Union Theatres Limited v Marrickville Buildings Limited

Marrickville Buildings Limited (the lessor) brought an action against Union Theatres Limited (the lessee) in the Supreme Court of New South Wales concerning a covenant in a lease. The lessee had covenanted to pay all taxes assessed or imposed upon the demised premises, the rent thereof, or the owner, occupier, or lessee in respect thereof, with the exception of Federal land tax. The lessor alleged that the lessee had breached this covenant by failing to pay the New South Wales income tax that had been assessed upon the lessor as the owner of the premises in respect of the rent received from the lessee. The lessee demurred to the declaration, arguing that the income tax was not a tax within the scope of the covenant.

The High Court of Australia was required to determine whether the New South Wales income tax, as assessed upon the lessor in respect of the rent received from the lessee, fell within the terms of the covenant. Specifically, the court had to consider the interpretation of the phrase "upon the rent thereof or on the owner occupier or lessee in respect thereof" and whether the word "thereof" referred only to the demised premises or also to the rent. The court also needed to consider the measure of the lessee's liability under the covenant if the income tax was indeed covered.

A majority of the High Court, comprising Knox C.J., Isaacs and Rich JJ., held that the demurrer was properly overruled. Knox C.J. reasoned that the word "thereof" in the phrase "on the owner occupier or lessee in respect thereof" meant "of the premises or the rent," and therefore the State income tax was a tax in respect of the rent received by the lessor. Isaacs and Rich JJ. concluded that the State income tax was a tax "upon the rent" within the meaning of the covenant. They further opined that the measure of the lessee's liability was the amount of income tax the lessor would have paid if the rent from the lessee had been the lessor's sole income. Gavan Duffy and Starke JJ. dissented, finding that the word "thereof" referred only to the premises and that the income tax was not directly imposed on the rent itself.

The appeal was dismissed, but the order of the Supreme Court was varied by striking out certain words, allowing the case to be remitted to the Supreme Court for further consideration as deemed just. The appellant was ordered to pay the costs of the appeal.