Union Theatres Ltd v Marrickville Buildings Ltd [1924] HCA 32; (1924) 35 CLR 171 (4 August 1924)

Union Theatres Limited Defendant, Appellant; and Marrickville Buildings Limited Plaintiff, Respondent.

The appellant as lessee of certain premises covenanted with the respondent, the lessor, to "pay discharge and perform all rates taxes charges assessments duties and outgoings whatsoever whether imposed by the Parliament of the Commonwealth or of the State ... which were" at the date of the lease or might at any time thereafter be "assessed charged or imposed upon the demised premises or upon the rent thereof or on the owner occupier or lessee in respect thereof" except Federal land tax. The question for decision is whether the respondent is entitled under this covenant to recover from the appellant the amount by which the State income tax paid by the respondent was increased by reason of the receipt by it of the rent payable under the lease.

I agree with the learned Judges of the Supreme Court in thinking the respondent is so entitled, and with the reasons given by Ferguson J. in support of that conclusion.

I have come to the judicial conclusion that the judgment must be affirmed. I arrive at that conclusion with some misgivings as to whether the technicalities of the pleadings represent the real facts of the case. If they do not, the Supreme Court, by reason of the variation of the judgment, will be able, if necessary, to subordinate form to substance. I apprehend, however, that the parties, once the law is ascertained, will adjust the facts, if adjustment be needed. The covenant sued on is one which, when applied to the New South Wales Income Tax Acts (secs. 1, 8, 9, 10 of No. 24 of 1911 as amended by No. 8 of 1914 and No. 22 of 1922 and the whole of No. 11 of 1912), is susceptible according to circumstances of the breach alleged, but is also, to my mind, in other circumstances, not susceptible of such a breach. Such covenants are to be construed in the way stated by Channell J. in Baylis v. Jiggens[1], where it is said: "In considering cases of this kind it is necessary, in the first place, to notice what the payment sought to be recovered is for, and next the exact words of the covenant." Unless that is observed, there is likelihood of error. For instance, I entertain no doubt that what the landlord desired was to get his stipulated rent, as a net sum free from diminution by taxation. On the other hand, I entertain no doubt that the tenant, while willing to do that, was not in the least intending to pay the landlord's income tax occasioned by the receipt of rent from other property, or by the receipt of income utterly foreign to the tenant, or on the basis of absenteeism. In order then to determine the matter justly it is proper to keep the parties to the bargain as constituted by the very words used. In Drughorn v. Moore[2] Viscount Haldane observes: "The jurisprudence of this country allows people a large latitude in bargaining about property, but they must understand that if they make contracts they must be judged as to their intentions by the words they have used and not by their intentions otherwise conceived."

I think from the collocation of the words of the covenant that this case must depend on the effect given to the word "rent" by the rest of the covenant. I shall assume that, though the income tax of New South Wales is levied, not on rent eo nomine, but on "income derived from the produce of property," meaning "income derived from any source in the State other than from personal exertion," the word "rent" in the covenant would attract that Act if the rest of the covenant is appropriate (see Hurst v. Hurst[3]). I refer to Nova Scotia Steel and Coal Co. v. Minister of Finance and Customs[4], but I think it distinguishable. It seems to me, however, perfectly proper to say that "rent" is under the income tax legislation "assessed" and "taxed" and is as "income" taxable if over £300 (sec. 16 (1) (a) of the Act No. 11 of 1912) or £250 (sec. 5 of the Act No. 9 of 1914) and except so far as subject to any other statutory deduction. But the governing words of the covenant by the appellant are to "pay, discharge and perform," &c. That is not a covenant to "repay" as is assumed in the judgment under appeal. If the obligation were broken and the covenantee had to pay in the first instance, there would, no doubt, be an obligation on the covenantor to repay, not as a covenant, but as the consequence of breach, that is, as damages for breach. The repayment would not be performance, but reparation for non-performance. That seems to me an important element for the purpose of delimiting the obligation. Whatever tax, &c., is included must be one which as between the parties could in the first instance be "paid, discharged or performed" by the covenantor either directly or through the covenantee, but without waiting for the covenantee to pay and afterwards sue for breach of covenant. "Rent" as a subject of income tax does, in my opinion, fall within that sphere of contractual obligation. If the "rent" of that property were the whole income of the covenantee, then, either it would be free as being under £300 or £250, or there would be an ascertainable amount which the covenantor could directly or indirectly pay to the Crown and so discharge his contractual liability. But if that rent be taxable only with other income—that is, only as a component part of a distinct integer and at rising amounts dependent on aggregate income and on circumstances beyond the covenantor's control—it would be legally impossible for the covenantor to know how much to pay, if the measure of his obligation is the varying liability of the covenantee. Imagine the covenantor asking the Commissioner of Income Tax or the lessor the amount attributable to that rent. All he could find at best would be that, according to variable total income and according to variable sources of that income, the tax, if that rent were absent, would be so much less. That is to say, the tax on the "rent" inflated by extraneous elements of income and extraneous sources of income, and possibly by absenteeism, might be mathematically represented by an ascertainable sum. But, even if that were ascertainable, it would, in my opinion, be a tax not on the rent simpliciter, but on the rent as a factor of a composite sum and as affected by other factors. I am of opinion that such a case is entirely outside the ambit of the covenant. Upon the whole, my construction of the covenant is that the contractual obligation of the covenantor is to pay (possibly through the covenantee) the amount of income tax that would be chargeable in respect of the rent, if that were the only income of the covenantee. The allegations of the declaration are consistent only with that simple form. They are that the tax was assessed "in respect of the rent" and that the respondent was forced to pay it, that all conditions &c. were fulfilled and so on, and that the respondent repudiates its obligation; and damages are claimed. These simple allegations are admitted by the demurrer, and for that reason I see no legal ground for denying the accuracy of the judgment. As the pleadings stand, the appeal should, therefore, in my opinion, be dismissed. But, having regard to the reasons above stated, the order of 8th November 1923 should, in my opinion, be varied by striking out all the words after "overruled." This will enable the Court, if necessary, to permit a proper adjustment.

The first count of the declaration alleges a covenant by the defendant company in the following words: "That the defendant did thereby for itself its successors and assigns covenant with the plaintiff its successors and assigns that the defendant would at all times during the continuance of the term thereby granted pay discharge and perform all rates taxes charges assessments duties and outgoings whatsoever whether imposed by the Parliament of the Commonwealth or of the State or by any municipal or local body or authority or of any other description which were then or might at any time thereafter be assessed charged or imposed upon the demised premises or upon the rent thereof or on the owner occupier or lessee in respect thereof except always Federal land tax." The count further alleges a breach of the covenant in the following words: "Income tax has been duly assessed charged and imposed by the taxation authorities acting under the provisions of the said legislation upon the plaintiff as owner of the said premises in respect of the rent thereof received by the plaintiff from the defendant under the provisions of the said memorandum of lease and the plaintiff has been forced and compelled by law to pay the said tax so assessed charged and imposed as aforesaid to the said authorities and the plaintiff has duly demanded payment by the defendant to the plaintiff of the amount of the said tax so assessed charged imposed and paid as aforesaid and all times elapsed and all conditions were fulfilled and all things happened necessary to entitle the plaintiff to the performance by the defendant of its said promises and to sue for the breaches thereof hereinafter alleged yet the defendant has neglected and refused and still neglects and refuses to pay the same or any part thereof to the plaintiff or to any other person or to make any provision whatsoever therefor and has repudiated and still repudiates any obligation to make any payment to any person in respect thereof or to make any provision therefor."

The question for our consideration is whether the word "thereof" in the phrase "or on the owner occupier or lessee in respect thereof" refers only to the premises and not to the rent of the premises. In our opinion it refers only to the premises, and the alleged breach is not, therefore, a breach of the covenant.

This disposes of the question actually determined by the Supreme Court of New South Wales; but it has been suggested that, even if the breach as laid is bad, still there has been a breach of the obligation to pay a tax imposed on the rent of the demised premises within the meaning of the covenant. In our opinion there has been no such breach; we think that the State income tax in New South Wales is not a tax imposed on the rent of demised premises merely because such rent is part of the income taxed by the Act. To constitute such a tax there must be an imposition immediately directed to the rent and attaching to it as such.

This is an appeal from a judgment of the Supreme Court of New South Wales overruling a demurrer to a declaration in an action on a covenant contained in a lease—not, I would observe in passing, a covenant of indemnity. It is admitted by the pleadings that income tax was imposed on the plaintiff in respect of the rent of the premises in question and was paid by him. The second ground of the demurrer was not pressed. The covenant in question has already been stated, and I need not restate it. The question for us is to ascertain the intention of the parties from the words of the covenant. The words of the covenant—"pay taxes assessed or imposed upon the rent"—are wide enough to include income tax imposed by the New South Wales Income Tax Acts on "income derived from the produce of property" as therein defined.

I am unable to agree with the contention made on behalf of the appellant that because income tax is imposed on an individual in respect of his whole "income"—that being the generic term—it is not imposed on any of its component parts, being various species of the larger designation. The tax is imposed on income from all sources; but that is to prevent any of the species, not specially exempted, from escaping. Every item of every species is separately shown in the return made by the taxpayer, and the sum of these, after subtracting any allowable deductions, constitutes the amount on which the tax is payable. What, then, is the measure of the obligation placed on the covenantor? The words of the covenant are not, I think, to be read in the widest sense of which they are literally susceptible. The burthen which the tenant undertakes to discharge is limited by the amount of the rent, which during the currency of the lease is fixed and certain. The "facts" are fixed as between the parties, the rent being taken as between the parties to the obligation as unassociated with any other items of income which the lessor might have and as the only source of his income assessable. Applying the law as it stands at the relevant time to the facts so fixed, the extent of the lessee's obligation is arrived at.

Appeal dismissed. Order appealed from varied by striking out all the words after "overruled." Case remitted to Supreme Court to be dealt with as may be considered just. Appellant to pay costs of appeal.

[1] (1898) 2 Q.B. 315, at p. 317.

[2] (1924) A.C. 53, at p. 57.

[3] [1849] EngR 1182; (1849) 4 Exch. 571, at p. 576.

[4] (1922) 2 A.C. 176.

High Court of Australia

Union Theatres Ltd v Marrickville Buildings Ltd [1924] HCA 32; (1924) 35 CLR 171 (4 August 1924)

HIGH COURT OF AUSTRALIA