Ceramics to terminate the lease. I would therefore dismiss the appeal. My reasons follow.
District Court Hearing
Italia Ceramics brought proceedings in the District Court to recover $156,894.52 for rent lost for the remainder of the lease term, $23,433.61 for outgoings and $8,965.19 for other losses, including the cost of re-entry, taking possession and re-leasing. CM Corporation defended the claim on the ground that the damage from the September hailstorm rendered the building unusable within the meaning of that term in s 40(1) of the Act, which provides:
40—Damaged premises
(1)A retail shop lease is taken to provide for the following if the shop or the building of which the shop forms part is damaged –
(a) the lessee is not liable to pay rent, or any amount payable to the lessor in respect of outgoings or other charges, that is attributable to a period during which the shop cannot be used under the lease or is inaccessible due to that damage;
(b) if the shop is still useable under the lease but its useability is diminished due to the damage, the lessee's liability for rent and any amount for outgoings attributable to a period during which useability is diminished is reduced in proportion to the reduction in useability caused by the damage;
…
Italia Ceramics contended that the reduction in useability of the premises was minimal.
A report and attached photographs prepared for Allianz Australia Insurance Ltd by loss adjusters was received into evidence. The Judge summarised the damages described in the report as follows:[2]
… the hailstorm blocked the roof gutters on the building with ice, causing water to overflow into the upper (mezzanine) level of the building. The water then flowed into various parts of the ground floor level of the building. Extensive damage was caused to plasterboard ceilings on both levels, as well as damage to the electrical system, the air‑conditioning system and the lighting system.
[2] [2018] SADC 8 at [17].
The repair works were substantially completed by 4 December 2015, only a short time before CM Corporation was evicted. An invoice from HAS Building Services Pty Ltd, which had carried out the repairs, dated 7 December 2015, in the sum of $32,444.32, was received into evidence.
The Judge dismissed Italia Ceramics’ claim. His Honour found that the damage diminished the premises’ useability by at least 50 per cent. In arriving at this figure, the Judge had had regard to correspondence between the plaintiffs’ senior commercial property manager and insurer, in which his Honour found that Italia Ceramics represented to the insurer that it had suffered a loss of at least 50 per cent of rent revenue. The Judge found that there was no evidence that showed that the useability of the premises was any greater than one half, and accordingly determined that the defendants were entitled to a 50 per cent abatement of rent for the period during which the repairs were carried out, being 16 September 2015 to 4 December 2015.
CM Corporation had paid rent in full for the months of September and October 2015. Applying the 50 per cent abatement, the Judge proceeded on the basis that there had been an overpayment for those months. The Judge carried over the credit from the September and October overpayment against the rent owing for the months of November and December. On the Judge’s calculation, CM Corporation was in credit by $3,667.84 before the rent fell due on 1 December 2015. It followed that Italia Ceramics had no basis on which to issue the Default Notice on 20 November 2015. Nor was there any basis on which to serve the Notice of Termination and Re-Entry on 7 December 2015 because it was founded on the purported breach specified in the Default Notice. The Judge found:[3]
[49]Accepting Ms Maas’ evidence, about which I am extremely sceptical, I find that Italia Ceramics was representing to Allianz that they had suffered a loss of at least 50% of the rent revenue for the period from 16 September 2015 to 4 December 2015. That is 50% of $36,678.40, or $18,339.20. I see no reason to conclude that the useability of the property was reduced to any lesser extent. The evidence does not suggest that the useability of the premises was any less than 50%. There is only the evidence of Ms Alyse Vozzo, who worked for CM at the time, who gave evidence of the extent to which the premises were used during the relevant period, but even that does not allow for any more exact quantification of the loss of useability of the premises.
[50]The defendants had paid the rent for the months of September and October 2015 in full. Allowing a 50% abatement of the rent during the period from 16 September 2015 to 31 October 2015, this was an overpayment of $14,671.36 per month x 1.5 months, less 50%, or $11,003.52.
[51]As for November, allowing for a 50% abatement, the defendants were liable to pay $14,671.36 less 50%, or $7,335.68.
[52]Since the defendants were $11,003.52 in credit, there was no rent outstanding as at 1 December 2015. In fact, the defendants were $11,003.52 – $7,335.68, or $3,667.84, in credit at the time.
[3] Italia Ceramics International Super P/L & Anor v CM Corporation P/L & Anor [2018] SADC 8 at [49]- [52].
I observe here that on 1 December 2015 the rent for the whole month of December fell due, albeit subject to some reduction in the first week whilst the repair works were completed. However, it remains the case that CM Corporation was not in default when the Default Notice was served.
Grounds of Appeal
The appeal to this Court proceeded on the following grounds:
1Abandoned.[4]
[4]    Ground 1 had provided:
‘The trial Judge erred by finding that the useability of the premises was diminished by 50 per cent during the period 16 September 2015 to 4 December 2015’.
In Italia Ceramics reply submissions, it withdrew the complaint that a 50 per cent reduction in useability, assessed by reference to the loss of floor space, was excessive.
2In the circumstances where the first respondent failed to make any payments of the rent and outgoings due on 1 November 2015 and 1 December 2015, the trial Judge erred by finding that:
(a)     the first respondent was not in breach of the lease as at the date of the issue of      the Notice to Remedy Default on 20 November 2015 and as the date of the Notice of Termination and Re-Entry on 7 December 2015;
(b)     there was no rent outstanding as at 1 December 2015 and that the first respondent was in credit at that time; and
(c)     the appellants had no right to terminate the lease and that the eviction of the first respondent was unlawful.
3The trial Judge erred by applying any purported credit (for the months of September and October 2015) towards the rent and outgoings payable on 1 November 2015 because:
(a)     there was an obligation of the first respondent under clause 3.1 of the lease to pay the rent on the first day of each month ‘free from exchange deduction set-off (including equitable set-off) or counterclaim or abatement’; and
(b)     the first respondent has paid the rent for September and October 2015 and it was not until 4 November 2015 that an abatement of rent was sought.
4The trial judge should have found that:
(a) the Notice to Remedy Breach was a valid demand even if it overstated the outstanding liability for rent that arose by operation of s 40(1)(b) of the Retail and Commercial Leases Act 1995 (SA); and
(b)     the Appellants were entitled to terminate the lease due to the failure by the first respondent to make any payment towards the November and December rent and outgoings.
Construction of s 40
The first contention put by Italia Ceramics on the construction of s 40 of the Act is that a tenant cannot claim a credit against rent paid in advance for a period in which the useability of the premises is later diminished. The Court of Appeal of New South Wales considered the operation of a contractual provision, for present purposes to the same effect as s 40 of the Act, in Edex International Holdings Pty Ltd v Marmalade Films Pty Ltd (Edex).[5]In that case, the landlord of commercial premises sought to recover rent for the remainder of the lease term after the tenant vacated the premises. The tenant occupied the premises under a three year lease from 25 May 1998 until it moved out at the end of July 2000. The tenant claimed that the useability of the premises had been diminished by rising damp which had been concealed by the painting of the building before it moved in. The tenant sought to set-off against the landlord’s claim for unpaid rent, which was paid in excess of an abatement to which it was entitled, because of the diminished useability of the premises. Over the period of its occupation, even though it had paid the recent over that time until August 2000, the tenant had not complained about the rising damp and had not informed the landlord’s agent that it had enjoyed only limited use of the premises until May 2000, shortly before vacating the premises.
[5] (2003) 56 NSWLR 63.
Clause 8 of the lease provided:[6]
[6] Edex International Holdings Pty Ltd v Marmalade Films Pty Ltd (2003) 56 NSWLR 63 at [11].
Part 8 — INSURANCE AND DAMAGE
…
What happens if the property is damaged?
8.2 If the property or the building of which it is part is damaged (a term which includes destroyed) —
8.2.1 the tenant is not liable to pay rent, or any amount payable to the landlord in respect of outgoings or other charges, that is attributable to any period during which the property cannot be used under this lease or is inaccessible due to that damage; and
8.2.2 if the property is still useable under this lease but its useability is diminished due to the damage, the tenant's liability for rent and any amount in respect of outgoings attributable to any period during which useability is diminished is reduced in proportion to the reduction in useability caused by the damage; and
8.2.3 the landlord notifies the tenant in writing that the landlord considers that the damage is such as to make its repairs impracticable or undesirable, the landlord or the tenant can terminate this lease by giving not less than 7 days notice in writing of termination to the other and no compensation is payable in respect of that termination; and
8.2.4 if the landlord fails to repair the damage within a reasonable time after the tenant requests the landlord to do so the tenant can terminate this lease by giving not less than 7 days notice in writing of termination to the landlord; and
8.2.5 nothing in clause 8.2 affects any right of the landlord to recover damages from the tenant in respect of any damage or destruction to which the clause applies.
The tenant’s claim was dismissed at trial. That decision was affirmed on appeal because of the tenant’s failure to give notice of the diminished useability of the premises.
On the appeal the landlord contended that:
·clause 8 should be construed by analogy with a ‘covenant to repair, in relation to which it was established that a landlord was not in breach of a covenant to repair unless the landlord had notice of the relevant need for repair’.[7] If it were not so construed, the landlord could be subject to a very substantial loss of rent in relation to something that could have been easily and cheaply repaired. ‘Accordingly, there should be implied in cl.8.2 a term that abatement was conditional on the landlord being notified of the relevant damage within a reasonable time of the damage having arisen’.[8]
·Alternatively, ‘there should be no refund of rent and outgoings actually paid, since they were voluntary payments and not fairly regarded as induced by mistake’.[9]
[7]    Edex International Holdings Pty Ltd v Marmalade Films Pty Ltd (2003) 56 NSWLR 63 at [22].
[8]    Edex International Holdings Pty Ltd v Marmalade Films Pty Ltd (2003) 56 NSWLR 63 at [22].
[9]    Edex International Holdings Pty Ltd v Marmalade Films Pty Ltd (2003) 56 NSWLR 63 at [22].

On the claim for a credit for rent already paid to the landlord, Hodgson JA commented:[10]
… it would in my opinion be a most unreasonable result if the tenant could claim a refund of that rent or part of it, at least unless the tenant had made a claim for abatement of the rent and had paid the rent under protest or otherwise provisionally pending resolution of that claim. Otherwise, a landlord having no reason to suppose that anything was wrong would be deprived of the option of repairing the damage or terminating the lease under cl.8.2.4, and may be liable to make very substantial refunds of rent. I think it most unlikely that that result could have been intended.
[10] Edex International Holdings Pty Ltd v Marmalade Films Pty Ltd (2003) 56 NSWLR 63 at [25].
The injustice identified by Hodgson JA in that passage is that of a lessee amassing a potential claim against a landlord, whilst the landlord is unaware that there is any loss of use of the premises, which would require the landlord to reimburse the lessee after having had the use of the money. Hodgson JA later distinguished between the case of a claim for restitution of, or credit for, rent paid, and a defence by way of a set-off against a claim for rent which has not been paid. It is the inequity of having to refund money used by the landlord in the belief, engendered by the tenant’s silence, that the landlord was fully entitled to it.
On the other hand, if rent is unpaid, a landlord might be alerted to a problem by interrogating the tenant or inspecting the premises. A landlord in that case may also be entitled to terminate the lease before a large unpaid rent claim was accumulated. It is within the landlord’s capacity to minimise a claim for abatement of future rent, but be left without options on a claim for restitution of, or a credit for, rent already paid.
Hodgson JA, with whom Beazley JA (as her Honour then was) and Heydon JA (as his Honour then was) agreed, then set out three approaches to clause 8 which would avoid the injustice of a landlord being called on to reimburse rent paid during a long period of diminished useability:[11]
[27]First, it could be avoided by way of implication from the actual language used in cl 8.2. Clause 8.2 relates to adjustment of liability to pay rent or outgoings, and it is implicit in the wording of the clause that some claim for that abatement must be made. Since the adjustment is to liability, it could be understood that the claim for abatement has to be made at a time when the liability exists, or before it arises; so that when there is no liability because the liability has arisen and been discharged, there is nothing to which a claim for abatement can relate.
[28]A second way in which the result might be avoided is in terms of non-availability of restitutionary relief, where a payment has been made voluntarily and, by reason of the payment and lack of notification of a claim for abatement, the landlord has lost the opportunity to either repair or terminate the lease. It could well be that in such situation the change in position of the landlord would be enough to deny a restitutionary remedy, even if it could be said that the tenant's payment was relevantly induced by a mistake.
[29]The third possible way in which the result could be avoided would be the implication of a term on the basis of business efficacy. If it be the case that neither of the first two alternatives were considered valid, the requirements for implication of a term for business efficacy set out in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 283 could be satisfied. The implication would in those circumstances be reasonable and equitable; it would be necessary to give business efficacy, in the sense of avoiding a wholly unreasonable result, and would I think go without saying; it would be capable of clear expression and would not be contradicted by express terms of the contract.
[30]It is not necessary to express a final view on which of these three approaches is correct. I propose that leave to appeal be refused in relation to the claim for a refund.
[11] Edex International Holdings Pty Ltd v Marmalade Films Pty Ltd (2003) 56 NSWLR 63 at [27]-[30].
Hodgson JA then explained why he took a different position with respect to rent not yet paid as follows:[12]
[31]Turning to the case of rent and outgoings that have not yet been paid, in my opinion the situation is different. It is by no means obvious that it would be unreasonable for an abatement to occur, even if the landlord does not know about the damage and even if the claim for abatement is not made until proceedings are brought for the rent. For example, if a tenant dies, the property is shortly afterwards destroyed by fire, and for some reason the landlord does not find out about this for some time, it is by no means clear that it would be unreasonable that the estate of deceased tenant should be entitled to an abatement of rent, even in respect of a period before the landlord had notice. I do not think any of the three bases of denying relief to the tenant in relation to rent and outgoings already paid apply here. In particular, I do not think that the implication of a term requiring notice in these circumstances is necessary to give business efficacy to the contract. If in any particular case a landlord is disadvantaged because of some failure by the tenant to communicate the damage to the landlord, in circumstances where such communication should have been made, the landlord may be able to rely on an estoppel.
[12] Edex International Holdings Pty Ltd v Marmalade Films Pty Ltd (2003) 56 NSWLR 63 at [31].
The third approach for avoiding the injustice Hodgson JA identified in paragraph [29] in Edex can have no application to s 40 of the Act. No implication grounded in business efficacy can be made in respect of a statutory provision.
The implication which Hodgson JA suggested in paragraph [27] might be drawn from the text itself is, with respect, difficult to identify with precision. His Honour may have had in mind reading in the words ‘after a claim for abatement is made’ after the word ‘period’ in clause 8.2.2. It may be that s 40 of the Act should be construed in a way which implies a mutuality of obligation requiring the tenant to give the landlord notice of any matter or circumstances affecting the useability of the premises. If s 40 of the Act was construed in that manner, that requirement was plainly satisfied in this case. On that construction, a landlord would have some protection even with respect to a claim for abatement against future rent in that the landlord can take steps to minimise the period over which the abatement might be claimed on the landlord’s action for unpaid rent. However, there is little warrant for reading in a precondition, the giving of notice, to the operation of s 40 of the Act, which Parliament has chosen not to require, even if that implication might be drawn from the language of a contract. As I have just observed, that construction is inconsistent with the approach to unpaid rent outlined by Hodgson JA in [31] of Edex. Be that as it may, in this case, Italia Ceramics was aware of the diminished useability from when the damage was first sustained and the implication of an obligation of mutuality will not entitle it to deny CM Corporation a credit for the September and October rent.
Alternatively, Hodgson JA may be suggesting an implication by reading down the word ‘liability’ in that clause so that it reads ‘any undischarged liability’. The latter construction is a more orthodox reading down in that it reduces the breadth of the meaning of a word instead of adding in both words and a requirement which a person must meet to take the benefit of a provision.
I acknowledge that the word ‘liability’ is most commonly used, especially in its legal sense, to refer to an undischarged obligation or a future obligation, in particular an inchoate one. In that strict sense a liability is existing and it is undischarged until the debt or obligation is paid or met, in which case there is no longer any liability. Strictly there can be no ‘discharged liability’. What Hodgson JA describes as an implication in paragraph [27] may be no more than a strict construction of clause 8.2.2.
The substantial difficulty with both implications is that, in the commonly occurring case of rent being paid in advance, any loss of useability within the month immediately following the payment will not result in any abatement. If premises suffer damage, which it is reasonably practicable to repair, it will not be uncommon for those repairs to be completed within a month. There is no reason to think that Parliament intend to exclude those cases from the beneficial operation of s 40 of the Act. Moreover, that construction would leave the tenant who had paid rent in advance punctually, worse off than the tenant who had still not paid the rent when the useability of the premises was diminished.
The mischief to which s 40 is directed strongly militates against limiting the word ‘liability’ to extant liabilities. If the word ‘liability’ is understood to refer to both extant liabilities and to past liabilities which have earlier been discharged, a tenant who has lost the use of premises in a month for which rent has been paid in advance will still fall within the protection afforded by s 40 of the Act.
Moreover, as Hodgson JA points out, a landlord may raise the lack of notice as a defence to a restitutionary claim. Alternatively, if the tenant were to seek to have the overpayment applied to a future rent charge, a plea in estoppel by convention or of unconscionability may be available to the landlord.
I would therefore construe the word liability in s 40 of the Act to include a liability to pay rent for a period in which the useability of the premises was diminished even though that liability has been discharged. I reject the first contention of Italia Ceramics on the construction of s 40 of the Act.
The second contention put by Italia Ceramics on the construction of s 40 of the Act is that the word ‘useability’ in subs 40(1)(b) of the Act:
… connotes more than the physical condition and extends to the financial consequences of the physical condition … useability needs to be considered in the practical sense of how the premises were being used prior to the hail storm compared with how they were used after that storm. …
Italia Ceramics submits that CM Corporation bore the onus of showing that the September hailstorm affected the particular way in which it would have used the premises. Italia Ceramics submitted that the evidence showed that CM Corporation did not have the financial resources to make full use of the premises because the shop fit‑out which it intended to install on the mezzanine floor was held up in containers on a port‑dock because it was unable to pay the freight fees.
Mr Rumbelow testified that he did not immediately take possession of the fit‑out from the transport company because he was told by the landlord’s agent, Ms Maas, that no work could be done on the mezzanine floor until the repair works had been completed. That claim was disputed by Italia Ceramics. Mr Rumbelow also testified that it was only because of very high storage fees charged in the period of delay that CM Corporation was unable to take possession of the fit‑out. Certain invoices received into evidence contradicted Mr Rumbelow’s testimony in that it appeared that an amount of $29,968.49 was owed to Toll Transport as early as 28 August 2015, and an amount of $8,242 was owed to the Chinese manufacturers of the fit‑out. Moreover, a $250,000 facility allowed to CM Corporation was at all material times fully drawn. An email sent by Mr Rumbelow to Italia Ceramics on 7 December 2015 also claimed that CM Corporation was under great financial stress for a variety of other reasons.
In this respect, the Judge never resolved the factual issues presented by the respective cases. The Judge made no finding on whether CM Corporation had the resources, financial and otherwise, to fully use the premises, and did not make any finding as to whether CM Corporation’s difficulty in paying the transport fees was occasioned by the delay resulting from the September hailstorm damage.
However, nothing turns on the Judge’s failure to resolve those issues because I would reject the construction of s 40 contended for by Italia Ceramics.
Italia Ceramics submitted that its construction of the word ‘useability’ ‘follows from the fact that the lessee’s financial liability is diminished in proportion to the reduction and useability’. Contrary to Italia Ceramics submission, the proportionate reduction in the lessee’s financial liability is a contra‑indication to the construction it proposes. There is nothing to suggest that the purpose of s 40 of the Act is to give the lessee a claim for compensation for the particular loss it suffers as a result of the damage. The proportionality required between the loss of useability of the premises and the rent suggests that an objective approach must be taken. That construction is supported by the nature of the commercial rental market. The market rent of premises is a function of the floor space, the location of the premises and the quality of the building and its fit‑out. Moreover, real property, including leaseholds, can readily be valued by expert valuers. A beneficial provision like s 40 of the Act would lose much of its efficacy if the proceedings took on the complexity of a damages claim. Adopting an objective approach increases certainty which in turn encourages the efficient resolutions of disputes over s 40 of the Act. The section is intended to adjust rental liability in a practical manner over the course of a lease if the useability of the premises is compromised. The reduction in rent allowed by s 40(1)(b) of the Act must be proportionate to the reduction in the value of the leasehold resulting from the damage.
It follows that CM Corporation was entitled to a diminution of its rental liability on the basis of the loss of floor area determined by the Judge. On the calculations of the Judge, no rent was outstanding at the time of the Default Notice of 20 November 2015. It follows that rent had not remained unpaid for 14 days and that, accordingly, Italia Ceramics did not have a right to terminate and re-enter on 7 December 2015. I dismiss grounds 3 and 4 of the Notice of Appeal.
Common Law Repudiation
Italia Ceramics also relies on a purported repudiation of the lease by CM Corporation. In this respect, Italia Ceramics relies on its common law rights to terminate the lease by accepting CM Corporation’s prospective breach.
It is authoritatively established that a lease may be terminated by the lessor’s acceptance of the lessee’s repudiation of the lease, unless the lease itself regulates the common law position, or abrogates it altogether, by providing otherwise.[13]
[13] Shevill v Builders Licensing Board (1982) 149 CLR 620 at 625-626 per Gibbs CJ; Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17 at 29-30 per Mason J, at 55-56 per Deane J.
Italia Ceramics relies on a letter sent by email by Mr Rumbelow on 7 December 2015 to its lawyers. The email reads:
Hi all, please see the attachment detailing my financial commitment.
I encourage you all to be understanding of my scenario and trust that moving forward together is the safest and best option for all.
I also thank you all in advance for the time spent on the considerations, especially at this busy time of year.
I look forward to a positive response from you and would like to add that the proposal includes a timeline to remedy the financial component, however every attempt will be made to move quicker than the framework of the timeline suggests, and is a worst case scenario.
The attachment included the following:
We are all aware that the process from here, terminating the lease and re-entering will be a costly one from all angles. It will also be the slowest way for the monies owed to be paid. You must realise that I have already invested in excess of $250,000 into the building, which is all site specific. If I was to be evicted, the losses I incur from these investments alone would be crippling. I’d be no closer to generating the cashflow that I require, making the possibility or liklihood [sic] of any payments being made even less possible.
The alternative is to allow me the time to come up with the money that I am in arrears, and move forward under the improved financial scenario that 2016 offers.
Please see attached proposed schedule to exit the arrears issue and maintain a commercially viable business without the dramatic and avoidable problems experienced so far.
The schedule provided for the rent to be paid later than the due date and for payments to be contingent on the finalisation of an insurance claim. The email and the attached statement, on its face, appears to be an attempt to negotiate terms. It is not expressed in the unequivocal terms which are necessary to support a claim that he had expressed an intention not to pay the rent if his attempt to negotiate failed.
The Judge made no findings on this issue. However, it is not necessary to remit the matter to the District Court for that purpose.
PARKER J: I agree with the reasons of the Chief Justice. I would dismiss the appeal.
LOVELL J I agree that the appeal be dismissed. I agree with the reasons of the Chief Justice.