Kabcon Pty Ltd & Ors v Walwyn Pty Ltd & Anor [2002] ACTSC 1 (18 January 2002)

Last Updated: 29 January 2002

KABCON PTY LTD & ORS v WALWYN PTY LIMITED & ANOR

[2002] ACTSC 1 (18 January 2002)

CATCHWORDS

LANDLORD AND TENANT - commercial leases - statutory code of practice - tenant and guarantor released by code from liability "upon the assignment of the lease" - meaning of "assignment".

Tenancy Tribunal Act 1994 (ACT), s 75

Commercial and Retail Leases Code of Practice, cls 11-12, 84-86, 90.

Ferguson v Hullock [1955] VLR 202 considered.

ON APPEAL FROM THE TENANCY TRIBUNAL

No. SCA 19 of 2001

Coram: Whitlam J

Supreme Court of the ACT

Date: 18 January 2002

IN THE SUPREME COURT OF THE )

) No. SCA 19 of 2001

AUSTRALIAN CAPITAL TERRITORY )

ON APPEAL FROM THE TENANCY TRIBUNAL

BETWEEN:

KABCON PTY LTD

GEORGE KABADANIS

CON KABADANIS

Appellants

AND:

WALWYN PTY LIMITED

CONFLAX PTY LIMITED

Respondents

ORDER

Judge: Whitlam J

Date: 18 January 2002

Place: Canberra

THE COURT ORDERS THAT:

1. The appeal is allowed in part.

2. The order made by the Tenancy Tribunal on 16 February 2001 is set aside and in substitution therefor an order is made in the case with effect from that date giving judgment for the applicants (the respondents on the appeal) against the respondents (the appellants on the appeal) in the sum of $25,980.08.

3. The appeal is otherwise dismissed.

4. The appellants are to pay the respondents' costs.

1. This is an appeal from a decision of the Tenancy Tribunal ("the Tribunal") made on 16 February 2001 giving judgment for the respondents against the appellants. The amount for which judgment was given was "the sum of $37,285.16 together with interest on that sum from 28^th October 1999 to the date of judgment calculated in accordance with clause 3.10 of the lease of 11^th September 1996." The background to the making of that order and the facts found by the Tribunal may be shortly stated.

2. The respondents were the owners of premises at 48 Hoskins Street, Mitchell. By an instrument dated 11 September 1996 they leased those premises to the firstnamed appellant ("the lessee") for a term of three years commencing on 20 November 1995 and terminating on 19 November 1998. The other appellants are the guarantors of the lessee's obligations under the lease.

3. In early 1997 the second appellant asked a director of the second respondent, Jim Demetriou, whether the lessee could transfer the lease to a Mr Stan Fraser. Mr Demetriou said that the respondents would consent to the lease being assigned and that their solicitor would prepare the documentation necessary to effect the assignment. The second appellant wrote to the respondents on 18 February 1997 identifying the proposed assignee of the lease as a company called SF Floor Services Pty Ltd. On 28 February 1997 the respondents' solicitors requested from the lessee certain information about that company and any proposed guarantors. A fairly uninformative reply to this request was received on 26 March 1997 from a solicitor acting for both the lessee and the prospective assignee. On 18 April 1997 the respondents' solicitors sent this solicitor a form of deed for execution by the appellants, by SF Floor Services Pty Ltd and by Mr Fraser. Under the proposed deed the lessee assigned its interest in the lease to SF Floor Services Pty Ltd, the respondents consented to such assignment, SF Floor Services Pty Ltd covenanted with the respondents to perform all the lessee's obligations under the lease, and Mr Fraser guaranteed the performance of those obligations by SF Floor Services Pty Ltd. This deed was never executed.

4. The lessee vacated the premises and let Mr Fraser into possession. Mr Fraser paid the respondents the rent due under the lease until January 1998. He then made no further payments and vacated the premises. The lessee refused to pay rent due after that time. After a futile attempt to invoke the jurisdiction of Magistrates Court, on 29 October 1999 the respondents lodged a notice of dispute with the Registrar of the Tribunal claiming from the appellants rent for the balance of the term and other moneys under the lease.

5. Before the Tribunal the appellants did not dispute the amount of the moneys claimed by the respondents under the lease, but they did dispute their liability to pay those moneys. They relied particularly on clause 90 of the Commercial and Retail Leases Code of Practice ("the Code"), which provides:

"90. A tenant and a tenant's guarantor are released from further obligations under the lease upon the assignment of the lease in accordance with this Code."

6. The appellants made three submissions to the Tribunal: (1) that there had been a valid assignment of the lease pursuant to the Code and they were consequently relieved of any further obligations under the lease; (2) in the alternative, that there had been an equitable assignment of the lease and that such an assignment relieved them of any further obligations under the lease by virtue of clause 90 of the Code; and, in the further alternative, that it would be unconscionable for the respondents to deny that the lease had been assigned to Mr Fraser and accordingly the respondents were estopped from doing so.

7. As to what the Tribunal described as the "primary submission", it said that the appellants simply submitted that, once the provisions of Division 9 in Part 3 of the Code were complied with, an assignment was complete. The Tribunal held that the Code did not provide for "the means by which leases are to be assigned" and that, in the instant case, no assignment at law had been concluded.

8. On the question of an equitable assignment, the Tribunal said that the appellants "may well have an agreement that equity would enforce by an order for specific performance against Mr Fraser". After referring to Ferguson v Hullock [1955] VLR 202, the Tribunal said:

"The fact that equity will contemplate an order for specific performance conditional upon a necessary consent being obtained is important as it demonstrates that circumstances which will give rise to an equitable right may occur without the knowledge of the lessor. It appears to me unlikely that the legislature intended the word `assignment' in clause 90 of the Code to be so widely interpreted. A lessor has a legitimate interest in ensuring that the lease is only assigned to an appropriate person. To my mind the word `assignment' in clause 90 of the Code must mean an assignment at law. Also the distinction between privity of contract and privity of estate must be observed. When the lease is executed there is both privity of contract and estate between the lessee and the lessor. Should the lessor assign the reversion, or the lessee assign the lease privity of estate no longer exists. But privity of contract remains and before the advent of the Code a lessor could look to the assignor for breaches of lease terms by the assignee. It is this situation that clause 90 of the Code was designed to overcome. It was not the intention of the legislature to broaden the basis upon which the lessor could no longer rely upon its rights in contract to include an equitable assignment."

9. The Tribunal also held against the appellants on their estoppel point. It referred to the statement of Mason CJ and Wilson J in Waltons Stores (Interstate) Ltd v Maher [1988] HCA 7; (1988) 164 CLR 387 at 404 about a plaintiff acting to his detriment on the basis of a basic assumption and said:

"The only direct representation that the [respondents] made to the [appellants] in this matter was a representation that [they were] willing to consent to the lease being assigned to Mr Fraser, and that [they] would prepare the paperwork necessary to effect the assignment. The [respondents'] conduct in allowing Mr Fraser to continue occupation of the premises without executing the Deed of Assignment and in not advising the [appellants] of Mr Fraser's failure to execute the deed is also relied upon by the [appellants]. In my opinion, no matter how one approaches the matter, neither the [respondents'] statements, nor [their] conduct amounted to a representation that the [respondents] had released the [appellants] from [their] obligations under the lease. The [respondents'] statement and conduct evinced a willingness to do so upon the assignment of the lease. Clearly the [appellants were] aware that formalities needed to be attended to to assign the lease to Mr Fraser. The [appellants were] aware of the terms of the lease. The conversation between Mr Kabadanis and Mr Demetriou as deposed to by Mr Kabadanis amply demonstrates the [appellants'] knowledge that the formalities had to be attended to. The [appellants] cannot therefore claim that [they] assumed that [they] had been released from [their] obligation[s] under the lease at the time of the conversation between Mr Demetriou and Mr Kabadanis. The subsequent conduct of the [respondents] in allowing Mr Fraser to enter into or remain in occupation of the premises and accepting rent from Mr Fraser, conduct which was directed at assisting the [appellants] in [their] desire to be released from [their] contractual obligation[s], cannot be characterised as unconscionable. If the [appellants] assumed that [they] had been released from [their] obligations under the lease, no representation or conduct on the part of the [respondents] can be said to have played such a part in the [appellants'] adoption of that assumption as to now make it unfair or unjust for the [respondents] to pursue [their] legal rights."

10. The Tribunal found that the respondents did all that they could to facilitate the assignment of the lease. It held that they bore no responsibility for the failure of the prospective assignee to execute the deed of assignment or for any assumption made by the appellants as to their liability under the lease. The Tribunal concluded that the appellants had not established any reason why the respondents should be precluded from relying on their rights under the lease.

11. The grounds of the appeal are:

"(a) The Tribunal erred in holding that the term `assignment' in clause 90 of the Commercial and Retail Leases Code of Practice did not include an equitable assignment;

(b) The Tribunal erred in failing to hold that in the circumstances of the case clause 90 of the Code released the appellants from their obligations under the lease;

(c) The Tribunal erred by including in the judgment the sum of $17,139.05 as interest; and

(d) The Tribunal erred in failing to hold that the respondents were estopped from denying that the lease had been assigned."

12. It is common ground that the Code applies to the lease in question here. The Code is approved under s 75 of the Tenancy Tribunal Act 1994 ("the Act"). As I have already mentioned, clause 90 is in Division 9 of Part 3 of the Code. That division is headed "Assignments, subleases and mortgages" and comprises clauses 83 to 93. Under clause 83 a tenant may write to an owner seeking consent to the assignment, sublease or mortgage of the tenant's lease. The owner then has 14 days under clause 84 to request certain information. However, clause 84 relevantly provides:

"... For the purpose of this clause an owner may not require information from a tenant other than:

(a) where the request is for consent to an assignment or sublease -

(i) information concerning the financial standing of the prospective assignee or subtenant, including details of any finance for which the prospective assignee or subtenant has approval;

(ii) information concerning the business skills of the prospective assignee or subtenant;

(iii) information concerning the financial standing of any prospective guarantor for the prospective assignee or subtenant;

(iv) a current tenant's certificate of occupancy for the premises;

(v) information as to the proposed use of the premises by the prospective assignee or subtenant; and

(vi) references for the prospective assignee or subtenant; ..."

Clauses 85 and 86 should be set out in full. They provide:

"85. An owner shall give written notice of his or her consent or refusal of consent to an assignment, sublease or mortgage, within 21 days of receipt of any information required to be given under clause 84. If no information is requested under clause 84, then the owner shall give written notice of his or her consent within 21 days after the expiry of the 14 day period referred to in clause 84. If the owner fails to give written notice of his or her consent in accordance with this section [sic], the owner shall be deemed to have given consent to the proposed assignment, sublease or mortgage. The Tribunal may order an owner to produce the Crown Lease at the Office of the Registrar of Titles to enable the endorsement of an assignment or sublease.

86. An owner may withhold consent to the assignment of a lease or granting of a sublease for premises only where the owner has reasonable grounds to believe that -

(a) the prospective assignee or subtenant intends to change the use of the premises as permitted under the lease;

(b) the prospective assignee or subtenant (taking into account information concerning any proposed guarantor for that person) does not have the financial standing to conduct the business;

(c) the tenant cannot produce a current tenant's certificate of occupancy for the premises; or

(d) the prospective assignee or subtenant possesses skills which are less than those of the existing tenant for the purposes of the [sic] conducting the business."

The terms of clause 90 have already been reproduced in [5] above.

13. Counsel for the appellants submits that the Code thus provides a regime for assignment of leases to which it applies. He contends that in the present case the Tribunal found that there was probably an assignment as between the lessee and Mr Fraser, that such assignment became effective by virtue of clause 85 of the Code, that in the present case the effective date was either 21 days after 26 March 1997 (when the respondents received a reply in respect of the information they sought) or 18 April 1997 (when their solicitors sent the proposed deed to the appellants' solicitor), and that from whichever of those dates was here applicable clause 90 had the effect of releasing the appellants from any further liability.

14. Counsel for the respondents vigorously contests key factual assumptions underlying these submissions, namely, that there was an actual assignment by the lessee to Mr Fraser and that the lessee supplied the information required by the respondents. He submits that the right of an owner to seek a guarantor for a prospective assignee is recognised in clauses 84(a)(iii) and 86(b) of the Code, but that the Code is otherwise silent about how such a guarantee is to be obtained. Counsel for the respondents contends that the Code deals with only one aspect of assignment of the leases to which it applies, namely, the giving or refusing of consent by the lessor.

15. I accept the respondents' last submission up to a point. Plainly the provisions in Division 9 preceding clause 90 deal only with the topic of consent. In particular, contrary to any suggestion in the submissions on behalf of the appellants, clause 85 does not provide for a "deemed" assignment. (Indeed, any "deemed" consent is expressed only to be given to a "proposed assignment".) Nor can the very curious last sentence of clause 85 mean that the Registrar-General may dispense with the memorandum of transfer required by the Land Titles Act 1925 in the case of the assignment of a lease. The true situation is that the Code makes no provision about the conveyancing aspects of assignment of the leases to which it applies. The substitution of guarantors is, of course, an entirely usual incident of an assignment, as is acknowledged in the provisions of the Code dealing with consent to which counsel for the respondents referred.

16. However, I think that it must be accepted that clause 90 may have effect after an owner has given consent to a proposed assignment. It would operate in respect of any provision of a lease by which the tenant and the tenant's guarantor remained liable under the lease after it has been assigned. In such a case clause 90 will displace that provision, thus effecting a statutory repeal of a rule of the common law based on privity of contract that has been recognised since Walker's Case (1587) 3 CoRep 22, so that liability ceases "upon the assignment of the lease". The following words "in accordance with this Code" are puzzling because the way in which leases may be assigned is not a matter prescribed in the Code. In my opinion, the Tribunal was correct in its conclusion on that point.

17. Clauses 11 and 12 are key provisions of the Code. They provide:

"11. Except as otherwise provided in this Code, where there is an inconsistency between a provision of this Code and a provision of a lease or an agreement to lease the Code shall prevail.

12. Notwithstanding that a lease may not include provisions required by the Code to be included in the lease, the lease shall be read as though those provisions were included in the lease."

18. In the present case the instrument of lease dated 11 September 1996 was in the form approved by the Registrar-General under the Land Titles Act. It incorporated by reference, with amendment, provisions contained in a memorandum of provisions registered pursuant to that Act. Clause 12.37 of the lease paraphrased clauses 11 and 12 of the Code, but provided (perhaps somewhat superfluously) that otherwise all the other provisions of the lease applied. The topic of assignment was dealt with in Part 6 of the lease. By Clause 6.3 the lessee covenanted not to assign the lease without the consent of the respondents. Clause 6.4 provided several conditions of consent, one of which was that the proposed assignee execute an assignment of the lease to which the respondents as lessors were a party. There is no inconsistency between clauses 86 and 90 of the Code and that provision of Clause 6.4 in the lease. Clause 90 of the Code is not expressed to be a provision required to be included in a lease but, in its application to the lease here in question, the lease itself stipulated what was required for its assignment. The minimal requirement was that the respondents as lessors be a party to any assignment. Accordingly, even if an assignment did take place merely between the lessee and Mr Fraser (as the Tribunal appears to have assumed), it would not, in my opinion, be an assignment for the purposes of clause 90 of the Code.

19. Ground (a) of the appeal raises a false issue in this case. An incomplete or informal assurance of an interest in land, such as a lease, may well involve an equitable assignment. However, in this case, as I have explained, the respondents were required to be a party to any assignment, and there is no finding that the respondents were a party to any agreement for such an assignment of which specific performance might be granted. Indeed, the evidence all points the other way: the respondents submitted a proposed deed to the appellants and their prospective assignee who failed to do anything about it. It may be that an equitable assignment could be covered by clause 90 of the Code. I express no concluded view upon that question. However, in any case where the lease contains a covenant against assignment, it is likely to have to be an assignment to which the owner is a party. (Interestingly the explanation of the Code's provisions published in 1994 speaks in paragraph 126 of the owner determining whether or not "to grant" an assignment.) Neither of the first two grounds of appeal is made out.

20. Perhaps I should add that I agree with what appears to have been the Tribunal's view, namely, that Ferguson v Hullock is of no assistance in construing the statutory expression here in question. That case involved an action by two separately represented plaintiffs, each of whom claimed to be a lessee entitled to recover possession of premises from a defendant lessor who had re-entered for breach of a covenant against assignment. The court held that the defendant was bound to give up possession because, as lessor, she had not given the statutory notice of breach of covenant. (Unlike s 1 of the Forfeiture of Leases Act 1901 (NSW), the Victorian statute extended to covenants against assignment.) In that case the first plaintiff was an assignee of the original lessee, and he had agreed to assign his interest in the lease to the second plaintiff. Accordingly Gavan Duffy J went on to consider whether the first plaintiff had divested himself of the right to possession in favour of the second plaintiff. His Honour held that the second plaintiff had a good enforceable promise to assign which gave her a "good equitable assignment" and "the right to present possession of premises". He said (at 207):

"... though in the present case I am not prepared to say whether [the defendant] could or could not refuse her consent to [the first plaintiff]'s assignment to [the second plaintiff], I think on principle their contract should be treated as, for the present at any rate, one proper for specific performance. The assignment which [the first plaintiff] agreed to make has not yet been made, and no breach of the covenant against assignment without consent has been committed."

His Honour then said he thought a conditional decree for specific performance "should" be made. That remark may have been obiter. The order actually made does not appear in the report, and it may well be that only an order for possession in favour of the second plaintiff against the defendant lessor was made. I cannot readily see how such a conditional order might be made in favour of one plaintiff against the other plaintiff, especially where, as his Honour earlier noted (at 204), they "appeared to conduct their case before me in close collaboration". It may be noted, however, that his Honour did not regard the agreement between the two plaintiffs as having effected an assignment of the lease.

21. The fourth ground of appeal, as framed in letter (d), strikes me as unarguable. The respondents submitted a proposed deed and the appellants failed to sign it themselves or to have their prospective assignee sign it. That would seem the end of the matter. However, counsel for the appellants attacks the Tribunal's conclusion on the estoppel point by criticizing its identification of the respondents' conduct said to have created the alleged assumption on the part of the appellants that the lease had been assigned to Mr Fraser. This approach faces great difficulty where an appeal lies only on a question of law and, at least so far as the appeal papers disclose, the hearing of the dispute took place before the Tribunal without pleadings. In my opinion, the Tribunal's findings of fact on the estoppel issue were well open on the evidence before it. Indeed, were it relevant, I agree with them. Be that as it may, I am unable to discern any error of law in its conclusions on this question, and this ground also fails.

22. The parties are, however, agreed that the Tribunal misapprehended an element of the respondents' claim as finally formulated, namely, the interest claimed on unpaid rent under Clause 3.10 of the lease. This error of law resulted in judgment being given for an excessive amount. The respondents promptly acknowledged this error, which is alleged in ground (c) of the appeal. The parties agreed that the correct amount for which judgment should have been given in favour of the respondents was $25,980.08. That figure includes interest from 28 October 1999 to the date of the Tribunal's order on 16 February 2001. In the circumstances the "appropriate" order under s 58(3)(c) of the Act is to make that correction: Putnin v Commissioner of Taxation (1991) 27 FCR 508 at 514. The appeal will be otherwise dismissed, and the appellants must pay the respondents' costs.

I certify that the twenty-two (22) preceding paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Whitlam

Associate:

Date: 18 January 2002

Counsel for the appellants: DJC Mossop

Instructing solicitors: Dibbs Barker Gosling

Counsel for the respondents: CM Erskine

Instructing solicitors: Sutherland & Tiirikainen

Date of hearing: 3 July 2001

Date of judgment: 18 January 2002