Frederick Brian Winter & Anor Official Trustee in Bankruptcy v Mark Joseph Ahern & Ors [1997] FCA 157 (28 February 1997)

CATCHWORDS

LEASES - surrender of leases - surrender by express agreement - agreement lacked any commercial efficacy - surrender by operation of law - not liable for rent after lease surrendered

BANKRUPTCY - proof of debt reduced

Bankruptcy Act 1966 s 99

Wood Factory Pty Ltd v Kiritos Pty Ltd [1985] 2 NSWLR 105

Prints for Pleasure Ltd v Oswald-Sealy (Overseas) Ltd [1968] 3 NSWR 761

FREDERICK BRIAN WINTER & ANOR OFFICIAL TRUSTEE IN BANKRUPTCY -v- MARK JOSEPH AHERN & ORS

No. QB 232 of 1992

EINFELD J

SYDNEY (heard in Brisbane)

28 FEBRUARY 1997

IN THE FEDERAL COURT OF AUSTRALIA )

BANKRUPTCY DISTRICT OF THE STATE ) No. QB 232 of 1992

OF QUEENSLAND )

Re: FREDERICK BRIAN WINTER and PAULINE MONICA WINTER

Bankrupts

Ex parte: FREDERICK BRIAN WINTER and PAULINE MONICA WINTER

Applicants

And: MARK JOSEPH AHERN, DEBRA ANNE AHERN, ALBERT ERNEST STOCKWELL, ALMA GEORGINA STOCKWELL

First Respondents

And: OFFICIAL TRUSTEE IN BANKRUPTCY

Second Respondent

MINUTE OF ORDERS

1. The proof of debt of the first respondents is reduced to $10,642.73.

2. Any costs sought are to be addressed by submissions in writing within 21 days.

NOTE: Settlement and entry of orders are dealt with in accordance with Order 36 of the Federal Court Rules.

EINFELD J

SYDNEY

28 FEBRUARY 1997

IN THE FEDERAL COURT OF AUSTRALIA )

BANKRUPTCY DISTRICT OF THE STATE ) No. QB 232 of 1992

OF QUEENSLAND )

Re: FREDERICK BRIAN WINTER and PAULINE MONICA WINTER

Bankrupts

Ex parte: FREDERICK BRIAN WINTER and PAULINE MONICA WINTER

Applicants

And: MARK JOSEPH AHERN, DEBRA ANNE AHERN, ALBERT ERNEST STOCKWELL, ALMA GEORGINA STOCKWELL

First Respondents

And: OFFICIAL TRUSTEE IN BANKRUPTCY

Second Respondent

REASONS FOR JUDGMENT

EINFELD J SYDNEY 28 FEBRUARY 1997

(heard in Brisbane)

Introduction

By an application dated 20 February 1996 the applicants pursuant to section 99 of the Bankruptcy Act 1966 seek to have the amount of the first respondents' proof of debt admitted by the second respondent in the sum of $40,131 expunged, or in the alternative reduced to the sum of $9,884.86. The second respondent (the trustee) took no stand on the matter except to resist any application for costs.

Factual background

The applicants became bankrupt on presentation of their own petitions on 3 February 1992. Prior to going bankrupt, they leased from the first respondents the Dysart Indoor Cricket Centre (the centre) for a term of two years commencing on 8 April 1991.

It is not a matter of dispute between the parties that by October 1991 the applicants were unable to meet their rental and other obligations under the lease in consequence of a decline in the patronage at the centre. In April 1991 there had been approximately 47 teams using the centre which had declined to about 17 teams in October 1991. This caused the applicants financial problems, to the extent that the first named applicant, Mr Winter, was paying the rent from his own wages (T 9).

At this point the applicants proposed that somebody else take over the running of the centre, and in September or October 1991 the first respondents and the applicants agreed that a married couple named McBride (the McBrides) would do so.

The issue of contention

The issue of contention between the parties is the terms of an agreement between Albert Ernest Stockwell ("Stockwell") on behalf of the first respondents, and Frederick Winter on behalf of the applicants ("Winter") that the McBrides could take over the running of the cricket centre. As such this case depends not on any question of principle but upon an evaluation of factual matters. Both parties agree that the resolution of the matter depends on whether the Court accepts the evidence of Mr Winter or the evidence of Mr Stockwell.

The submissions of the parties

The applicants' case was that the first respondents agreed to the surrender of the lease to the McBrides and that in consequence the applicants were relieved of any further obligations under the lease except in respect of stock which they agreed to continue to pay off and the rent which had already accrued. That is, the lease entered into between the parties was surrendered by operation of law on or about 14 October 1991 when the McBrides took over.

By contrast, the first respondents argued that the applicants were not released from their obligations under the lease, and that in early October 1991 it was agreed between the first respondents and the applicants that the McBrides could take over the running of the cricket centre under the existing terms but that the applicants would remain liable under the lease for any shortfall in the rent paid by the McBrides. They contended that there was an assignment of the lease, and that it was not surrendered by operation of law. As events transpired, there was a shortfall in the rent and it is this shortfall which makes up the bulk of the proof of debt sought to be expunged or reduced.

Principles of law

The leading authority on the surrender by operation of law is Wood Factory Pty Ltd v Kiritos Pty Ltd [1985] 2 NSWLR 105, in which Priestley JA summarised the relevant law. The applicants contend that the following items in his Honour's judgment are of particular relevance in this case:

1. Surrender by express agreement:

(a) This puts an end to the lease.

(b) The landlord has no claim for damages for the early termination.

(c) Questions of repudiation cannot arise.

2. Surrender by operation of law:

(a) Where this comes about by an agreement either manifested by or inferred from a giving up of possession by the tenant and immediate resumption of possession by the landlord, the position is the same as with surrender by express agreement.

.....

It is apparent that in the absence of an express agreement, the applicants contend that the lease was surrendered by operation of law in accordance with paragraph 2 (a).

The evidence of the parties

Mr Winter recalled the first conversation between the parties on the matter:

Right. So, was the first communication with the lessors your approaching Mr Stockwell and suggesting that the McBrides should take over?---Yes, I - I seen them and I said that I'm going downhill fast, and they said, "the only way you might be able to get out is - we're trying to sell this - sell the place, and if we sell it beforehand, you can get off the hook." And I said to him, "The only other way is if I try and find someone else to take over." (T 10)

Following this conversation the applicants proceeded to pursue the option of seeing if another party could take over the lease. That is apparently how the McBrides came into the picture.

Mr Stockwell described what occurred next:

WINTER informed me that he had someone else to take over the business and he said that the MCBRIDES were willing to do so. I informed him that he had a contract and he had to live up to his obligations in that contract and I indicated to him that I was not prepared to allow any other persons to take over the business. He then said that if I was not going to allow the MCBRIDES to take over the business then he would simply close the doors and declare himself bankrupt.

In that conversation he offered to make up any shortfall in rent that the MCBRIDES could not meet and that he would continue to pay off whatever was owing on the stock. I then informed him that I would need to speak to my partners and I would get back to him about that. (Affidavit A.E. Stockwell 14 March 1996 p 1)

After discussion amongst themselves, the first respondents agreed that it would be best to seek to retain the goodwill in the business by acceding to the applicants' request:

At some time between the Thirtieth day of September 1991 and the Fifth day of October 1991, I spoke again with WINTER and informed him that my partners and I had agreed to allow the MCBRIDES to take over the premises but it was solely on the basis that if there was any shortfall in the rental that he would have to pay that and further, that the WINTERS would continue to pay what was owing on the stock. (Affidavit A.E. Stockwell 14 March 1996 p 2)

Mr Winter described how he perceived the situation:

It was then arranged that Mr McBride and his wife would take over the business from 14 October 1991, and that they would pay the same rental that I was paying under the lease agreement, except for the provision for stock which I was to continue to pay off. This arrangement was never formalised in any way. (Affidavit of Frederick Winter, 20 February 1996).

Therein lies the problem which pervades this rather trivial litigation. If either party had the foresight to make some form of memorandum of agreement, this matter would not have been before the Court at all. I find it difficult to believe that commercial parties, dealing with each other in matters of some financial significance for each of them, could have failed to take such precautionary measures. It is also unusual that the McBrides were not called by either party. Undoubtedly their evidence would have been of great assistance.

In any event, on 5 October 1991, an inventory check was conducted by Mr Stockwell in the presence of Mr Winter and Mr McBride. Mr Stockwell contended that:

It was agreed with the MCBRIDES that they would be obliged to comply with the same obligations and have the same rights as the WINTERS under the pre-existing lease and sub-lease referred to in paragraph 3 of the Affidavit of Frederick WINTER.

...

No written agreements were ever entered into with the MCBRIDES as I told them they could carry on the business under the same terms and conditions contained in the lease and sub-lease already in existence with the WINTERS. I had already given to them a copy of the lease and sub-lease. (Affidavit A.E. Stockwell p 3)

The McBrides attempted to pay the full amount of rent owed on the premises from 14 October 1991 to 9 December 1991. After that date, however, they informed the first respondents that they could not afford to keep the centre open and were closing over the Christmas break from 16 December 1991 until the commencement of the new season in early February 1992. At this point, the McBrides informed the first respondents that they could not maintain the level of payments under the lease, and could only pay rental of approximately $350 per week as opposed to the $600 per week payable under the terms of the lease. The first respondents were prepared to accept that the McBrides were paying what they could afford given the run down nature of the business.

The first respondents then sought to enforce the alleged terms of the "assignment" of the lease. This was explained by Mr Winter in his affidavit of 15 April 1996 at p.2:

In January 1992 I spoke to Mr Stockwell and he said to me words to the effect "The McBrides closed down over Christmas as they had no teams there. You are going to have to make up the difference." I replied, "When we made the agreement it was that the McBrides were going to take over the whole thing."

Evidently Mr Stockwell thought differently. He stated in cross- examination that it was Mr Winter who had suggested that the McBrides take over and that he would pay any difference in rent, after which negotiations proceeded on that basis. However, Mr Stockwell conceded that he had not emphasised the continuing nature of the Winters' obligations on every occasion he spoke to Mr Winter who may therefore have misconceived the situation:

So I go back to my original question, Mr Stockwell, [is] when Mr Winter first raised this question about the McBrides taking over and you have agreed that that was by something along the lines of, "Look, if I can get the McBrides to take over, well, will you accept that?"---Mm.

That you understood him to be suggesting that that would be the end of his obligations?---He might have thought it was, yes. (T 24)

The threat of bankruptcy

The first respondents contended that they only agreed to the arrangement with the McBrides because Mr Winter threatened to declare himself bankrupt if the first respondents did not permit the applicants to have someone to take over the lease. The relevance of this alleged threat, according to the first respondents, was that it induced them to allow the McBrides to commence the running of the centre, provided that the applicants would pay any shortfall in rent.

The applicants denied that any such threat was made by Mr Winter, and in particular that there was ever an agreement that they would be responsible for any shortfall in rent following the McBrides commencing operation of the centre. Mr Winter's version of events was that

..... he (Stockwell) agreed to McBrides taking over the premises on the same terms and conditions as I and my wife had agreed to save for the payment of the stock, which I was to continue paying off. I deny that I mentioned about going bankrupt. I did not even inform Mr Stockwell at that stage that I was contemplating bankruptcy. (Affidavit of Frederick Winter, 15 April 1996 p 2)

At best, it is inexplicable how the first respondents gained a measure of comfort from the alleged assurance of the applicants that they would pay any shortfall in rent if it is true that Mr Winter had threatened to declare himself bankrupt.

Commercial efficacy

The applicants put the view that the alleged agreement between the parties was so vague that it lacked commercial efficacy, and that the Court should refrain from presuming that the parties entered into such an arrangement. Vagaries certainly exist in the alleged agreement between the parties, including precisely what would need to occur for the secondary obligation of the Winters to arise. At no time did the first respondents consult the applicants about the McBrides' inability to pay the full amount of rent owed under the lease. This became evident when Mr Stockwell was cross examined (at T 30):

You did not get in touch with Mr Winter at all, did you, and say, "Look, the McBrides say they can't pay the $600 per week, we're thinking about dropping it down," you did not see any need to discuss the matter with him at all?---We weren't on the best of terms. He'd made his offer to make up any shortfall and that was it.

Well, any shortfall, and that was any shortfall on what the McBrides were unable to pay?--Well, that's what I understood, yes.

And you understood that "unable to pay" to mean just if the McBrides said they could not pay?---That's right.

The first respondents argued that the agreement between the parties was clear and unambiguous. In my view, the clarity of the agreement is greatly in doubt and fraught with ambiguity. It seems inconceivable that the applicants would be responsible for debts not paid by the McBrides merely on the McBrides' declaration of an inability to pay. This would make the alleged agreement of very uncertain terms, and contingent on the subjective intent and actions of a third party.

The first respondents contended that they did not consent to the surrender of the lease, and that it was only when the Winters allegedly threatened bankruptcy that they reluctantly consented to an assignment of the lease. Immediately prior to the alleged assignment, the business was run down, and the first respondents stated that, for this reason, the assignment of the lease was consented to strictly on the basis that the assignors, Mr and Mrs Winter, would pay any shortfall in rental unable to be met by the assignees, the McBrides.

It is true, as the first respondents contended, that the courts strive to uphold commercial agreements, particularly where the parties have purported to act on the terms of the alleged agreement: Prints for Pleasure Ltd v Oswald-Sealy (Overseas) Ltd [1968] 3 NSWR 761 at 765-6. In this instance, however, the terms of the agreement alleged are neither clear nor unambiguous. It is thus hardly possible to draw the conclusion that the parties acted on "the agreement" when in hindsight there was a complete absence of agreement on a pivotal term. In any event, the first respondents have not acted consistently with the agreement which they claim existed.

The behaviour of the parties after the "agreement"

The first respondents argued that the behaviour of both parties after the McBrides took over the centre supported their contention that the applicants had ongoing obligations in respect of rental. In this respect, the first respondents rely upon a Magistrates' Court Plaint issued on 18 December 1991 against the applicants claiming inter alia rent for a period after the McBrides took over. I am unable to agree with the submission that the plaint supports their claim that the applicants had an ongoing responsibility. To the contrary, the plaint clearly shows that the first respondents were of the view that the agreement with the McBrides constituted a new lease. The plaint and summons state in part (emphasis added):

11. On the thirteenth day of October 1991 the defendants (the applicants) vacated the sub-leased lot and demised premises without payment of rental, rates, solicitors' professional costs and outlays and debtor's monies.

12. The defendants have by partial repayment only paid to the plaintiffs the sum of FOUR HUNDRED AND FIFTY DOLLARS ($450.00) since the thirteenth day of October 1991.

13. The plaintiffs have mitigated their loss by leasing the sub- leased lot and premises and receiving payment of rental from a new sub-lessee from the fourteenth day of October 1991. The new sub- lessees are paying the same rental on the sub-lease and agreement for lease as the defendants had contracted to do.

14. The new sub-lessees have told the plaintiffs they will not pay rental for the sub-leased lot and demised premises from the ninth day of December 1991 to and including the nineteenth day of January 1992.

The plaint admits that the centre was leased to the McBrides from 14 October 1991 for the same rental as the applicants were paying, thus supporting the applicants' contention that a new lease of the premises was entered into by the first respondents with the McBrides and that the applicants would therefore not be liable for any further payments under the lease.

Further support for the applicants' case may be derived from the letter of demand dated 24 October 1991 from the first respondents' solicitors. In part the letter states (emphasis added):

We are instructed that you have vacated the business premises and that 12 chairs and 5 bins have been removed ....

The letter claims that a sum of $10,414 is owed to the first respondents under the lease. It is worth noting, however, that no mention is made of any continuing obligation on the applicants to pay rent, and specifically any agreement that they would pay the McBrides' shortfall.

The fact that the McBrides as new sub-lessees are reputed to have told the first respondents that they would not pay rental for the premises over the 1991-1992 Christmas period does not mean that the applicants should be liable for the rental during that period. The McBrides had a contractual liability by virtue of the new sub-lease to pay the same rental as the applicants. Hence they were legally obligated to pay that sum to the first respondents irrespective of whether or not they told them that they would not pay that amount.

The McBrides in fact paid a lower rent than the applicants, after a period in possession. The first respondents' explanation for the lower rate was that the McBrides had stated that they could not afford to keep the centre open and pay the rent at its original level. Mr Stockwell believed the McBrides' assertion that they could not afford to pay the rent due, and thought that he was therefore left with no alternative but to lower the rent for the remainder of the lease. However, the McBrides remained in possession of the premises and the business until 10 August 1993, a period four months beyond the time that they would have been required to remain under the agreement alleged by the first respondents. It seems inconsistent to say the least that if the circumstances of financial viability were as claimed by Mr Stockwell, the McBrides would have taken or been permitted to take this course.

If it is true, as the first respondents claim, that the applicants were liable for the rent of the premises over the Christmas break, then it would seem that the first respondents were bound to inform the applicants that this was the case before rather than after the event. This would have not only alerted the applicants to their liability but would also have enabled them to seek to mitigate their loss if necessary by operating the centre themselves. It can hardly be said that the applicants were aware of their liability under the alleged agreement at this point. Despite opportunities to do so, the first respondents at no time sought to clarify their alleged agreement with the applicants even though Mr Stockwell was aware that Mr Winter was not altogether clear on the agreement. The letter of demand dated 24 October 1991 from the first respondents' solicitors for monies due and payable at that date made no mention whatsoever of any liability for future rent.

If this had been done, it would seem likely that the applicants would have attempted to mitigate their loss, or at the very least sought clarification of the alleged agreement. Indeed, they may well have sought to declare themselves bankrupt at that point, rather than wait until February 1992 to do so. It would seem that the Winters were aware of their options, as Mr Winter's reaction to the news that the first respondents were seeking to enforce the alleged agreement would show (T 15):

When did you first think about going bankrupt?---It was in - it must have been the January, it was after Christmas - he come and told me - I'm not sure where it was - he come and told me, he says, "McBrides are closing the centre down for Christmas," or had closed it down for Christmas, "and you've got to make up the shortfall." I went home and I said to the wife, I said, "I thought this was all behind us," and I thought, well, we're in that deep trouble now, the only way to go is we're going to have to go and see a solicitor. And I went and seen a solicitor in Rockhampton and he suggested that I - the only way to get out of it would be to go bankrupt.

It is evident that by allowing the McBrides to pay a lower rent, and by failing to inform the applicants of their alleged liability for rent over the Christmas break before it was incurred, the first respondents were the authors of their own loss. From the information available to me, no action has been taken against the McBrides to recover the monies owing under the sub-lease. This is another inexplicable fact in this sequence of allegations and counter allegations.

Whilst the applicants' version of the agreement is tenuous, it is not as improbable as the first respondents would have the Court believe. The first respondents did not execute formal lease documents with the McBrides or obtain consent from the Minister for Lands for a transfer of the lease. Nor did they attempt to codify the terms of the alleged agreement with the applicants or to clarify the precise circumstances upon which the applicants would become liable for any shortfall in rent under the alleged assignment. Furthermore, the Magistrates' Court plaint issued at the behest of the first respondents alleged that the premises had been sub-leased to the McBrides without alleging any continuing liability in the applicants for rent.

Conclusion

In my opinion it cannot be said that there was any formal or informal assignment of the lease. I find that the lease between the applicants and first respondents was surrendered by operation of law for the following reasons:

(1) the formal requirements for assignment of the lease between the applicants and the first respondents were not complied with

(2) the first respondents have previously asserted in Court proceedings that there was a new lease entered into

(3) the first respondents attempted to unilaterally vary the terms of the alleged agreement between the parties as to the amount of rent payable by the McBrides who in any event remained in possession of the business and premises for a time longer than the original lease to the applicants

(4) an inventory check was conducted by the first respondents of the applicants on 5 October 1991 which is indicative of the end of a lease

(5) the applicants vacated the premises on 13 October 1991 and the McBrides commenced possession of the premises on 14 October 1991 with the consent of the first respondents and apparently under the same terms and conditions as had been applicable to the applicants

However, the amount of the admitted debt should not be expunged in its entirety. The applicants did accept that they had some liability to the first respondents for amounts owed under the lease agreement up to the date the lease was surrendered. I find that other amounts were also owed. The calculation of the debt owed by the applicants is as follows:

Rental due from commencement of lease (8.4.91)

to date lease was surrendered and occupancy

was assumed by the McBrides (14.10.91)

26 weeks at $600.00 per week $15,600.00

Less paid 15 weeks at $600.00 $ 9,000.00 $ 6,600.00

Plus

(a) balance owed in respect of stock $ 1,631.00

(b) rates 01.01.91 to 30.06.91 $ 264.00

(c) share of rates 01.07.91 to 31.12.91

(183 days = $2.0069 per day -

applicants in possession for 105

days of the period

amount owing $367.27 x 105 $ 210.73

183

(d) first respondents' solicitors'

costs for preparation of the

lease $ 1,647.00

(d) replacement cost of 12 chairs

and 5 bins $ 290.00 $ 4,042.73

Total amount owed by the applicants

to the first respondents $10,642.73

I order that the amount of the first respondents' proof of debt be reduced to $10,642.73. Costs were not argued at the hearing or in submissions except that the first respondents did not concede that the trustee ought not to have costs awarded against it. If there is no agreement, any party seeking costs should apply in writing within 21 days of this judgment being delivered.

For the applicant Mr G.W. Diehm instructed by Anne Murray & Co Solicitors

For the first respondents Mr I. Molloy instructed by Wallace & Wallace Solicitors

For the second respondent Mr P. Kar

Date of hearing 15 April 1996

Written submissions 3 May 1996

completed

Date of judgment 28 February 1997