Duffy Bros Fruit Market (Campbelltown) Pty Ltd v Gumland Property Holdings Pty Ltd; Gumland Property Holdings Pty Ltd v Pisciuneri & Anor [2007] NSWCA 7 (14 February 2007)

Last Updated: 25 March 2008

NEW SOUTH WALES COURT OF APPEAL

CITATION: Duffy Bros Fruit Market (Campbelltown) Pty Ltd v Gumland Property Holdings Pty Ltd; Gumland Property Holdings Pty Ltd v Pisciuneri & Anor [2007] NSWCA 7
This decision has been amended. Please see the end of the judgment for a list of the amendments.

FILE NUMBER(S):
40224/06, 40210/06

HEARING DATE(S): 5/12/06

6/12/06

7/12/06

JUDGMENT DATE: 14 February 2007

PARTIES:
Duffy Bros Fruit market (Campbelltown) Pty Ltd
Gumland Property Holdings Pty Ltd
Ferinando Pisciuneri
Natale Pisciuneri

JUDGMENT OF: Giles JA Santow JA Tobias JA

LOWER COURT JURISDICTION: Supreme Court - Equity Division

LOWER COURT FILE NUMBER(S): SC 50066/05

LOWER COURT JUDICIAL OFFICER: Macready AsJ

LOWER COURT DATE OF DECISION: 30/3/05

LOWER COURT MEDIUM NEUTRAL CITATION:
Gumland v Duffy [2006] NSWSC 10

COUNSEL:
(40224/06)
A: R J Ellicott QC / N J Kidd
1R: R G Keller (F Pisciuneri
(40210/06)
A: G Lindsay SC / A Combe
R: R J Ellicott QC / N J Kidd

SOLICITORS:
(40224/06)
A: PricewaterhouseCoopers Legal, Sydney
R: Curwood Partners, Sydney
(40210/06)
A: PricewaterhouseCoopers Legal, Sydney
R: Davis Legal, Sydney

CATCHWORDS:
LANDLORD AND TENANT — Assignment, severance and sublease — Sublease — Whether sub-lessor obliged to pay rent and outgoings payable by the sub-lessee under the Sub-lease but unpaid — Privity of contract and privity of estate — Whether guarantor’s covenant runs with the land — Rent — Breach of covenant to pay — Actions to recover rent or damages — Action to recover rent — Construction and interpretation — Variation by deed — Whether a term in a Deed purporting to vary a lease is an essential term of the lease — Termination of the tenancy — Repudiation — Damages — Loss of bargain damages
GUARANTEE AND INDEMNITY — Discharge of surety — Variation of the principal contract

LEGISLATION CITED:
Conveyancing Act 1919
Real Property Act 1900
Suitors Fund Act 1951

CASES CITED:
Acron Pacific Ltd v Offshore Oil NL [1985] HCA 63; (1985) 157 CLR 514
Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15; (1987) 162 CLR 549
Associated Newspapers Ltd v Bancks [1951] HCA 24; (1951) 83 CLR 322
Bakarich v Commonwealth Bank of Australia [2004] NSWSC 283
Bowes v Chaleyer [1923] HCA 15; (1923) 32 CLR 159
Burger King Corporation v Hungry Jack’s Pty Ltd [2001] NSWCA 187
Cameron v UBS AG (2000) 2 VR 108
Carr v J A Berriman Pty Ltd [1953] HCA 31; (1953) 89 CLR 327
Chan v Cresdon Pty Ltd [1989] HCA 63; (1989) 168 CLR 242
City of London v New Hampshire Insurance Co
Phillips J
18 January 1991
unreported
Codelfa Contruction Pty Ltd v State Rail Authority [1982] HCA 24; (1982) 149 CLR 337
Commonwealth Bank of Australia v McArthur [2003] VSC 31
Coulton v Holcombe [1986] HCA 33; (1986) 162 CLR 1
DTR Nominees Pty Ltd v Mona Homes Ltd [1978] HCA 12; (1978) 138 CLR 423
Habel v Tiller (1929) SASR 170
Holme v Brunskill (1878) 3 QBD 495
Karacominakis v Big Country Developments Pty Ltd [2000] NSWCA 313
Konica Business Machines Australia Pty Ltd v Tizine Pty Ltd (1992) 26 NSWLR 687
Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd [1989] HCA 23; (1989) 166 CLR 623
National Westminster Bank plc v Riley (1986) BCLC 268
O’Dea v Allstates Leasing System (WA) Pty Ltd [1983] HCA 3; (1983) 152 CLR 359
Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 7
Roadshow Entertainment Pty Ltd v (ACN 053 006 269) Pty Ltd (1997) 42 NSWLR 462
Ross T Smyth & Co Ltd v T D Bailey
Son & Co (1940) 3 All ER 60
Ryde Joinery Pty Ltd v Zisti (1997) 7 BPR 97 638
Sanderson v Aston (1873) LR 8 Ex 73
Sanpine Pty Ltd v Koompahtoo Local Aboriginal Land Council [2006] NSWCA 291
Shevill v The Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620
Stewart v M’Kean [1855] EngR 170; (1855) 10 Exch 675
156 ER 610
Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR NSW 632
Wallingford v Mutual Society (1890) 5 App Cas 685
Wardens and Commonalty of the Mystery of Mercers of the City of London v New Hampshire Insurance Co (1992) 2 Ll R 365
Zenith Engineering Pty Ltd v Queensland Crane & Machinery Pty Ltd [2000] QCA 221.

DECISION:
A. In 40210/06 –1.Appeal allowed in part; 2.Set aside the judgment against the first defendant for the plaintiff in the amount of $2,096,574 and in lieu thereof judgment for $362,232 taking effect on 28 March 2006; 3.Set aside the order that the first defendant pay the plaintiff’s costs of the proceedings on a party/party basis and in lieu thereof order that it pay 50% of the plaintiff’s costs of the claim against it; 4.Order that the respondent pay 80% of the appellant’s costs of the appeal; B.In 40224/06 - 1. Appeal allowed; 2. Set aside the judgment in favour of the second and third defendants and in lieu thereof judgment for the plaintiff against the second and third defendants for $362,232 taking effect on 28 March 2006; 3. Set aside the order that the plaintiff pay the costs of the second and third defendants and in lieu thereof order that the second and third defendants pay the plaintiff’s costs of the claim against them; 4. Order that the respondents pay the appellant’s costs of the appeal; 5. Order that the respondents have a certificate under the Suitors Fund Act if otherwise qualified


JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40210/06

CA 40224/06

SC 50066/05

GILES JA

SANTOW JA

TOBIAS JA

Wednesday 14 February 2007

DUFFY BROS FRUIT MARKET (CAMPBELLTOWN) PTY LTD v GUMLAND PROPERTY HOLDINGS PTY LTD

GUMLAND PROPERTY HOLDINGS PTY LTD v PISCIUNERI & ANOR

Judgment

1 GILES JA: Gumland Property Holdings Pty Ltd (“Gumland”) became the lessor to Duffy Bros Fruit Market (Campbelltown) Pty Ltd (“Duffy Bros”) of premises in a shopping centre at Campbelltown. Messrs Ferdinando and Natale Pisciuneri gave guarantees with respect to the occupation of the premises. Gumland purported to terminate the lease, and claimed unpaid money and damages from Duffy Bros and recovery from the Messrs Pisciuneri as guarantors. Macready AsJ upheld the claim against Duffy Bros and gave judgment against it, including interest, for $2,096,514. He dismissed the claim against the Messrs Pisciuneri.

2 Duffy Bros appealed against the judgment, as to liability and in one respect as to quantum. Gumland appealed against the dismissal of its claim against the Messrs Pisciuneri. Many issues were raised by the grounds of appeal and by notices of contention, and the submissions were extensive. Some submissions were said to be unavailable on appeal because they had not been made at the trial.

3 In my opinion, Duffy Bros’ appeal should be upheld in part and the judgment against it should be reduced to $362,232; and Gumland’s appeal should be upheld and there should be judgment against the Messrs Pisciuneri for the same amount. In coming to these conclusions, it has not been necessary to decide all the issues raised by the parties.

A. Facts

4 The evidence at the trial went in part to matters not raised as issues on appeal. The course of events and the provisions of documents material to the issues on appeal were as follows.

The lease from Transit

5 By a lease under the Real Property Act, 1900, the copy of which in evidence is undated (“the Lease”), Transit Management Pty Ltd (“Transit”) as Lessor leased to Duffy Bros as Lessee Shop 10 in the Marketfair Campbelltown Shopping Centre (“the shopping centre”) for a term of fifteen years commencing on 30 March 1993 and expiring on 29 March 2008, with an option to renew for a further ten years. The Lease was registered U318066 on 2 June 1994.

6 In the interpretation clause of the Lease the definition of “Lessor” was “the Lessor its successors and assigns and where the context permits its servants or agents”, and the definition of “Lessee”, perhaps with an interpolation, was -

“ ... the Lessee and the executors administrators successors and permitted assigns of the Lessee and the ‘Lessee’s agents’ shall mean servants agents contractors subcontractors invitees licensees sub-tenants and also any persons claiming through or under the Lessee and sub-tenant.”

7 The base rent under the Lease was $245,343 per annum payable by monthly instalments in advance. The rent was subject to annual CPI increases and to a five yearly market review. In addition, the Lessee was required to pay 19.65 per cent of the Lessor’s outgoings in respect of the shopping centre, by equal monthly instalments in advance based on an estimate notified by the Lessor to the Lessee for each twelve month period from 1 July, and with adjustment at the end of each period.

8 By cl 3 the Lessee covenanted to pay the rent and other monies “hereby secured” within seven days of the day on which each monthly instalment of rent fell due or the other monies became payable. Clause 7.1 provided that covenants thereafter specified were “essential terms of this Lease”, and by cl 7.1.1 the covenants included that in cl 3; it is appropriate to set out cl 7.1 in full -

“7. ESSENTIAL TERMS OF LEASE

7.1 Each of the covenants by the Lessee which are specified in this clause are essential terms of this Lease:

7.1.1 The covenant to pay rent throughout the lease term at a date not later than seven (7) days after the due date for the payment of each monthly instalment of rent and any other monies payable under the terms of this Lease (clause 3);

7.1.2 Clause 2(16) regarding subletting and assignment;

7.1.3 Clause 12 regarding the right of the Lessor to terminate the Lease; and

7.1.4 Clause 14 regarding the use of the Demised Premises.””

9 Clause 7 of the Lease included -

“7.3 The Lessee covenants to compensate the Lessor in respect of any breach of an essential term of this lease and the Lessor is entitled to recover damages from the Lessee in respect of such breaches. The Lessor’s entitlement under this clause is in addition to any other remedy or entitlement to which the Lessor is entitled (including to terminate this Lease).

7.4 In the event that the Lessee’s conduct (whether acts or omissions) constitutes a repudiation of the Lease (or of the Lessee’s obligations under the Lease) or constitutes a breach of any Lease covenants, the Lessee covenants to compensate the Lessor for the loss or damage suffered by reason of the repudiation or breach.

7.5 The Lessor shall be entitled to recover damages against the Lessee in respect of repudiation or breach of covenant for the damage suffered by the Lessor during the entire term of this Lease.

7.6 The Lessor’s entitlement to recover damages shall not be affected or limited by any of the following:

7.6.1 If the Lessee shall abandon or vacate the Demised Premises;

7.6.2 If the Lessor shall elect to re-enter or to terminate the lease;

7.6.3 If the Lessor shall accept the Lessee’s repudiation; or

7.6.4 If the parties’ conduct shall constitute a surrender by operation of law.”

10 The Lessee’s covenants in cl 8 included, as a continuing covenant not limited to making good after termination -

“8.8 Make Good all Damage

To make good all damage, if any, to the Subject Premises arising in any manner whatsoever from, by or through machines, plant, fixtures or fittings therein or brought thereon by the Lessee.”

11 By cl 14.1 the Lessee agreed not to use Shop 10 or any part thereof, or permit it to be used, for any purpose other than “the carrying on the business described in the Lease as the Permitted Use”. The Permitted Use was, by a more complex definition in cl 1.18 of the Lease, a fruit and vegetable market and meat market. As has been seen, the specification of essential terms in cl 7.1 included cl 14.

12 Clause 15 provided for removal by the Lessee of the Lessee’s fixtures and fittings after expiration or sooner determination of the term of the lease.

13 Clause 16 provided -

“16. CONTINUING RIGHTS AND REMEDIES IN THE EVENT OF DETERMINATION OF THE LEASE

The determination of the Lease shall not prejudice or affect any rights or remedies of the Lessor against the Lessee or any person or company jointly liable with the Lessee on account of any antecedent breach by the Lessee of any of the terms, covenants and restrictions on the part of the Lessee. Further the Lessee acknowledges that it is the Lessee’s fundamental obligation to ensure that the Lessor shall receive the rental provided for in this Lease during the full term thereof and in the event that the lease is determined consequent upon default of the Lessee then the Lessee shall be liable to the Lessor for the full loss and/or damages suffered by the Lessor by reason of the non-receipt of such rental for the full term or the non-receipt of any part of it and shall be liable also for the cost of finding new tenants and the costs (including the legal costs on a solicitor/client basis) involved in the recovery of possession, preparing the Demised Premises for reletting and the reletting of the same and for any difference in the rental provided for in this Lease and the rental received from such reletting for the period from the termination of this Lease consequent upon default and the date upon which it would have terminated if the Lessee had not been in default.”

14 Clause 21 was a Lessor’s covenant not to lease any other part of the shopping centre for use as a fruit market or a meat market, save that it could lease for use as a delicatessen or “as a supermarket allowing the sale of potatoes, onions and oranges in season and fresh chickens.”

The 1994 Guarantees

15 Separate instruments under hand were executed dated 24 March 1994 between Mr Ferdinando Pisciuneri and Mr Natale Pisciuneri respectively, each described as “Guarantor”, and Transit, described as “First Lessor” (“the 1994 Guarantees”).

16 The 1994 Guarantees recited that Transit had “entered into an Agreement for Lease relating to the occupation of” Shop 10 by Duffy Bros, described as “First Lessee, and -

“B. It is intended that the benefit of this Guarantee shall subsist for the benefit of not only the First Lessor but any person or company who may become the Lessor of the said premises to the Lessee (as hereinafter defined).”

17 There was no evidence of an agreement for lease as distinct from the Lease.

18 The definition clause in the 1994 Guarantees included definitions of “Lessor” and “Lessee” -

“’Lessor’ shall mean the First Lessor whilesoever the First Lessor owns the freehold of the said premises without granting a concurrent lease thereof and thereafter shall mean the person or company who shall be the owner of the freehold of the said premises to the Lessee or holder of the leasehold estate subject to the lease to the Lessee hereinafter defined but with the intent that rights accrued in favour of the First Lessor or any subsequent Lessor as at the date of change of ownership of the freehold or granting of any such concurrent lease shall remain enforceable against the Guarantor.

‘Lessee’ shall mean the First Lessee until the First Lessee shall assign its right of occupation of the said premises with the consent of the Lessor and thereafter shall mean each person or company who is in occupation or shares in the occupation of the said premises during the term of operation of this agreement as defined in clause 4 hereof.”

19 The instruments provided -

“2. The Guarantor guarantees to the Lessor the payment to the Lessor of all monies now or hereafter to be payable to the Lessor by reason of the use or occupation of the said premises or by reason of any provisions of any relevant lease whether for rental, interest, damages, mesne profits or otherwise and on any account and whether by the Lessee or any other person during the term of operation of this agreement as defined in clause 4 hereof and guarantees also the payment to the Lessor of all monies now or hereafter to become payable to the Lessor by reason of or arising out of any breach of an agreement to lease the said premises.

3. To the extent that the guarantee set forth in Clause 2 hereof shall be void or unenforceable by reason of the fact of all or any of the obligations to the Lessor to pay any such monies may not or may cease to be enforceable the Guarantor agrees to indemnify the Lessor in respect of any failure of the Lessee or any other person to meet any obligations arising from the Lessee to the Lessor relating to the use or occupation of the said premises during the said term of operation of this agreement or arising from the failure of the Lessee or either of the companies included in that term to meet all the obligations of the Lessee or either of them to the Lessor under any agreement to lease relating to the said premises.

4. The term of the operation of this agreement is the period from the date hereof until the entry into a lease of the said premises by the First Lessee and thereafter until the happening, in relation to the said premises, of the latest of the following events to occur, viz:-

(a) the relationship of landlord and tenant shall cease to exist between the Lessor and Lessee (as hereinbefore defined) or between the Lessor and any person included in the term “Guarantor”;

OR

(b) the Lessee (as hereinbefore defined) shall or the Guarantor or any of the persons included in that term shall cease to be in possession or control of the said premises or part thereof

OR

(c) the said premises or part thereof shall cease to be in the possession of or partly in possession of any person or company with the consent of the Lessee, the Guarantor or either of the persons included in that term;”

20 The definition clause included a definition of “relevant lease” -

“’relevant lease’ shall mean any lease relating to the use or occupation of the said premises during the term of the operation of this agreement as defined in clause 4 hereof.”

21 By cll 10 and 11 the 1994 Guarantees provided, so far as presently relevant -

“10 The Guarantor agrees:-

(a) to waive each and every of each of the Guarantor’s rights whether legal, equitable, statutory or otherwise which may at any time be inconsistent with any of the provisions hereof or in any prejudice, limit or restrict the Lessor’s rights and remedies or recourse.

(b) ...

11. The Guarantor shall not be exonerated in whole or in part nor shall the Lessor’s rights, remedies or recourse against any Guarantor be in any way prejudiced or adversely affected by any of the following:

...

(c) Any release with respect to any part of the Guaranteed Monies of the liability of any guarantor or guarantors or other person liable to the Lessor in respect of all or any part of the Guaranteed Monies provided that this paragraph shall not be construed so as to preserve any liability of the Guarantor to the Lessor which the Lessor expressly releases.

...

(j) The failure to give notice to or the lack of consent of any Guarantor before or after the happening of any of the events referred to in this clause or generally the making of any agreement or transaction between the Lessor and the Lessee or between the Lessor and any other guarantor or any other person.”

The 1999 Deed

22 By 1999 trading conditions had become difficult for Duffy Bros, and it was in arrears with the rent and outgoings. Transit and Duffy Bros entered into a Deed dated 2 March 1999 (“the 1999 Deed”), the effect of which was to provide regimes for the payment by Duffy Bros of the arrears of rent and outgoings and with respect to future payment of rent and outgoings. Its recitals included that after extensive negotiations the parties “wish to continue their commercial relationship based on the circumstances as the parties have found them to be in Campbelltown”.

23 Clause 2 of the 1999 Deed provided -

“Ratification and affirmation

2. Subject to the terms of this Deed the parties ratify and affirm the terms of the Lease”.

24 Clause 3 provided -

“Area occupied

3. From the date hereof Duffys shall continue to occupy that part of the Leased Premises being the hatched area in the plan annexed marked ‘B’ and carry on the business permitted by the Lease in the said area.”

25 By cl 4 -

“Sub letting of an area

4. The parties agree to seek a sub-lessee for that part of the Leased Premises being the hatched area in the plan annexed marked ‘C’ and for the purpose of putting this agreement into effect:

4.1 Duffys irrevocably appoints each of the directors of Transit as its attorney to locate sub-lessees from time to time and enter into sub leases of the area hatched in annexure ‘C’ during the term of the Lease upon such terms and conditions as Transit sees fit.

4.2 It will be a term of any sublease that any sublessee shall pay all rents and outgoings under any such sublease directly to Transit.”

26 Clauses 5, 6 and 7 provided for payment of the arrears of rent and outgoings, their detail not being material in the appeals.

27 Clauses 8 and 9 provided for payment of a First Higher Sum for the period 1 August 1998 to 30 June 1999, Higher Sums for the twelve month periods from 1 July 1999 to 30 June 2007, and a Final Higher Sum for the period 1 July 2007 to 29 March 2008. These sums were in substance percentages of Duffy Bros’ gross receipts, subject to a minimum of an indexed $156,000 per annum. Again, their detail is not material in the appeals, but unless Duffy Bros’ gross receipts greatly increased the Higher Sums (the First Higher Sum and the Final Higher Sum being pro-rata for commencing and concluding broken periods) would be much less than the base rent and outgoings payable under cl 3 of the Lease. In fact, the Higher Sums did not ever exceed the indexed minimum.

28 By cl 10.2 of the 1999 Deed -

“10.1 For the purpose of interpreting clause 10.2 any payment due by Duffys under Clause 10.2(d) is not due and payable until the 29th March, 2008 or upon an earlier Scheduled Breach of the Lease by Duffy’s or an earlier breach of this Deed by Duffys which subsists for a period of 7 days after Transit has given notice to Duffys of such breach.

10.2 Duffys shall pay to Transit the aggregate of the following sums for rent and outgoings payable by Duffys under the Lease:

(a) the arrears in accordance with clauses 6 and 7 of this Deed,

(b) the First Higher Sum, Higher Sums and the Final Higher Sum in accordance with clause 8 of this Deed,

(c) all rent and outgoings under any such sublease entered into pursuant to clause 4 of this Deed, and

(d) the Sum by which the rent and outgoings payable by Duffys under the Lease up to the date the Lease terminates exceeds the aggregate of sums received under clauses 10(a),(b) and (c) [sic].

PROVIDED THAT if the Lease terminates on the 29th March, 2008 without any continuing Scheduled Breach of the Lease or breach of this Deed by Duffys then Transit shall accept the sums payable under clause 10(a), (b) and (c) [sic] hereof in satisfaction of rent and outgoings payable by Duffys under the Lease.”

29 “Scheduled Breach of the Lease”, found in cl 10.1 and the proviso to cl 10.2, was defined to mean “a breach of the Lease as defined in paragraph 7 of the Lease as essential terms of the Lease”.

30 Clause 11 provided -

“Removal of restriction

11. Transit and Duffys agreed the Lease is further varied from the date hereof by the deletion of clause 21 of the Lease and the parties agree Transit may allow:

a. one supermarket at the Centre to sell fresh fruit, fresh vegetables, fresh meat or any other product without any restriction on Transit or the supermarket and

b. a second supermarket at the Centre which does not sell fresh fruit, fresh vegetables or fresh meat.”

31 By cl 14, time was of the essence “for all payments by Duffys”.

32 Clause 15 provided -

“Confidential agreement

15. The parties agree not to disclose the facts recited in the Recitals to this Deed or the terms of this Deed to any third party except as required by the operation of law or for the purpose of enforcement of its terms or the enforcement of the Lease.”

33 Clause 20 provided -

“Severance

20 Notwithstanding any [sic] before mentioned in this Deed if any provision or part of a provision of this Agreement be held or found to be void, invalid or otherwise unenforceable, it shall be deemed to be severed from this Deed or clause (as the case may be) to the extent that it is void or to the extent of its voidability, invalidity or unenforceability but the remainder of this agreement or clause (as the case may be) shall remain in force and effect.”

34 Duffy Bros paid the arrears of rent and outgoings in accordance with cl 10.2(a) of the 1999 Deed, and paid the First Higher Sum and subsequent Higher Sums in accordance with cl 10.2(b). Central to the appeals were its obligations under cl 10.2(c) and (d), and the consequences of non-payment of the amounts to which those paragraphs referred.

The 1999 Confirmations

35 Mr Ferdinando Pisciuneri and Mr Natale Pisciuneri entered into separate Deeds with Transit, undated save as to 1999 (“the 1999 Confirmations”). The recitals included -

“C. By guarantee dated 25th March 1994 the guarantor covenanted with Transit to Guarantee the due and proper performance of Duffys pursuant to the Lease and indemnify Transit against loss.

...

E. After extensive negotiations the parties wish to continue their commercial relationship based on the circumstances as the parties have found them to be in Campbelltown and have entered into a Deed to record their agreement (‘the Deed’).”.

36 The 1999 Confirmations provided -

“1. The Guarantor acknowledges that Transit has this day entered into a Deed with Duffys whereby the terms of the Lease are varied.

2. The Guarantor acknowledges the terms of the guarantee made by the Guarantor in favour of Transit dated 25th March 1994 shall apply and be effective in respect of:

(a) the Lease and

(b) the Deed between Transit and Duffys of the date hereof whereby we [sic: the] lease is varied.

3. To the extent that the guarantee and the Deed referred to in the recitals to this deed shall or clause 2 [sic] be void or unenforceable by reason of the fact of all or any of the obligations to Transit to pay any such monies may not or may cease to be enforceable the Guarantor agrees to indemnify Transit in respect of any failure of Duffys or any other person to meet any obligations arising from the Lease or Deed to Transit relating to the use or occupation of the said premises during the said term of operation of the Lease or arising from the failure of Duffys to meet all the obligations of Duffys under the Lease.

4. The parties otherwise affirm the terms, conditions and covenants of the guarantee dated 25th March 1994.”

The power of attorney

37 By an instrument under seal dated 2 March 1999, addressed to Transit and “To whom it may concern”, Duffy Bros appointed Richard William Rowe, Joyce Beryl Rowe and Jane Margaret Rowe severally to -

“1. negotiate, make or enter into an agreement for sub-lease, to make or enter into a sub-lease of the lease registered as dealing U 318066 lease in respect of the hatched area in the plan annexed and marked ‘C’ (‘the Area’),

2. negotiate, make or enter into a variation of any sub-lease of the Area,

3. negotiate or accept a surrender or termination of any sub-lease of the Area.

And execute such documents, carry out such acts and do such things as the Attorney shall see fit and to bind DUFFY BROS FRUIT MARKETS (CAMPBELLTOWN) PTY LIMITED and DUFFY BROS FRUIT MARKETS (CAMPBELLTOWN) PTY LIMITED will ratify, confirm and put into effect all acts, deeds, agreements, contracts and obligations entered into by the Attorney pursuant to or in reliance upon the authority hereby granted.”

38 The appointees were directors of Transit. This was plainly supplementary to cl 4.1 of the 1999 Deed.

The registered variation of lease

39 By a Variation of Lease executed by Transit and Duffy Bros, undated but stamped on 16 March 1999, the Lease was varied by omitting cl 21 and adding a cl 21A. The new cl 21A was in accordance with the second agreement in cl 11 of the 1999 Deed. The Variation of Lease gave effect to cl 11 of the 1999 Deed. It was registered 7738423, but when it was registered did not appear.

40 There was no registered Variation of Lease otherwise giving effect to the 1999 Deed.

The sub-lease of part of Shop 10

41 By a sub-lease dated 3 December 1999 (“the Sub-lease”) Duffy Bros leased to Austie Nominees Pty Ltd (“Austie”) the part of Shop 10 hatched in the plan annexed ‘C’ to the 1999 Deed, identified as Shop 10A, for a term of three years from 1 August 1999 expiring on 31 July 2002, with two options to renew for periods of three years. The Sub-lease was registered 6737167. It was executed by Transit, cl 27 providing -

“27. CONSENT OF HEAD-LESSOR

The Head-Lessor consents to the terms and conditions of this Lease which consent is evidenced by the Head-Lessor’s execution of this Lease save and except that it is agreed between the Head-Lessor and the Lessor that the said consent shall not in any way constitute or be deemed a waiver by the Head-Lessor of any past breach of the Head-Lease by the Lessor.”

42 The base rent under the Sub-lease was $98,875 payable monthly in advance, subject to CPI adjustment and adjustment for revaluation. The permitted use under the Sub-lease was a licensed retail liquor store. There was no provision for payment of a percentage of outgoings. Clause 28 provided that the tenancy created by the Sub-lease “shall determine upon the determination of the Head Lease for any reason whatsoever”.

43 Clause 10 of the Sub-lease, in which “Lessor” and “Lessee” meant the sub-lessor and the sub-lessee, provided -

“10. HOLDING OVER

In the event of the Lessee continuing in possession after the expiration of the term of this Lease otherwise than under the terms of a new lease then this tenancy shall continue to the next Rent Day on a daily tenancy at a rent equal to the daily equivalent of the aggregate of the Current Base Annual Rent and the Reimbursement Rent and then as a monthly tenancy only determinable by either party giving one months notice in writing to the other and shall continue subject to all the covenants and conditions and agreements herein contained except that the rental per month shall be an amount being equal to the monthly equivalent of the Current Base Annual Rent.”

44 The reference in cl 10 to Reimbursement Rent, a phrase used in the Lease in relation to outgoings, appears to have been a mistake.

45 The Sub-lease provided for payment of the rent to Duffy Bros. It did not, as contemplated by cl 4.2 of the 1999 Deed, provide for Austie to pay rent and outgoings directly to Transit, or for payment of outgoings at all.

46 The execution of the Sub-lease by Duffy Bros was by Mr Richard Rowe as its attorney under the power of attorney of 2 March 1999. From other evidence, the Sub-lease was the result of Transit’s directors’ location of Austie as sub-lessee (cl 4.1 of the 1999 Deed) or of their negotiation of the Sub-lease (cl 1 of the power of attorney). Mr Natale Pisciuneri gave evidence that after Transit “took over the leasing responsibilities of shop 10A”, he knew nothing of a new tenant until Austie moved in.

Transfer of the Sub-lease

47 At some time in 2001, a Deed was executed between Duffy Bros as Landlord, Austie as Assignor and Woolworths Ltd (“Woolworths”) as Assignee (“the Assignment Deed”). By the Assignment Deed, the copy of which in evidence was undated, Austie assigned to Woolworths all its estate and interest in and to “the Lease”, including the rights to occupy Shop 10A and to any unexercised option. The definition of “the Lease” was “the document or documents mentioned in Item 2”, and Item 2 read -

“2. Lease

Head Lease undated but stamped 24 March 1994 between Transit Management Pty Ltd as Lessor and Duffy Bros Fruit Markets (Campbelltown) Pty Ltd as Lessee

Sub-Lease dated 3 December 1999 between Transit Managements Pty Ltd as head Lessor, Duffy Bros Fruit Markets (Campbelltown) Pty Ltd as sub Lessor and Austie Nominees Pty Ltd as sub Lessee.”

48 Clause 4.2 of the Assignment Deed provided -

“4.2 Assignee to pay Rent and perform and observe Lease after Assignment Date

The Assignee agrees with the Assignor and also with the Landlord:

(a) to pay the Rent and other monies payable to the Landlord under the Lease at the times mentioned in the Lease to the Landlord or as the Landlord may in writing from time to time direct; and

(b) to perform and observe the other Tenant’s Obligations,

from and including the day immediately after the Assignment Date until the expiration of the Term.”

49 By cl 9.1 Duffy Bros consented to the assignment, but without prejudice to its rights against Austie in respect of existing breaches of the Sub-lease.

50 The Assignment Deed provided by cl 8 for execution and registration of a transfer of the Sub-lease. By a Transfer of Lease dated 30 October 2001 registered 8350092K, Austie transferred the Sub-lease to Woolworths.

Transfer of the freehold to Gumland

51 By a Contract for the Sale of Land dated 6 September 2001 (“the Contract”) Gumland agreed to purchase the shopping centre from Transit. Although not expressly stated, the purchase was subject to tenancies. The tenancies disclosed in special condition 43 included -

“Lease to:

(a) ...

(e) Duffy Bros Fruit Markets (Campbelltown) Pty Ltd of Shop 10;

(f) Variation of Lease being Part Shop 10;

(g) Austie Nominees Pty Limited of Shop 10A;

(h) ... “

52 The misdescription of the Sub-lease as a lease from Transit was repeated in special condition 48, which provided that the “lessee” of Shop 10A intended to assign its “lease” to Woolworths and that the purchaser would not object thereto.

53 Special condition 50 provided -

“50(a) The Purchaser acknowledges that under a Deed between the Vendor and Duffy Bros Fruit Markets (Campbelltown) Pty Limited dated 2nd March 1999 (‘the Duffy Bros Deed’) the Vendor may become entitled to payments properly attributable to the period prior to completion.

(b) The Vendor shall upon the request of the Purchaser, or the registered proprietor of the Property from time to time cause to be executed all documents the Purchaser or registered proprietor, as the case may be, reasonably requests it to sign and which it is empowered to sign under the clause 4 of the Duffy Bros Deed.

(c) The Purchaser takes the Property subject to the Duffy Bros Deed and the Purchaser shall indemnify the Vendor against any breach of that deed by it.

(d) This Further Condition 50 shall not merge on completion.”

54 The Contract did not expressly provide for assignment to Gumland of Transit’s rights and entitlements as lessor.

55 The purchase was completed on 5 December 2001. A transfer to Gumland was thereafter registered, the evidence not disclosing when.

Duffy Bros ceases to carry on business at Shop 10

56 On 17 April 2002 Mr Natale Pisciuneri told the manager of the shopping centre that Duffy Bros would cease trading at Shop 10 so as to reduce its losses. Duffy Bros’ solicitor wrote to Gumland on 24 April 2002, saying -

“Our client has been concerned for quite sometime as to the decline of the Centre and is forced to mitigate its losses by ceasing to trade effectively within 30 days from the date of this letter.

Despite regular advertising of the business by our client, the business continues to lose in excess of five thousand dollars ($5,000.00), per week.

Our client believes that a major factor in the decline of their business can be attributed to the poor performance of the Centre itself, relative to the aesthetics, condition, appearance, car parking and high vacancy rates.

Our client does not intend to breach the terms of the Lease and will continue to pay rental prescribed by the Lease.

Our client, however, requests your co-operation in any attempt to assign the Lease or grant a new Lease to another willing Lessee.

Again we reiterate, that our client does not intend to breach any of the Lease provisions.”

57 Gumland’s solicitors replied on 6 May 2002, refuting any poor performance of the shopping centre and complaining that Duffy Bros had taken down its signage without making good the walls, and concluding -

“Our client notes that your client does not intend to breach the lease in terms of its rent payment. However, if they do fail to pay rent in the future, our client would seek remedies in accordance with clauses 7 and 16 of the lease in the form of recovery of rent and/or damages for the entire term of the lease.”

58 New solicitors for Gumland wrote again on 31 May 2002. It was a more forthright letter, referring to the letter of 24 April 2002 and continuing -

“We note that your client has indicated therein its intention to close its business within thirty days of the date of your letter. We note that as of today’s date your client is still trading in the premises. Would you please obtain urgent instructions as to your client’s intention to cease trading at the premises.

Please note that if your client ceases to trade at the premises this constitutes a breach of the Lease.

In these circumstances your client remains obligated to pay all rental and other monies owing under the Lease to our client until the expiration of the term of the Lease. We note your instructions as set out in your letter of 24 April, 2002 that your client “will continue to pay rental prescribed by the Lease”.

Your client should be aware that any abandonment of the Lease or vacating of the premises, or even any suggestion to follow these courses of action, will result in an action for substantial damages including all consequential losses, loss of rent, agents’ fees and legal costs being instituted by our client.

Further, as your client is the anchor tenant of the Centre, such legal action will include all loss of rental and consequential losses relating to all other tenancies in the Centre.

We are instructed that your client is also engaging in conduct which is calculated to and which will result in damages being sustained to the Centre and its financial viability. In these circumstances, the proposed legal action will include a claim for all losses arising from such conduct by your client.

It should be noted that our client will take all steps necessary to preserve its legal position in respect to this matter.”

59 Duffy Bros’ solicitors replied on 12 June 2002 -

“We have sought instructions in regard to your letter dated 31 May, 2002 and reply as follows:

1. Our client does not plan to close its business in its entirety;

2. Our client denies that in the event it does close its business it will constitute a breach of Lease. Our client intends to pay all rental and outgoings as provided for in the Lease;

3. Our client does not intend to abandon the Lease;

4. Our client denies that the Lessor will suffer any damages at all in the event that our client does cease trade. Our client has evidence that the Centre has been in decline for quite sometime and that a number of the tenancies are in fact vacant and have in fact been abandoned;

5. Our client denies that it is an anchor tenant in the Centre.

a) Jewels Supermarket

6. Our client denies any liability to any consequential loss if any;

7. Our client denies it is engaging in conduct which is calculated and will result in damages being sustained to the Centre or its financial viability. This Centre has been in decline for a number of years. Our clients possess evidence of this fact also by way of correspondence to the previous landlord. In fact, our client considers that the state of the Centre is a factor in the decline of its business and has placed not only your client on notice of this fact but has also placed the previous landlord on notice of this fact;

8. Our client will from Sunday 16 June, 2002 now concentrate on its meat lines. It will continue to trade albeit in a reduced capacity for a trial period from that date. There will be no abandonment of the premises. Any attempts by your client to recover possession of the premises will be taken as a repudiation of the Lease and our client will seek damages from the landlord.”

60 The response from Gumland’s solicitors, by a letter dated 14 June 2002, was -

“We note that your client intends to no longer conduct the business of a Fruit and Vegetable Market from the premises as from Sunday, 16 June, 2002.

This is a clear breach of the permitted use of the premises as set out in clause 1.18 of the Lease.

Your client is hereby on notice that our client will take all action available to it arising from your client’s breach.”

61 Duffy Bros ceased to conduct its fruit and vegetable market at about this time; precisely when it ceased was not clear, but there is no reason to conclude that it was prior to 16 June 2002. It seems that a meat market conducted by a licensee from Duffy Bros continued trading at Shop 10, but the business was unprofitable and conduct of the meat market also ceased in about December 2002. Duffy Bros’ fixtures and fittings and other equipment (cash registers, cool rooms, shelving, display units et cetera) were left in place, according to Mr Natale Pisciuneri so that Duffy Bros could recommence trading if shopper numbers improved at the shopping centre.

62 Duffy Bros continued to pay the Higher Rents in respect of Shop 10. There was no evidence that, after the letter of 14 June 2002, Gumland again told Duffy Bros that it was in breach because it was not carrying on business at Shop 10, or complained that it was not trading at Shop 10.

Woolworths acts unilaterally

63 At the end of April 2002 Woolworths asked for a meeting with Gumland “to discuss Woolworths entering into a direct lease with Gumland Holdings over the premises that is currently occupied by our BWS store.”

64 By a letter dated 9 May 2002 it informed Duffy Bros that it would not be exercising its option to renew the Sub-lease from 1 August 2002. It said in the letter that its preference was to negotiate a direct lease with Gumland “but unfortunately, the owners have advised that they are not in a position at present to consider a direct lease with Woolworths”. It offered to take a new sublease from Duffy Bros on terms which it set out. The terms included rent of $50,000 per annum plus GST, about half the rent under the Sub-lease.

65 Duffy Bros gave a holding response on 27 May 2002; so far as appears, it gave no further written response.

66 Woolworths renewed negotiations with Gumland. On 19 June 2002 it wrote to Gumland -

“Thank you for your time on Wednesday 12 June 2002 to discuss Woolworths Limited’s future tenure within Campbelltown Marketfair.

As you know, we have not exercised the option to renew our sub-lease with Duffy Bros from 1 August 2002 and require agreement from Gumland Holdings to enter into a new direct lease with Woolworths Limited. We have been advised by our store Manager that Duffy Bros ceased trading last Sunday and are currently vacating their tenancy.

Whilst we understand there have been ongoing issues between Gumland Holdings and Duffy Bros to resolve, we have become frustrated by our inability to finalise a direct lease with Gumland Holdings and agree new terms.

In an attempt to finalise lease terms and provide assurance to Gumland Holdings of Woolworths future within the centre, we now submit for your agreement the following offer which is identical to our offer to Duffy Bros dated 9 May 2002 ... “

67 Gumland replied on 25 June 2002, saying that the offer was under consideration but -

“As you are aware, in order for us to grant a fresh lease to your company, the existing head lease to Duffy Brothers needs to be surrendered.

We have commenced negotiations with Duffy Brothers with respect to the premises and these negotiations are now well advanced.”

68 It was not clear from the evidence what negotiations were under way with Duffy Bros.

69 Woolworths responded to Gumland on 27 June 2002 -

“We refer to your letter of 25 June 2002 which notes that our latest offer of 19 June 2002 to lease the above premises is under consideration from your Board of Directors.

Whilst we note your comment regarding your ongoing negotiations with Duffy Bros over the surrender of their lease, we continue to be frustrated by Gumland Holding’s level of commitment to finalise new terms under a direct lease with Woolworths Limited. As such, we are not prepared to accept your non committed response to our offer and will arrange for the new rental of $50,000 gross per annum + GST to commence from the date of the next payment.

We will be prepared (subject to Property Committee Approval) to enter into a direct lease with Gumland for the subject premises under the same terms and conditions detailed in our offer of 19 June 2002.”

70 Gumland’s solicitors’ reply by a letter dated 2 July 2002 included -

“We are instructed that in the circumstances of your letter of 27 June, 2002, your offer to lease the above premises is hereby rejected.

You seem to be suffering under a misunderstanding as to your legal commitments in respect to this matter. Until such time as our client’s Head Lease with Duffy Bros. Fruit Markets (Campbelltown) Pty Limited is concluded, our client is not in a position to offer you a separate lease in respect of the above premises. As you are aware, negotiations with your Head Lessor in respect to resolving the Head Lease issue are under way.

In these circumstances, your letter of 27 June, 2002, appears simply to be a crude attempt to unilaterally reduce the payment of rent for the premises.

Until such time as the Head Lease issue is resolved, our client is not legally able to give a ‘non committed response’ to your offer which we note is conditional in any case upon approval by your Property Committee.”

71 Woolworths then wrote to Duffy Bros, by a letter dated 11 July 2002 -

“We refer to our previous meetings of 19 February 2002 and 22 May 2002, our letter of 9 May 2002 and your letter of response dated 27 May 2002 regarding the above premises and Woolworths Limited’s future tenure within the Centre.

We advised in our letter of 9 May 2002 that Woolworths would not be exercising its option to renew the existing sub-lease from 1 August 2002 and would holdover on a month to month basis whilst we negotiated a direct lease with Gumland Holdings Pty Limited.

A meeting was held on 12 June 2002 with Mr Shawn Chuen of Gumland and Warren Perry of Accord (centre management) to discuss Woolworths’ future tenure within the Centre. In principle, all parties agreed that a direct lease with Gumland under new terms and conditions would be negotiated. We forwarded letters to Gumland on 19 and 27 June 2002 requesting agreement to enter into a direct lease under identical commercial terms and conditions in our offer to Duffy Bros of 9 May 2002.

Gumland advised on 26 June 2002 and 2 July 2002 they will not consider any offers until the Head Lease between Gumland and Duffy Bros is concluded. This response from Gumland perpetuates an unacceptably high rental charge and puts into doubt the sustainability of our business.

Therefore, despite many attempts to seek co-operation from Gumland to negotiate a new lease, we are left with no alternative but to advise you, as our legal sub-lessor that we will adjust our current monthly rental to $50,000 gross per annum ($4,166.67 + GST) to commence from the date of the next payment in accordance with our original letter of offer dated 9 May 2002. As per current practice, we will continue to direct payments to Gumland. In turn, upon conclusion of the Head Lease between Gumland and Duffy Bros, we will then resume our negotiations with Gumland to enter into a new direct lease reflecting the adjusted rental charge.”

72 Commencing with the rent for August 2002, Woolworths paid rent at the “adjusted” rate. It paid direct to Gumland, see below as to payment arrangements.

73 That Woolworths could not obtain a direct lease from Gumland provided no justification for unilateral adjustment of the rent payable under the Sub-lease. It was a stark breach by Woolworths of its obligations to the company which it acknowledged as its “legal sub-lessor”.

74 Woolworths’ short payment nonetheless does not appear to have brought a strong reaction. According to Mr Chan Kwok Cheun, Gumland’s leasing manager, Gumland had “spoken to them that they were not paying the correct rental they are paying half rental unilaterally”, but he was no more specific. According to Mr Kevin Roach, the administration manager for Duffy Bros, in the later part of 2002 he attended a meeting with Gumland representatives and its solicitor at which he said that, on his reading of the 1999 Deed, Duffy Bros was not liable for rent unpaid by Woolworths, and the solicitor said, “We have a different reading of the Deed and we believe Duffy Bros is liable for the full rent”. The evidence did not show greater protest to Woolworths, or greater insistence that Duffy Bros pay to Gumland the amount of rent unpaid by Woolworths; the strong flavour is that this did not occur.

Payment arrangements during this period

75 By letters dated 5 December 2001 to Duffy Bros and Austie, the solicitors for Transit advised that Shop 10 and Shop 10A respectively had been “sold and transferred” to Gumland on that day and “[a]ll rental payments from that date must be made directly to the Purchaser or as directed by them”. This continued the error in the Contract, treating the Sub-lease as a lease from Transit.

76 It was not clear in the evidence whether Austie had been paying its rent direct to Transit.

77 From 21 December 2001 to 16 June 2003 Gumland invoiced Duffy Bros with respect to Shop 10, at the rate appropriate to the Higher Rents under the 1999 Deed. As I have indicated, Duffy Bros paid the Higher Rents in accordance with the 1999 Deed.

78 From 21 December 2001 to 19 March 2002 Gumland invoiced “Liberty Liquor”, Austie’s trading name, with respect to Shop 10A, and from 15 April 2002 to 18 August 2003 it invoiced Duffy Bros. From some rather unclear correspondence, it appears that in early April 2002 it was arranged that Gumland would invoice Duffy Bros and Duffy Bros would invoice Woolworths with a notation authorising and directing it to pay direct to Gumland. At all times after the transfer of the Sub-lease the rent payable thereunder was paid by Woolworths direct to Gumland; no rent was paid by Woolworths to Duffy Bros.

Gumland purports to terminate the Lease

79 On or about 3 July 2003 Gumland served on Duffy Bros a notice headed “Notice to Remedy Breach of Lease – Outstanding Rent”. The notice read -

“Lease to Duffy Bros. Fruit Market (Campbelltown) Pty Limited (‘Lessee’) Registered Lease No. U3180669 (‘Lease’)

Premises: Shop 10 in the centre known as Market Place at the corner of Tindall Street, Kellicar Road and Menangle Road, Campbelltown, New South Wales (‘Premises’)

The Lessee is in default under the terms of the Lease in that it has failed to pay rent for the period 31 August 2002 to 30 June 2003 in the sum of $57,893.55 (including GST) (“the Breach”), calculated as follows:

Date	Description	Total Rental (incl. GST)	Total Rental Received	Outstanding Balance (incl. GST)
18/7/02	Rental for Aug 02	$9,429.72	$4,166.67	$5,263.05
23/8/02	Rental for Sep 02	$9,429.72	$4,166.67	$10,526.10
16/9/02	Rental for Oct 02	$9,429.72	$4,166.67	$15,789.15
18/10/02	Rental for Nov 02	$9,429.72	$4,166.67	$21,052.20
18/11/02	Rental for Dec 02	$9,429.72	$4,166.67	$26,315.25
18/12/02	Rental for Jan 03	$9,429.72	$4,166.67	$31,578.30
16/1/03	Rental for Feb 03	$9,429.72	$4,166.67	$36,841.35
14/2/03	Rental for Mar 03	$9,429.72	$4,166.67	$42,104.40
14/2/03	Rental for Apr 03	$9,429.72	$4,166.67	$47,367.45
15/4/03	Rental for May 03	$9,429.72	$4,166.67	$52,630.50
15/5/03	Rental for Jun 03	$9,429.72	$4,166.67	$57,893.55
	Total amount Due			$57,893.55

The Breach entitles the Lessor to:

1. claim interest on the outstanding rent pursuant to clause 3.3 of the Lease; and/or

2. re-enter the Premises pursuant to clause 12.1 of the Lease; and/or

3. terminate the Lease.

Whilst reserving all of the Lessor’s rights in respect of the Breach, the Lessor hereby demands that the Lessee rectify the Breach by paying to the Lessor, C/- its solicitors PricewaterhouseCoopers Legal, the sum of $57,893.55 by way of bank cheque payable on or before 9 July 2003.

If the Breach is not rectified by this time, the Lessor will seek to enforce its rights pursuant to the Lease without further notice to you.”

80 The Total Rental was the amount of rent payable under the Sub-lease. The Total Rental Received was Woolworths’ “adjusted” payments. Duffy Bros failed to pay the $57,893.55 the subject of the notice, or any part thereof.

81 On 1 August 2003 Gumland served on Duffy Bros a notice -

“Lease to Duffy Bros Fruit Market (Campbelltown) Pty Limited (‘Lessee’) – Registered Lease No U318066 (’Lease’)

Premises: Shop 10 in the centre known as Market Place at the corner of Tindall Street, Kellicar Road and Menangle Road, Campbelltown, New South Wales (‘Premises’)

Gumland Property Holdings Pty Ltd ABN 76 067 278 782 hereby gives you notice of termination of the Lease as a result of your failure to pay arrears of rent totalling $57,893.55 as stated in the Notice to Remedy Breach of Lease – Outstanding Rent sent to you on 3 July 2003 by Gumland Property Holdings Pty Ltd ABN 76 067 278 782.”

Events after the termination

82 On 4 August 2003 Gumland’s solicitors wrote to Duffy Bros’ solicitors -

“Our client requires your client to make good the premises on or before 12 August 2003, in accordance with clauses 8.8 and 15.1 of the Lease. In particular, our client requires your client to carry out the following works:

1. rectify the fascia at the loading dock

2. rectify the fascia of the shop front

3. remove all shelves and counters

4. remove the cool rooms except for the cool room in the butcher shop

5. repair the damaged gyprock

Our client is currently quantifying its loss as a result of the termination of lease and will inform your client of that amount shortly.”

83 Mr Roach gave evidence that on 3 or 4 August 2003 he went to Shop 10 but was prevented from entering by “two persons”, and when he saw the shopping centre manager he was told that she had been given instructions not to let him into the shop. He asked how he was supposed to “get our gear out”, and was told, “I don’t know love, I was just given instructions and that’s all I know”. There was no evidence that the same question was asked between the solicitors.

84 On 13 August 2003 the solicitors wrote that they had not received a response and the work had not been commenced, and -

“Accordingly, our client would engage its own contractors to carry out the make good of the premises and remove the chattels and fixtures left behind by your client. These works will commence immediately and the cost of those works will be claimed against your client.”

85 Gumland’s solicitors wrote again on 14 August 2003 -

“We refer to our letter to you of 13 August 2003.

Unless your client informs our client that it has made the necessary arrangements to remove the chattels it left behind in the premises by close of business tomorrow, 15 August 2003, our client will dispose of those items and claim the cost of the disposal against your client.”

86 There was evidence that, when inspected in 2005, Shop 10 still had in place a lot of the equipment left by Duffy Bros.

87 Duffy Bros’ solicitors wrote to Gumland’s solicitors by a letter dated 18 August 2003. The letter began -

“We refer to the pretended notice of termination of 1 August 2003, the deprivation of our client’s possession of area B in the plan annexed to the Deed of Variation of its Lease referred to in your letter of 14th August 2003 and the threats to convert its fixtures and fittings. These actions plainly constitute a repudiation of your clients’ obligation under the Lease in that they breach its covenant for quiet enjoyment and derogate from its grant.

Our client elects to accept this repudiation as terminating the Lease. Our client has attended to proceed with all due expedition to remove its property from the centre, but was informed on 14th August 2003 that it could not remove property that is situated in the butcher shop. The reason given was that the property will be used to offset the debt claimed. Such an action is contrary to section 177A of the Conveyancing Act 1919.

We demand the property of our client and access to remove such property. If the property is not given to our client and access is not granted, appropriate proceedings will be commenced.”

88 The letter included, as part of a suggestion that Gumland or Duffy Bros bring proceedings against Woolworths -

“By the deed, the sub tenant was obliged to pay its rent directly to the head-lessor. This practice has been followed since the sub-lease was granted, though of recent months it appears that Woolworths has not fully complied with its obligation.”

89 On 6 August 2003 Gumland’s solicitors wrote to Woolworths advising of the termination of the lease to Duffy Bros, and saying, ”Accordingly, the sub-lease with Duffy Brothers is terminated.” The letter said that a representative of Gumland “will be in contact with you shortly to discuss future arrangements”. By a letter dated 3 October 2003 Gumland told Woolworths that it was agreeable in principle to negotiate a new lease, but it would “only be undertaken upon the settlement and conclusion of the Supreme Court case with Duffy Brothers”. The letter asserted that Woolworths was “currently on a month-to-month tenancy”.

90 Gumland thereafter invoiced Woolworths for the amount of the rent payable under the Sub-lease, and Woolworths continued to pay only the “adjusted” rent. Gumland also re-leased parts of Shop 10, and received rent. It is not necessary to go into detail; the rents received were credited to Duffy Bros in the calculation of the damages claimed by Gumland.

The later assignments

91 After the commencement of the proceedings Gumland obtained from Transit a Deed of Assignment of the Lease and Deeds of Assignment of the guarantees given by the Messrs Pisciuneri, all dated 5 May 2005.

92 By the Deed of Assignment of the Lease Transit assigned to Gumland -

“ ... all the Assignor’s rights and obligations under the;

(a) Lease as varied by the Variation of Lease.

(b) Transit Deed.”

93 The Lease was the lease registered U318066. “Variation of Lease” was defined in the plural to mean “the variations of the Lease registered as dealing numbers 7738423 and 8412036”. Continuing the tradition of errors, the registered variation of lease 8412036 was not a variation of the Lease, but a variation of the Sub-lease in early 2002 to do with loading access. The Transit Deed was the 1999 Deed.

94 Notice of the assignment was given to Duffy Bros by a letter dated 5 May 2005.

95 By each of the Deeds of Assignment of the guarantees Transit assigned to Gumland “all the Assignor’s rights and obligations under the Guarantee and the Second Guarantee”. The Guarantee was the relevant 1994 Guarantee. The Second Guarantee was the relevant 1999 Confirmation.

96 Notice of the assignment was given to each of the Messrs Pisciuneri by letter dated 5 May 2005.

B. The judgment against Duffy Bros

97 There were four constituents of the judgment -

(i) the amount of the short-fall in payments by Woolworths from 1 August 2002 to 31 July 2003, payable under cl 10.2(c) of the 1999 Deed; the trial judge awarded $57,415 and interest of $21,220, a total of $78,635;

(ii) rent and outgoings payable under cl 10.2(d) of the 1999 Deed; the trial judge awarded $215,724 and interest of $67,873, a total of $283,597.00;

(iii) damages consequent on termination of the Lease, described as damages for loss of bargain, representing rent and outgoings for the period 1 August 2003, to 29 March 2008 less the rents received after 1 August 2003, with appropriate discounting; the trial judge awarded $1,235,889 and interest of $388,848, a total of $1,624,737; and

(iv) costs of making the premises good and re-leasing them; the trial judge awarded the costs as damages and under cl 16 of the Lease, in a total amount including interest of $109,545.

98 The course of the trial judge’s reasoning was, in brief, that pursuant to cl 10.2(c) of the 1999 Deed Duffy Bros was obliged to pay Gumland the shortfall in payments by Woolworths; that its failure to pay was a Scheduled Breach of the Lease upon which the cl 10.2(d) amount became payable; that its failure to pay also entitled Gumland to terminate the Lease for breach of an agreed essential term of the Lease, and to recover damages for loss of bargain; and that the termination of the Lease also entitled Gumland to recover the costs of making the premises good and re-leasing them, as damages or under cl 16 of the Lease.

99 The trial judge did not accept Gumland’s submissions that, apart from failure to pay the cl 10.2(c) amount, it could rely upon a breach by Duffy Bros failing to carry on business at Shop 10 as making the cl 10.2(d) amount payable and for entitlement to terminate the Lease, and that in any event it had been entitled to terminate the Lease for repudiation by Duffy Bros.

C. Payment of the shortfall pursuant to cl 10.2(c) of the 1999 Deed

100 The issues here raised were -

(a) whether there was a fresh tenancy between Gumland and Woolworths from 1 August 2002, in place of the Sub-lease from Duffy Bros; if not

(b) whether the Sub-lease was “entered into pursuant to clause 4 of this Deed” within cl 10.2(c) of the 1999 Deed; if so

(c) whether cl 10.2(c) of the 1999 Deed obliged Duffy Bros to pay to Transit rent payable under the Sub-lease but unpaid; and if so

(d) (although it became a non-issue) whether Gumland could enforce cl 10.2(c) of the 1999 Deed.

A fresh tenancy?

101 The issue was raised at the trial as a submission that there had been surrender by operation of law of Duffy Bros’ lease in respect of the area of the Sub-lease, with Woolworths becoming a tenant at will of Gumland under a deemed monthly tenancy by virtue of s 127 of the Conveyancing Act 1919. Referring to Konica Business Machines Australia Pty Ltd v Tizine Pty Ltd (1992) 26 NSWLR 687 at 689, the trial judge asked whether there was abandonment by the tenant and an unequivocal indication by the landlord that it no longer regarded the lease as in existence. After describing the correspondence of May-July 2000, he concluded that Gumland had acted “consistently with the existence of that part of its Lease to Duffy Bros as is comprised in the Sub-lease for shop 10A” and that it was “hard to see that there had been any abandonment of the premises by Duffy Bros”, and that there had not been surrender by operation of law (at [40], [41]).

102 The submissions on appeal focussed on creation of a new tenancy rather than partial destruction of the old, although they must go together.

103 It will be recalled that cl 10 of the Sub-lease provided for holding over as monthly tenant. Duffy Bros submitted that Woolworths did not hold over pursuant to cl 10, because it was paying a reduced rent and, contrary to the terms of the Sub-lease, was paying it direct to Gumland. It said that Gumland “consented to its remaining in occupation on that basis”, so that the Sub-lease no longer governed Woolworths’ occupation of Shop 10A, and (in effect) that from 1 August 2002 cl 10.2(c) of the 1999 Deed had nothing on which to bite.

104 While Woolworths was paying the “adjusted” rent, by its letter of 11 July 2002 to Duffy Bros it made clear that what it adjusted was the monthly rental payable to Duffy Bros as Woolworths’ “legal sub-lessor”. It said it would hold over while it negotiated a direct lease with Gumland, the fact of negotiating a direct lease in the context of the course of correspondence negating a then direct tenancy between Gumland and Woolworths even under a tenancy at will.

105 Gumland did not consent to Woolworths remaining in occupation on the basis of a direct relationship of lessor and lessee. By its letter of 2 July 2002 it declined to enter into a direct relationship until it had resolved the “Head Lease issue”, and it can not be taken to have agreed to a direct relationship of landlord and tenant as to Shop 10A while Duffy Bros remained, as it did, the lessee of Shop 10A under the Lease. Although the evidence was not specific, Gumland did complain to Woolworths that it was not paying the correct rental, meaning the rent under the Sub-lease rather than the “adjusted” rent, and Mr Roach’s evidence shows that Gumland made known to Duffy Bros in the latter part of 2002 that it believed Duffy Bros was liable for the full rent. In due course Gumland formally claimed payment by the notice of 3 July 2003. Although payment was made by Woolworths direct to Gumland, that was under an arrangement continued from well prior to August 2002 and with Gumland invoicing Duffy Bros and Duffy Bros invoicing Woolworths. The invoices were for the Sub-lease rent, not the “adjusted” rent.

106 For Duffy Bros’ submission to succeed there had to have been a surrender of the Lease in respect of the area of the Sub-lease and creation of a direct relationship of lessor and lessee between Gumland and Woolworths, or a tripartite consensual re-arrangement to the same effect. The evidence did not support either, and in my opinion Duffy Bros’ submission was without substance. There was not a fresh tenancy between Gumland and Woolworths from 1 August 2002, and Woolworths was holding over under the Sub-lease.

Entry into the Sub-lease pursuant to cl 4 of the 1999 Deed?

107 Clause 4.2 of the 1999 Deed required that it be a term of any sub-lease that the sub-lessee should pay all rents and outgoings thereunder direct to Transit (“a direct payment term”). The Sub-lease did not have a direct payment term. The trial judge declined to hold that this meant that the Sub-lease was not “entered into pursuant to clause 4 of this Deed” within the meaning of cl 10.2(c) of the 1999 Deed, so that again cl 10.2(c) had nothing on which to bite.

108 In the course of noting the submissions of the parties on this issue and the cases to which they referred, the trial judge said that the evident purpose of the term contemplated by cl 4.2 was to minimise the risk to the head lessor that the rent referable to Shop 10A might be paid by the sub-lessee to Duffy Bros and not paid by Duffy Bros to the head lessor. He expressed the view that the departure from the 1999 Deed “is not substantial and is in respect of a term which was for the sole benefit of the head lessor” and that the Sub-lease conformed to the area authorised by the 1999 Deed. He concluded -

“54 Having regard to these matters and the evident purpose of clause 10 of the Deed, namely, to ensure that the benefit of the rent under the sub-lease which was to be granted later was to accrue to the lessor, I think that the sub-lease was granted pursuant to clause 4 notwithstanding the omission of the term in 4.2.”

109 Duffy Bros submitted on appeal that cl 4.2 was an important provision, for the benefit not only of Transit as head lessor but also of Duffy Bros because, in the light of cl 10.2(c), it was a safeguard against exposure of Duffy Bros to an increase in liability under cl 10.2 of the 1999 Deed. Where Transit was by cl 4 of the 1999 Deed and the supplementary power of attorney of 2 March 1999 effectively given control of sub-leasing the hatched area in the plan marked ‘C’, it said, Transit’s powers should be construed strictly, so that a direct payment term as contemplated by cl 4.2 was necessary to the outcome of the exercise of its powers and to the consequent imposition of an obligation by cl 10.2(c).

110 Gumland submitted that cl 4 of the 1999 Deed did not exclude entry by Duffy Bros into a sub-lease with a sub-lessee which it, rather than Transit, had located, and that it was incorrect to approach cl 4 as giving control to Transit. It said that a direct payment term was indeed only for the benefit of Transit, and that Duffy Bros’ exposure under cl 10.2 was the same whether or not there was the term because it had to pay rent which the sub-lessee did not pay whether the payment should have been direct to Gumland or should have been to Duffy Bros. It referred to Habel v Tiller (1929) SASR 170, to which it had referred the trial judge, in which the Full Court of the Supreme Court of South Australia held that the words “pursuant to” were capable of a wide meaning, including acts done in intended or substituted performance as well as acts done strictly in performance of an agreement. And it said, although it did not make clear the relevance to the meaning of the words, that strictly the failure to include a direct payment term in the Sub-lease was that of Duffy Bros by its attorneys.

111 The Sub-lease was entered into in performance of the parties’ agreement, in cl 4 of the 1999 Deed, that a sub-lessee would be sought for what became Shop 10A. Transit was not given dominating control, but was certainly given power to enter into a sub-lease through the appointment of its directors as Duffy Bros’ attorneys for that purpose, and the agreement extended to the exercise of the power to enter into a sub-lease. Transit exercised the power in performance of the agreement. Performance was defective to the extent that the Sub-lease did not contain a direct payment term, but as in Habel v Tiller “pursuant to” readily extended to what was there called (at 176) a “substituted mode of performing the written contract”.

112 I do not think that inclusion in a sub-lease of a direct payment term was essential, so that in its absence there was not performance of the agreement. Clause 4.2 did not state a condition of achieving a valid sub-lease, but an expectation of a term that “will be” in the sub-lease; perhaps only an expectation in the event that Transit’s directors exercised their power. The agency in cl 4.1 and the expectation in cl 4.2 were “for the purpose of putting this agreement into effect”, both for the benefit of Transit, and cl 4.2 was in truth no more than Duffy Bros’ agreement that Transit could put a direct payment term in any sublease it entered into in the exercise of the power given to it. A direct payment term did not give a practical benefit to Duffy Bros, which for the reasons given in relation to the next issue was liable to Transit for rent in relation to Shop 10A once it was sub-leased.

113 In my opinion, the Sub-lease was entered into pursuant to cl 4.2 of the 1999 Deed.

114 I add that Gumland submitted that that, even if the Sub-lease did not contain a direct payment term, an equivalent to a direct payment term was put in place by the arrangements whereby Duffy Bros’ invoices to Woolworths authorised and directed it to pay direct to Gumland. This arrangement does not seem to have been put in place until well after the entry into the Sub-lease, and in any event I do not think it could take the place of a term of the Sub-lease if the term was essential to the status of the Sub-lease as entered into pursuant to cl 4.

Obligation to pay rent payable under the Sub-lease but unpaid?

115 The trial judge said, referring to the High Court’s explanation of the phrase “obligation under this lease” in Chan v Cresdon Pty Ltd [1989] HCA 63; (1989) 168 CLR 242 at 249, that “under any such sub-lease” in cl 10.2(c) meant “created by, in accordance with, pursuant to or under authority of” the Sub-lease.

116 Turning to the submissions in relation to limiting the words in the circumstances in which the 1999 Deed came about, his Honour said -

“58 On the question of the true construction the submissions were as follows:

‘(d) It is submitted that by reason of clauses 4.1 and 4.2 the true construction of clause 10.2(c) is that only rent received by Duffy Bros from the sub-lessees would have to be paid by Duffy Bros to Transit (or its successor).

(e) The reason why such construction is appropriate is demonstrated if one considers a situation where if [sic] no sub-lessee had ever been obtained. It is submitted the only monies that Duffy Bros would then have had to pay before 29 March 2008 was the monies the subject of clauses 10.2(a) and 10.2(b).

(f) Such a construction is further supported by the absence of a provision that Duffy Bros was to pay to Transit (or its successor) an amount equal to the amount that would be payable to Duffy Bros by any sub-tenant.’

59 However, what clause 10.2(c) is dealing with is a situation where there has been a grant of a sub-lease. In such circumstances it is the sub-lessor who controls the existence of that sub-lease. It can enforce payment of the rent whether by threats of termination or action to recover the rent. The head lessor may or may not be able to sue upon the condition in the sub-lease depending upon its terms but it would not be likely to have a power to determine the sub-lease. In contrast the sub-lessor has all the necessary powers to determine the sub-lease if rent is not paid and can thus limit its exposure to the head lessor under clause 10.2(c) of the deed. The head lessor would have a right to then grant a further sub-lease of the area to a new sub-lessee. Clause 4.1 of the deed makes this plain. In my view the proper construction is that clause 10.2(c) is not limited to monies paid.”

117 Referring then to the admissibility of evidence of surrounding circumstances as discussed in Codelfa Contruction Pty Ltd v State Rail Authority [1982] HCA 24; (1982) 149 CLR 337, his Honour said -

“62 In the present case I think that the language of the clause is not ambiguous and accordingly there is no call to consider the surrounding circumstances. In any event the surrounding circumstances referred to in the submissions do not support the construction advanced by Duffy Bros.”

118 Duffy Bros submitted on appeal that, in requiring that it should pay to Transit “all rent and outgoings under” the Sub-lease, cl 10.2(c) was what it called an accounting provision. It said that it was obliged to account for, in the sense of pass on to Transit, rent and outgoings paid by the sub-lessee to it, but had no greater obligation itself to pay rent and outgoings should the sub-lessee fail to pay. It submitted that the introductory words of cl 10.2, requiring that Duffy Bros pay “sums”, were significant; and that, picking up the rent and outgoings in cl 10.2(c) which, by regard to cl 4.2 of the 1999 Deed were to be paid directly to Transit, the cl 10.2(c) amount was any sum by way of rent and outgoings which happened to be paid to Duffy Bros. It said that the absence of any time frame for payment supported this construction, and that where there was a sub-lease it was contrary to fundamental concepts that it as sub-lessor should be liable to pay to the head lessor rent or outgoings payable by its sub-lessee; it put this a different way in submitting that there was nothing in cl 10.2 to make it a surety for the sub-lessee.

119 In my opinion, there is no substance in these submissions. Clause 10.2(c) ensured that Transit would be paid by Duffy Bros an equivalent amount to the rent and outgoings payable under a sub-lease if, contrary to an expected direct payment term, the sub-lessee did not pay Transit. It was concerned with payment of what was not paid, not with passing on what was paid.

120 It was not correct that Duffy Bros was liable as sub-lessor to pay its sub-lessee’s rent and outgoings, or to liken it to a surety for the sub-lessee. It was liable as lessee for the cl 10.2(c) amount. Duffy Bros remained the lessee from Transit of the area of the original Shop 10, which included Shop 10A. The 1999 Deed changed the timing and amount of what it had to pay “for rent and outgoings payable by Duffys under the Lease”, but whatever it had to pay was still for rent and outgoings for the whole of what became Shop 10 and Shop 10A. It was recognised in cl 3 of the 1999 Deed that Duffy Bros would occupy only part of the premises, the area which became Shop 10, and that the area which became Shop 10A would if possible be sub-leased. Apart from the arrears the subject of cl 10.2(a), until such time as Shop 10A was sub-leased Duffy Bros was to pay for rent and outgoings the Higher Sums the subject of cl 10.2(b). The purpose of cl 10.2(c) was that, when Shop 10A was sub-leased, there should also be payable by Duffy Bros for rent and outgoings the cl 10.2(c) amount, an amount referable to the rent and outgoings for which the sub-lease provided but payable for rent and outgoings payable under the Lease. In short, if the right to possession of Shop 10A became remunerative because Shop 10A was sub-leased, then what Duffy Bros had to pay was correspondingly increased.

121 The true accounting provision would have been a direct payment term. If the sub-lessee failed to pay, Duffy Bros as the sub-lessor was the party entitled to sue for the rent and outgoings. Duffy Bros submitted that Transit could sue as third party beneficiary; that is at best doubtful, and it may be observed that, while parties to leases do not always do sensible things, it would not have been sensible for Transit to accept under the 1999 Deed a doubtful ability to sue the sub-lessee as a third party beneficiary in lieu of a clear right of action against Duffy Bros. Yet that was the result of Duffy Bros’ submissions.

122 In my opinion, Duffy Bros was obliged to pay to Transit rent payable under the Sub-lease but unpaid.

Enforcement by Gumland?

123 Duffy Bros’ submissions on appeal included that there was no privity of contract between Gumland and Duffy Bros, only privity of estate, and that the 1999 Deed was “a side agreement in respect of which rights and obligations under cl 10.2 did not run with the land”. They also included that the operation of s 117 of the Conveyancing Act had been excluded, relying in particular on cl 50 of the Contract, and that its operation in any event did not entitle Gumland to recover loss of bargain damages. It was for a time not clear whether by the submissions Duffy Bros contended also that Gumland could not enforce the 1999 Deed by suing for the cl 10.2(c) amount.

124 In its contentions filed in answer to the contentions in Gumland’s summons Duffy Bros had asserted that Gumland was bound by the 1999 Deed. At the trial its counsel had said, during the opening by Gumland’s counsel, “We are content to see the case approached on that basis, that this deed [the 1999 Deed] ran with the land and bound both the plaintiff and the defendant”. The trial was conducted on the basis that Duffy Bros was obliged to pay to Gumland, and Gumland was entitled to be paid by Duffy Bros, whatever sums were properly payable pursuant to cl 10.2(c) and 10.2(d) of the 1999 Deed. Gumland submitted that Duffy Bros should not be permitted to depart on appeal from the basis on which the trial had been conducted in this respect.

125 The issue was resolved in Duffy Bros’ submissions in reply in the appeal. While maintaining its position that s 117 of the Conveyancing Act did not avail Gumland, Duffy Bros said -

“Should Duffy Bros be held to have breached the sub-clause [cl 10.2(c)] it accepts that it would have a liability under the sub-clause enforceable by Gumland via Transit (because under the 1999 Deed Duffy Bros agreed with Transit that it would pay clause 10.2 amounts to Transit or its successors in title and, by its letter of attornment, Transit directed Duffy Bros to pay Gumland) and Duffy Bros does not submit that the non-joinder of Transit in the proceedings precludes a judgment on that liability being made in favour of Gumland.”

126 I doubt that Duffy Bros should have been permitted to depart from the basis on which the trial had been conducted. It is unnecessary to comment on Duffy Bros’ reasons for its acceptance of exposure to liability in the submissions in reply. By concession, Gumland could enforce cl 10.2(c) of the 1999 Deed.

Conclusion

127 It follows from the determination of these issues that Duffy Bros was liable to Gumland for constituent (i) in the judgment, the amount of the shortfall in payment by Woolworths payable under cl 10.2(c) of the 1999 Deed.

D. Payment of rent and outgoings under cl 10.2(d) of the 1999 Deed

By cl 10.1 of the 1999 Deed the cl 10.2(d) amount was not payable until 29 March 2008, unless there was a Scheduled Breach of the Lease or a breach of the 1999 Deed subsisting for seven days after notice. Payment could thereby be accelerated. The issues raised, apart from whether there was breach by failure to pay Gumland the shortfall in payments by Woolworths, were -

(a) whether breach by the failure to pay was a Scheduled Breach of the Lease; alternatively

(b) whether there had been notice of breach by the failure to pay subsisting for seven days; alternatively

(c) whether there was a Scheduled Breach of the Lease, or a breach of the 1999 Deed subsisting for seven days after notice, by reason of Duffy Bros ceasing to carry on business at Shop 10;

(d) if any of (a), (b) or (c), whether the acceleration of payment of the cl 10.2(d) amount was void as a penalty.

128 A further issue, whether Gumland could not enforce cl 10.2(d) of the 1999 Deed because it had no privity of contract with Duffy Bros, was also resolved in Duffy Bros’ submissions in reply in the appeal -

“As in the case of clause 10.2(c), Duffy bros accepts that, should it be held to have a liability under clause 10.2(d), that liability is enforceable by Gumland via Transit, although neither section 117 nor section 51 [of the Conveyancing Act] can lend aid to Gumland.”

Failure to pay - a Scheduled Breach of the Lease?

129 The trial judge said -

“67 Gumland’s submission was that the failure to pay the clause 10.2 (c) amount was a scheduled breach of the lease itself. This is on the basis that the opening words of clause 10.2 makes it plain that the amounts which have to be paid under that clause are payable under the lease. The relevant clauses are clauses 3, 4 and 5 of the lease which provide for payment of the rent, outgoings and CPI adjustments. Such clauses are, under clause 7, essential terms of the lease. The definition in the deed of a ‘scheduled breach of the lease” which is the expression used in clause 10.1 means “a breach of the lease as defined in paragraph 7 of the lease as an essential term of the lease’.

68 It was the submissions of the guarantors (which Duffy Bros adopted) that clause 10 of the deed, by its language, suspended the operation of clauses 3, 4 and 5 of the lease during the term of the deed and clause 10 of the deed applied so far as rent and outgoing were concerned to the exclusion of clauses 3,4 and 5.

69 Such a construction ignores the express words at the commencement of clause 10.2, namely, ‘for rent and outgoings payable by Duffy Bros under the lease’. Such an expression acknowledges a continuing liability under the lease. The deed has merely amended the lease to provide for different amounts of rent and outgoings to be payable under the lease. The new amounts are the amounts in 10.2(a)(b) and (c).

70 Thus the ordinary construction of the clause would be that the failure to pay the Woolworths’ rent in full was a scheduled breach of the lease. Such a scheduled breach does not require notice for it to have effect. A breach of the deed does require seven days notice before the acceleration provisions in clause 10.1 apply. Although a notice of breach in respect of non-payment was said to be given on 3 July 2003 it did not purport to be notice of a breach of the deed and therefore would not be sufficient to accelerate the payments.”

130 Duffy Bros submitted on appeal that the agreement embodied in cl 10.2 of the 1999 Deed did not operate to vary the Lease, but was by way of a side agreement which suspended the obligation to pay rent and outgoings under cl 3 of the Lease and provided a separate regime of payment “for” rent and outgoings payable under the Lease; it said that “for” meant in lieu of such rent and outgoings. The separate regime could bring the same result if the cl 10.2(d) amount became payable upon breach in accordance with cl 10.1, or if breach as at 29 March 2008 meant that the proviso did not apply, it said, but it was still a separate regime, and that it was separate was underlined by the references in cl 10.1 and the proviso to breach of the 1999 Deed as something separate from breach of the Lease. Hence, according to the submission, while there could be a Scheduled Breach of the Lease within cl 10.1 in a respect other than the payment of rent and outgoings, failure to pay the cl 10.2(c) amount was not a breach of the Lease and therefore not a Scheduled Breach of the Lease.

131 Duffy Bros further submitted that the operation of the 1999 Deed as a side agreement was explained by its cl 15, providing for confidentiality, indicating that the parties intended that there be a side agreement rather than variation of the Lease in order that third parties (presumably particularly having other tenants in the shopping centre in mind) would not know of the arrangement to which they had come for continuing their commercial relationship. It said that this was underlined by the fact that the only registered variation of lease was that giving effect to cl 11 of the 1999 Deed, which itself was the only provision of the 1999 Deed expressly referring to variation.

132 Gumland submitted that the trial judge was correct in his view that the cl 10.2(a), (b) and (c) amounts and, subject to cl 10.1, the cl 10.2(d) amount in the 1999 Deed were varied rent and outgoings payable under the Lease. It said that the 1999 Deed was plainly ancillary to, and could not operate independently of, the Lease, and by its cl 2 recorded that subject to its terms the parties ratified and affirmed the terms of the Lease. The amounts payable under cl 10.2 were expressly for rent and outgoings payable by Duffy Bros “under the Lease”, the proviso referred to acceptance of the cl 10.2(a), (b) and (c) amounts in satisfaction of rent and outgoings “payable by Duffys under the Lease”, and these words made clear that the amounts were by variation of what had been payable under the Lease and that “for” was a word of equivalence rather than substitution.

133 That there was properly a variation of the Lease, Gumland said, was evident from the effect of cll 3 and 4 of the 1999 Deed in varying the user covenant in cl 14 of the Lease and from the express reference in cl 11 to the Lease being “further varied” by the deletion of cl 21 of the Lease. Further, Gumland said, “Scheduled Breach of the Lease” would have no content in relation to either payment of rent and outgoings or user unless the 1999 Deed varied, rather than suspended, the covenants to pay rent and outgoings and the user covenant.

134 I do not think that this issue is to be resolved by characterisation as variation or something other than variation. As I have said, the 1999 Deed changed the timing and amount of what Duffy Bros had to pay “for rent and outgoings payable by Duffys under the Lease”, and that could aptly be described as a variation of the Lease because Duffy Bros’ obligations changed: at least as to timing and, depending on cl 10.1 and the proviso, also as to overall amount. To say that there was a suspension of the obligations under the Lease did not mean much, because with the change something had to happen to them. Suspension does not seem to me to be correct, because on any view they would not come back to life: if there were acceleration under cl 10.1 or the proviso did not operate, the timing would still have changed. However, the true question is one of the meaning of “Scheduled Breach of the Lease”.

135 The definition, to repeat, was “a breach of the Lease as defined in paragraph 7 of the Lease as essential terms of the Lease”. That takes one to para 7 of the Lease, which identified particular clauses of the Lease as essential terms of the Lease, relevantly (by cl 7.1.1) -

“The covenant to pay rent throughout the lease term at a date not later than seven (7) days after the due date for the payment of each monthly instalment of rent and any other monies payable under the terms of this Lease (clause 3);”

136 Was failure to pay the cl 10.2(c) amount a breach of the covenant described in cl 7.1.1? In my opinion, the answer is no. It was a breach of the promise in cl 10.2 of the 1999 Deed to pay the cl 10.2(c) amount. The definition of “Scheduled Breach of the Lease” took up numbered clauses of the Lease as found in cl 7.1, not their subject matter independently of the numbered clauses. The source of Duffy Bros’ obligation to pay the cl 10.2(c) amount was cl 10.2. It was not cl 3 of the Lease.

137 In my opinion, failure to pay the cl 10.2(c) amount was not a Scheduled Breach of the Lease.

Failure to pay – notice of breach subsisting for seven days?

138 To repeat from the trial judge’s [70] set out above -

“A breach of the deed does require seven days notice before the acceleration provisions in clause 10.1 apply. Although a notice of breach in respect of non-payment was said to be given on 3 July 2003 it did not purport to be notice of a breach of the deed and therefore would not be sufficient to accelerate the payments.”

139 Gumland submitted that notice of breach of cl 10.2(c) of the 1999 Deed was given by the notice of 3 July 2003, and that the breach subsisted for seven days and more thereafter, so that there was breach of the 1999 Deed within cl 10.1; and that the trial judge was in error in holding that the notice of 3 July 2003 was not notice of breach of the 1999 Deed because it did not purport to be such a notice.

140 In my opinion, the submission should be accepted. Clause 10.1 did not require any particular form of notice, and although the notice of 3 July 2003 did refer in its heading to the Lease and did allege “default under the terms of the Lease” the default was, and could only have been understood as, referable to default under cl 10.2(c) of the 1999 Deed. The Total Rental to which the notice referred was the rent payable under the Sub-lease, and the Total Rental Received to which it referred was Woolworths’ “adjusted” payments. Particularly when, at the meeting of which Mr Roach gave evidence, Gumland had asserted and he had disputed that Duffy Bros was obliged to pay the shortfall in Woolworths’ payments of rent under the Sub-lease, the notice was and would have been understood as a demand that Duffy Bros pay, and necessarily notice of breach by failure to pay, the cl 10.2(c) amount.

141 The purpose of the seven days notice was to give an opportunity to rectify the breach of which notice was given. As can be seen from the holding of the trial judge, it was understandable that failure to pay the cl 10.2(c) amount should be regarded as default under the terms of the Lease, but what mattered for Duffy Bros was notice that it was in default in payment of the shortfall in Woolworths’ payment of rent under the Sub-lease. Attribution by reference to the Lease rather than to the 1999 Deed, which in any event all concerned would have appreciated dealt with the matter in a manner which in a practical sense amounted to a variation of the Lease, did not detract from the notice. That the basis for the asserted default was cl 10.2(c) of the 1999 Deed was plain, and would have been so recognised by Duffy Bros; there was no evidence that it was mislead or in doubt.

142 A notice requirement such as that found in cl 10.1 is a practical instrument, and whether it is satisfied should be determined in a practical and not technical manner; here it was satisfied. In my opinion, there was notice of breach by the failure to pay subsisting for seven days.

Ceasing to carry on business – a Scheduled Breach of the Lease or a breach of the 1999 Deed subsisting for seven days after notice?

143 It is not necessary to determine these issues, but it is appropriate briefly to explain why I do not think they should be determined favourably to Gumland.

144 The trial judge held that, in ceasing to carry on business at Shop 10, Duffy Bros was in breach of cl 3 of the 1999 Deed. He said that there was an obligation to carry on business in the area which became Shop 10 -

“ ... and that is a mandatory obligation the ambit of which would obviously include trading from the premises during ordinary business hours”.

145 His Honour said, however -

“71 Gumland also submitted that the second breach, namely, the ceasing to trade in breach of the 1999 deed was also either a scheduled breach or a breach of the deed. I would not have thought it was a scheduled breach and in order to accelerate the payments the appropriate notice would have to be given if it was to be relied upon as a breach of the 1999 deed. Although a notice was given on 14 June 2002 referring to Duffy Bros’ proposal to cease to trade that would not be an effective notice for the purposes of the 1999 deed. This is because the breach has to subsist for a period of seven days after Transit has given notice to Duffy Bros of such breach. The ordinary construction of these words requires a breach to have occurred before notice can be given. In these circumstances the breach of the user covenant in the deed did not have the effect of accelerating the balance of the rent.”

146 Duffy Bros submitted on appeal that ceasing to carry on business was not a breach of cl 3 of the 1999 Deed. It said that cl 3 did not impose a mandatory obligation, and did no more than identify the new area to be occupied by Duffy Bros and to confirm that the Permitted Use in the Lease applied to that area. If it had been intended to impose a new mandatory obligation, it said, that would have been noted in the recitals and made more clear. It also submitted that an obligation to carry on business would not be breached when equipment was left in place hoping for a resumption of trade when business conditions improved.

147 The latter submission need only be stated to be rejected. The former submission has more substance; in my opinion it is correct. However, even if there were a breach of cl 3 of the 1999 Deed the trial judge was correct in his conclusion that it did not bring acceleration of payment of the cl 10.2(d) amount.

148 Gumland submitted that ceasing to trade was a Scheduled Breach of the Lease because cl 3 of the 1999 Deed amounted to a variation of cl 14 of the Lease and cl 14 of the Lease was stated in cl 7.1.4 to be an essential term. I do not think cl 3 of the 1999 Deed varied cl 14 of the Lease, because cl 14 dealt with permitted user and cl 3 dealt with obligatory user; that they both dealt with user did not mean variation, and they could stand together. In any event, for the reasons earlier given failure to carry on business was not a breach of the covenant described in cl 7.1.4 of the Lease, but of the different promise (as held by the trial judge) in cl 3 of the 1999 Deed.

149 Gumland further submitted that there had been notice of breach by ceasing to trade by its solicitors’ letter of 14 June 2002 and subsistence of the breach for seven days thereafter, and thus a breach of the 1999 Deed. It submitted that it did not matter that as at 14 June 2002 Duffy Bros had not ceased to conduct its fruit and vegetable market at Shop 10.

150 The letter of 14 June 2002 asserted breach of cl 1.18 of the Lease. Clause 1.18 of the Lease was the definition of Permitted Use. The covenant not to use for any purpose other than the Permitted Use was in cl 14.1 of the Lease, and the letter did not assert breach of the different promise in cl 3 of the 1999 Deed. In any event, the trial judge was correct in holding that the breach had to subsist at the time notice of it was given. Clause 10.1 referred to a breach, not a possible or future breach. Notice that if a thing is done it will be a breach is not notice of a breach; and even if the recipient of the notice had firmly announced an intention to do the thing, he could always change his mind and never be in breach.

Acceleration void as a penalty?

151 Having noted the parties’ submissions and the cases to which they referred, and in particular what was said by Gibbs CJ in O’Dea v Allstates Leasing System (WA) Pty Ltd [1983] HCA 3; (1983) 152 CLR 359 at 366, the trial judge said -

“82 In the present case clause 10 is dealing with either a present or past debt which is payable under the lease. It is true, as pointed out in Gumland’s submissions that there is no acceleration of any future payments because all that is dealt with is the amount up to the time of termination following upon a breach of condition. In the present case Gumland’s claim is only for the amount due under clause 10.2(d) up to the date of termination, namely, 1 August 2003. What has happened as a result of the 1999 deed was that the existing liability to make periodic payments of rent under the lease was to be less provided certain conditions were met.

83 In these circumstances it does not seem to me that there is any question of penalty in the operation of clause 10.2(d).”

152 Duffy Bros submitted on appeal that where the cl 10.2(d) amount was not payable until 29 March 2008, and not even then if the proviso operated, but became earlier payable by reason of breach in accordance with cl 10.1, its obligation to make earlier payment was penal and void. It said that cl 10.2 remained otherwise valid, in accordance with cl 20 of the 1999 Deed. The accelerated payment was penal, Duffy Bros submitted, because as a matter of substance -

“ ... the obligation upon Duffy Bros to pay money (under clause 10.2(d) read with clause 10.1 was an obligation conditioned upon a breach of contract, designed as security for performance of contractual obligations, imposing upon Duffy Bros an obligation to pay a higher amount (calculated in accordance with clause 10.2(d)) than it would otherwise be obliged to pay.”

153 Duffy Bros submitted that cl 10.2(d) could not be characterised in the manner to which Gibbs CJ had referred in O’Dea v Allstates Leasing System (WA) Pty Ltd at 366, as a “present debt, which, by reason of an indulgence given by the creditor, is payable either in the future, or in a lesser amount, provided that certain conditions are met”, because by cl 10.1 the amount was initially not payable until 29 March 2008 and earlier payment was expressly only by reason of breach; and, it said, the same sanction was imposed for breaches which could be of differing degrees of seriousness and with outcomes disproportionate to the acceleration of payment.

154 Again, I do not think there is any substance in Duffy Bros’ submissions. They failed to place cl 10.2 in its wider context.

155 As I have said, the 1999 Deed provided a new regime for the timing and amounts for payment of the rent and outgoings payable under the Lease. But it did so in a manner plainly intended to preserve to Transit recovery of the rent and outgoings payable under the Lease, if there was breach within cl 10.1 or if at the time of termination there was continuing breach contrary to the proviso. That is apparent from the continuance of the Lease with Duffy Bros as lessee of the area of the original Shop 10, and its ratification and affirmation subject to the terms of the 1999 Deed in cl 2 of that Deed; from cl 10.1, the effect of which was to defer payment subject to a condition; from the reference to the amounts in cl 10.2 as sums for rent and outgoings payable by Duffy Bros under the Lease; from the proviso referring to acceptance of the sums payable under cl 10.2(a), (b) and (c) in satisfaction of rent and outgoings payable by Duffy Bros under the Lease; and from the conditionality of the proviso.

156 The substance was that Duffy Bros remained liable for the rent and outgoings payable under the Lease, but depending on future events might not have to pay. It conditionally did not have to pay the rent and outgoings at the times and in the amounts for which the Lease provided, but was entitled to make payments at the times and in the amounts in cl 10.2(a), (b) and (c); but on one or other of the conditions expressed in cl 10.1 or in the proviso, that relief from its obligation to pay the full amount of the rent and outgoings payable under the Lease was lost. That the 1999 Deed should have that substance is unsurprising when Duffy Bros was liable for rent and outgoings under the Lease but, because trading conditions had become difficult and it was in arrears, obtained an indulgence from Transit.

157 In O’Dea v Allstates Leasing System (WA) Pty Ltd at 366 Gibbs CJ said -

“The cases to which counsel for the first respondent referred in support of his argument that there can be no question of penalty in the present case seem to me to fall into two classes. In the first class of case, if a sum of money is payable by instalments, and it is provided that in the event of one instalment not being punctually paid the whole sum shall immediately become payable, the acceleration of payment is not a penalty: The Protector Loan Co. v. Grice; Wallingford v. Mutual Society at pp. 696, 702, 705-706, 710. Similarly there is no penalty where it is agreed to charge a certain rate of interest on condition that if payment is made punctually the rate will be reduced (Astley v. Weldon at p. 353) or where a creditor agrees to accept payment of part of his debt in full discharge if certain conditions are met but stipulates that if the conditions are not met he will be entitled to recover the original debt: Thompson v. Hudson at pp. 15-16, 27-28, 30; Ex parte Burden; in re Neil. In all the cases of this kind there is a present debt, which, by reason of an indulgence given by the creditor, is payable either in the future, or in a lesser amount, provided that certain conditions are met. The failure of the conditions does not mean that the creditor becomes entitled to damages; the consequence is that the sum which was always owed, but which the debtor was allowed to pay by instalments or in a smaller amount, becomes recoverable at once or in full.”

158 His Honour emphasised at 374 that this principle applied where there was “a present debt, a debt actually due before the breach which accelerated the payment”. See also Wilson J at 380, 380 accepting the principle of an agreement which “provided merely for the acceleration of payment of an existing debt in the event of the lessee’s default”, and Brennan J at 386.

159 In Acron Pacific Ltd v Offshore Oil NL [1985] HCA 63; (1985) 157 CLR 514 Mason ACJ and Wilson, Brennan and Dawson JJ accepted, referring to Wallingford v Mutual Society (1890) 5 App Cas 685 at 702 and O’Dea v Allstates Leasing System (WA) Pty Ltd at 366-7, 382 and 386, that there is no penalty “if the provisions of the moratorium deed simply grant an indulgence for the payment of a debt that is due and payable”. The importance of a present debt was emphasised, and determinative, in Zenith Engineering Pty Ltd v Queensland Crane & Machinery Pty Ltd [2000] QCA 221.

160 In Cameron v UBS AG (2000) 2 VR 108 proceedings to enforce a Swiss judgment debt for the equivalent of $8.4 million were settled by the defendant agreeing to pay the plaintiff $1 million in five instalments, but with a provision that if the defendant defaulted in payment of any one or more of the instalments the plaintiff could apply for reinstatement of the proceedings and the entry of judgment for $8.4 million. The defendant was late in paying the first instalment. The plaintiff applied for the entry of judgment for the $8.4 million. It was held that the provision for entry of judgment was not penal, because by the settlement the defendant had acknowledged that the $8.4 million was payable and it was a case of the kind referred to by Gibbs CJ in O’Dea v Allstates Leasing System (WA) Pty Ltd.

161 All members of the court said that there was an initial obligation to pay the $8.4 million, and that the deed was not an agreement to pay $1 million but was (in the words of Phillips JA at [20]) ‘a bargain about the enforcement of the Swiss judgment’. There was no question of pre-estimation of damage or a penalty to compel payment of the $1 million, but rather (again in the words of Phillips JA at [20]) ‘the sum payable upon default is already due and owing and the chance to pay a lesser sum or on terms is being afforded as a privilege or indulgence’.

162 In the present case there was not wholly a present or existing debt as at 2 March 1999, the date of the 1999 Deed. The arrears of rent and outgoings the subject of cl 10.2(a) was a present debt, but the future rent and outgoings under the Lease was not.

163 However, the future rent and outgoings was in my opinion within the reasoning of the principle of which Gibbs CJ spoke in O’Dea v Allstates Leasing System (WA) Pty Ltd. The distinction between an admitted debt and a disputed debt, as in Cameron v UBS AG, is matched by a distinction between an admitted obligation and a disputed (or un-established) obligation. There can be a privilege or indulgence to pay less or on terms to discharge an admitted obligation. In the present case there was a present and existing obligation to pay the rent and outgoings which would become payable under the Lease, at the least as each rental month arrived. The futurity in cl 10.2(d) was not beyond termination of the Lease, so that the rent and outgoings which could be called up in the cl 10.2(d) amount were in my view in the same position as a present or existing debt.

164 I do not think it was submitted that cl 10.2(d) was penal because it made immediately payable, if cl 10.1 had operation, all rent and outgoings to the date of termination of the Lease. I do not think it did so. If there were an operative breach prior to 29 March 2008, the rent and outgoings payable under the Lease to 29 March 2008 would not necessarily be known; it could depend on CPI increases or reviews. Clause 10.2 provided for payment of the sums to which it referred “for rent and outgoings”, and the cl 10.2(d) amount was the rent and outgoings payable up to the operative breach and thereafter periodically as necessary to top up the aggregate of the cl 10.2(a), (b) and (c) amounts to the rent and outgoings periodically payable under the Lease.

165 In my opinion, the acceleration of payment of the cl 10.2(d) amount was not void as a penalty.

166 Gumland submitted also that, even if cl 10.2(d) was penal, it was entitled to recover from Duffy Bros an equivalent amount as rent and outgoings payable under the Lease. It said that cl 10.1 provided for deferral of payment only of any amount due from Duffy Bros under cl 10.2(d), and that the underlying obligation to pay the rent and outgoings under the Lease remained and Duffy Bros was relieved from it only if the proviso operated, which had not occurred because 29 March 2008 had not yet arrived; so there was no impediment to recovery of the rent and outgoings payable under the Lease. It is sufficient to say that cl 10 impeded recovery of the rent and outgoings payable under the Lease, by making the part thereof the subject of cl 10.2(d) conditionally payable only on 29 March 2008, and it was necessary that recovery be found within the regime of the 1999 Deed.

Conclusion

167 It follows from the determination of these issues that Duffy Bros was liable to Gumland for constituent (ii) in the judgment, the rent and outgoings payable under cl 10.2(d) of the 1999 Deed up to 1 August 2003.

D. Damages for loss of bargain

168 Subject to an over-arching issue, and apart from whether there was breach by failure to pay Gumland the shortfall in payments by Woolworths, the issues raised were -

(a) whether breach by the failure to pay was of an essential term of the Lease, entitling Gumland to terminate it; alternatively

(b) whether ceasing to carry on business at Shop 10 was breach of an essential term of the Lease, entitling Gumland to terminate it;

(c) if either of (a) or (b), whether termination for breach of an agreed essential term entitled Gumland to recover loss of bargain damages; alternatively

(d) whether there had been repudiation of the Lease by Duffy Bros on which Gumland could rely for termination and recovery of loss of bargain damages; and

(e) if Gumland could recover loss of bargain damages, whether they were to be assessed on rent and outgoings for the period 1 August 2003 to 29 March 2008 payable under the Lease (as the trial judge had done), or as the Higher Sums payable under the 1999 Deed.

169 The over-arching issue was raised by Duffy Bros’ submissions that Gumland had no privity of contract with it, only privity of estate, and that s 117 of the Conveyancing Act did not bridge the gap to create privity of contract. It submitted that the agreement upon essential terms in cl 7.1 of the Lease was not an agreement to which it was party, so that there could not be contractual essentiality entitling Gumland to terminate the Lease; and it submitted that even if Gumland had validly terminated the Lease, in the absence of privity of contract Gumland could not recover loss of bargain damages. Section 117 of the Conveyancing Act did not bridge the gap, it said, because cl 50 of the Contract amounted to an agreement between Transit and Gumland to exclude its operation, and because in any event s 117 did not give rise to statutory privity of contract as distinct from privity of estate or, if it did, the statutory privity of contract did not survive termination of the Lease.

170 Gumland submitted that these submissions were not available to Duffy Bros on appeal, because the trial had been conducted on the basis that there was privity of contract between Gumland and Duffy Bros and if it had been an issue at the trial it could possibly have adduced evidence to establish privity from communications between Gumland and Duffy Bros: Coulton v Holcombe [1986] HCA 33; (1986) 162 CLR 1. It sought to rely on affidavit evidence from Mr Liam Copley of Gumland’s solicitors to the effect that he did not seek out evidence of that kind because privity of contract was not in issue, and that he would have done so if it had been in issue. Duffy Bros objected to receipt of the affidavit by this Court, ultimately on grounds of relevance.

171 The submissions, on what privity existed between Gumland and Duffy Bros and its effect on termination and damages for loss of bargain, and also on whether privity of contract had been in issue at the trial or could now be raised, were quite detailed and lengthy. I note the submissions, but for reasons which will appear it is not necessary to decide these matters. The affidavit evidence of Mr Copley should not be received, because it is not relevant to disposal of the appeal.

172 I also note that Duffy Bros’ submissions included that the Lease came to an end not by termination but when, at or about the time of the purported termination, Gumland and Duffy Bros acquiesced in it being treated as at an end. It was common ground that the Lease came to an end, but I do not accept that it was by surrender found in acquiescence. The stances in the letters in August 2003 were anything but acquiescent. Either Gumland validly terminated the Lease, as it purported to do, or its purported but invalid termination was a repudiation which was accepted by Duffy Bros by its solicitors’ letter of 18 August 2002.

(a) Failure to pay – breach of an essential term of the lease?

173 The trial judge said -

“84 Gumland submitted that the ordinary principles of contract law, including those regarding termination for breach of essential terms or for repudiation, apply to leases - see Liristis v Wallville [2001] NSWSC 428 per Barrett J; Shevill v The Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620 at 625-7; Progressive Mailing House Pty Ltd v Tabali Pty Ltd [1985] HCA 14; (1985) 157 CLR 17 at 29-31 per Mason J (with whom Wilson and Deane JJ agreed in general, and Dawson J agreed).

85 It was submitted that all the breaches relating to failure to pay rent were breaches of essential terms. Clauses 7, 16 and 1.13 in the lease (and clause 14 in the deed) are substantially similar to those appearing in the lease in the Karacominakis v Big Country Developments Pty Ltd [ 2000] NSWCA 313 at 123-128, which the Court of Appeal found made the timely payment of rent an essential term. As I have earlier pointed out clause 10.2 of the deed describes the payments set out there under as being “sums for rent and outgoings payable by Duffy under the lease”. Clause 7 of the lease (relating to essential terms) plainly includes the payment of the amounts described in clause 10.2 of the deed. Clause 14 of the deed confirms that time was essential for all payments by Duffy Bros.

86 In these circumstances Gumland would be entitled to terminate the lease for breach of this essential term.”

174 Duffy Bros repeated on appeal its submission that the 1999 Deed was a side agreement which suspended the obligation to pay rent and outgoings under the Lease, and said that the trial judge was in error in describing cl 7 of the Lease as including payment of the amounts described in cl 10.2 of the 1999 Deed. According to the submission, there was no breach of the covenant to pay rent in cl 3 of the Lease, but at most a different breach of cl 10.2 of the 1999 Deed, and so no breach of a term relating to payment of rent declared essential by cl 7.1 of the Lease; and it followed that there was no entitlement to terminate the Lease for breach of an essential term.

175 By cl 7.1.1 of the Lease, the covenant in cl 3 was an essential term of the Lease. Agreement that it was an essential term entitled the lessor to terminate for its breach, see Shevill v The Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620 at 627 per Gibbs CJ -

“It is clear that a covenant to pay rent in advance at specified times would not, without more, be a fundamental or essential term having the effect that any failure, however slight, to make payment at the specified times would entitle the lessor to terminate the lease. However, the parties to a contract may stipulate that a term will be treated as having a fundamental character although in itself it may seem of little importance, and effect must be given to any such agreement: see Wickman Tools v. Schuler A.G. at p. 251. In other words, a right to forfeit a lease might arise ‘in the case of any breach of covenant however trifling, if the parties had agreed that a breach of that covenant should create a forfeiture’: Campbell v. Payne and Fitzgerald at p. 539.”

176 See also Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 7 at 29-30, 54 and Karacominakis v Big Country Developments Pty Ltd [2000] NSWCA 313 at [123]- [128].

177 Was failure to pay the cl 10.2(c) amount breach of a term which the parties had agreed was essential? The issue is related to whether there was a Scheduled Breach of the Lease within cl 10.1 of the 1999 Deed. For the reasons given in relation to whether there was a Scheduled Breach of the Lease, I do not think there was a breach of the covenant described in cl 7.1.1 of the Lease, being the covenant in cl 3 of the Lease. It was a breach of the promise in cl 10.2 of the 1999 Deed to pay the cl 10.2(c) amount. The promise to pay the cl 10.2(c) amount was a promise to pay different amounts at different times from those payable under cl 3 of the Lease. The breach was not breach of a term which the parties had agreed was essential.

178 Gumland gains no assistance from cl 14 of the 1999 Deed. Even if time were of the essence for payment of the cl 10.2 amounts, failure in timely payment did not make out breach of an essential term of the Lease. It is not necessary to consider whether, on privity grounds, Duffy Bros had not agreed with Gumland upon essentiality.

179 In my opinion, Gumland was not entitled to terminate the Lease for breach by the failure to pay.

(b) Ceasing to carry on business – breach of an essential term of the Lease?

180 The trial judge said -

“87 The second breach, relating to ceasing to trade, was a breach of clause 3 of the 1999 deed. In terms the deed did not make that an essential term of the deed and in the deed the specific provision in clause 14 that time is of the essence for payments by Duffy Bros is a strong indicator that the parties did not regard clause 3 as an essential term.

88 Gumland submitted that a breach of clause 3 of the 1999 deed was also a breach of an essential term of the lease (as amended by the deed). It submitted that in commercial contracts substantial and important provisions are prima facie treated as essential terms unless the contrary intention is manifest: Bowes v Chaleyer [1923] HCA 15; (1923) 32 CLR 159 at 196. The fact that, in the event of breach, a clause would not be readily enforceable by way of an action for damages (because damages would be difficult to prove) is a factor favouring a conclusion that the clause is essential: Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15; (1987) 162 CLR 549 at 557. It was submitted that this factor applies in the present case because the lessor could not readily enforce a breach by the lessee of the obligation to trade by way of an action for damages.

89 The lease in clause 7 specifically described what were the essential terms of the lease and the deed made specific provision for the payment of rent to be of the essence of the deed. Bearing these matters in mind, namely, that the parties addressed their minds as to what matters should be essential terms – even though it would be difficult to enforce clause 3 of the deed by way of an action to damages - I would not conclude that clause 3 was an essential term of the lease.”

181 As earlier indicated, I do not think that cl 3 of the 1999 Deed imposed a mandatory obligation; for that reason alone, there was no breach of an essential term of the Lease.

182 That is also the position even if cl 3 imposed a mandatory obligation.

183 Gumland again submitted that cl 3 of the 1999 Deed amounted to a variation of cl 14 of the Lease, and that, since cl 14 was stated in cl 7.1.4 to be an essential term of the Lease, cl 3 of the 1999 Deed should similarly be regarded as an essential term. For the reasons given in relation to a Scheduled Breach of the Lease, there was not a variation of cl 14, and in any event failing to carry on business was breach not of the covenant described in cl 7.1.4 of the Lease but of the different promise (as held by the trial judge) in cl 3 of the 1999 Deed.

184 Gumland further submitted that cl 3 of the 1999 Deed should be held to be an essential term even if not so agreed through cl 7.1.4 of the Lease. It submitted that in commercial contracts substantial and important provisions were prima facie treated as essential terms unless the contrary intention was manifest, referring to Bowes v Chaleyer [1923] HCA 15; (1923) 32 CLR 159 at 196 and Burger King Corporation v Hungry Jack’s Pty Ltd [2001] NSWCA 187 at [125]- [126].

185 In Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR NSW 632 Jordan CJ said at 641-2 -

“The question whether a term in a contract is a condition or a warranty, ie, an essential or a non-essential promise, depends upon the intention of the parties as appearing in or from the contract. The test of essentiality is whether it appears from the general nature of the contract considered as a whole, or from some particular term or terms, that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or a substantial performance of the promise, as the case may be, and that this ought to have been apparent to the promisor: Flight v Booth; Bettini v Gye; Bentsen v Taylor Sons & Co (No 2); Fullers’ Theatres Ltd v Musgrove; Bowes v Chaleyer; Clifton v Coffey. If the innocent party would not have entered into the contract unless assured of a strict and literal performance of the promise, he may in general treat himself as discharged upon any breach of the promise, however slight. If he contracted in reliance upon a substantial performance of the promise, any substantial breach will ordinarily justify a discharge. In some cases it is expressly provided that a particular promise is essential to the contract, eg, by a stipulation that it is the basis or of the essence of the contract: Bettini v Gye; but in the absence of express provision the question is one of construction for the Court, when once the terms of contract have been ascertained: Bentsen v Taylor Sons & Co (No 2); Clifton v Coffey.” (citations omitted)

186 This test for whether a term is essential or non-essential has been adopted by the High Court in, for example, Associated Newspapers Ltd v Bancks [1951] HCA 24; (1951) 83 CLR 322; DTR Nominees Pty Ltd v Mona Homes Ltd [1978] HCA 12; (1978) 138 CLR 423; Shevill v The Builders Licensing Board and Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15; (1987) 162 CLR 549.

187 The contracts in Bowes v Chaleyer and Burger King Corporation v Hungry Jack’s Pty Ltd were very different from the Lease and its associated agreements. The passage in Burger King Corporation v Hungry Jack’s Pty Ltd refers only to time stipulation in contracts; it also emphasises that it depends on the proper construction of the contract. I do not think these cases support Gumland’s submission; the test in Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd should be applied.

188 In my opinion, cl 3 of the 1999 Deed was not an essential term. Gumland did not explain in its submission why it was an essential term. From the submission recorded by the trial judge, a suggested reason was that it would be difficult to prove damages in the event of breach, presumably having in mind that in 2002 Gumland asserted that Duffy Bros was “the anchor tenant of the Centre”, see its solicitors’ letter of 31 May 2002 (although Duffy Bros denied that assertion in its solicitors’ reply of 12 June 2002). It is difficult to see cl 3 as a promise of such importance to Transit that it would not have entered into the 1999 Deed without it, when it had entered into the Lease without it. The new regimes involved Duffy Bros occupying a reduced area, but that did not give a promise to carry on business additional importance. I do not think that, on the assumption that it was promissory as found by the trial judge, cl 3 was an essential promise in the 1999 Deed; or, if it was a variation of the Lease by addition of obligatory user to permitted user, of the Lease as varied.

189 It is not necessary to consider whether there was variation or whether, on privity grounds, Gumland was not entitled to terminate the lease for breach by ceasing to carry on business.

(c) Entitlement to recover loss of bargain damages upon termination for breach of an agreed essential term?

190 Duffy Bros submitted that the application of “ordinary contractual principles” to leases in accordance with Progressive Mailing House Pty Ltd v Tabali Pty Ltd did not extend to authorisation of loss of bargain damages upon termination for breach of an agreed essential term, as distinct from repudiation or breach of a term which was truly essential apart from the parties’ agreement. It said that, to the extent that Karacominakis v Big Country Developments Pty Ltd decided to the contrary, it was wrongly decided. I do not describe the development of the submission, or the submissions in answer to it; the issue need not be decided, since there was not a valid termination for breach of an agreed essential term.

(d) Termination for repudiation?

191 The nub of the trial judge’s holding, after reference to the conventional principles upon which repudiation of a contract is to be ascertained, was -

“98 If the situation had been one where Duffy Bros had ceased to pay all rent and also ceased to trade it would seem to be clear that this would constitute a repudiation of the terms of the lease. The question involved, however, is whether the additional factor in this case, namely, that the substantial part of the rent payable under the lease and deed was paid to the lessor, Gumland, leads to a view that the conduct of Duffy Bros was not a repudiation.

99 I earlier referred to the fact that Duffy Bros breach of the covenant to trade was not a breach of an essential condition of the contract. Bearing in mind this position, and that a substantial part of the rent was paid, I do not think there has been a repudiation of the contract by Duffy Bros.”

192 If there had been repudiation by Duffy Bros, Gumland did not purport to terminate the Lease for that reason. The notice of 1 August 2003 was expressly “as a result of your failure to pay arrears of rent”. However, I do not accept Gumland’s submission that the trial judge was in error in declining to hold that Duffy Bros repudiated the Lease.

193 In Shevill v The Builders Licensing Board at 625-6 Gibbs CJ said that a contract may be repudiated -

“ ... if one party renounces his liabilities under it – if he evinces an intention no longer to be bound by the contract ... or shows that he intends to fulfil the contract only in a manner substantially inconsistent with his obligations and not in any other way.” (citations omitted)

194 This passage was taken up in The Progressive Mailing House Pty Ltd v Tabali Pty Ltd at 33, 40 and in Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd ([1989] HCA 23; 1989) 166 CLR 623 at 634, 643, 664. In Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd there was also taken up at 658, 666 the description of repudiatory conduct by Fullagar J in Carr v J A Berriman Pty Ltd [1953] HCA 31; (1953) 89 CLR 327 at 351, as conduct such that “a reasonable man could hardly draw any other inference than that the building owner does not intend to take the contract seriously, that he is prepared to carry out his part of the contract only if and when it suits him”.

195 Whether the conduct is repudiatory is not decided by reference to the party’s subjective intention, but by reference to how it would appear to a reasonable person in the position of the other contracting party: Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd at 643, 647-8, 657-8, 666. But, as was emphasised in Sanpine Pty Ltd v Koompahtoo Local Aboriginal Land Council [2006] NSWCA 291, the party’s conduct must be evaluated in all the circumstances, and conduct may not be repudiatory if, for example, the party acted on a misapprehension of his contractual rights and obligations but was “willing to recognise his heresy once the true doctrine is enunciated or ... to accept an authoritative exposition of the correct interpretation”: DTR Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12; (1978) 138 CLR 423 at 432 per Stephen, Mason and Jacobs JJ; see also Ross T Smyth & Co Ltd v T D Bailey, Son & Co (1940) 3 All ER 60 at 71-2 and Roadshow Entertainment Pty Ltd v (ACN 053 006 269) Pty Ltd (1997) 42 NSWLR 462 at 479.

196 Gumland submitted that as at 1 August 2003 Duffy Bros was not carrying on business from Shop 10, in breach of cl 3 of the 1999 Deed which, as earlier described it said was an essential term. Duffy Bros was in default in payment of rent, the rent unpaid by Woolworths, in a substantial amount, and the cessation of trading had subsisted for many months and the arrears of rent had been accruing since August 2002. An empty shop, it said, would be detrimental to the shopping centre, and over five years remained of the term of the Lease. It said that the area of Shop 10 was about 13 per cent of the total lettable area of the shopping centre, a figure which Duffy Bros did not controvert. It submitted that by its solicitors’ letter of 14 June 2002 Gumland had told Duffy Bros that ceasing to conduct the business of a fruit and vegetable market would be a breach of the permitted use of the premises, which although incorrect conveyed to Duffy Bros that Gumland considered that Duffy Bros was obliged to continue to trade, and that the notice of 3 July 2003 made express that Gumland regarded failure to pay the amount demanded as a breach of the Lease. In those circumstances, Gumland submitted, by continuing not to trade at Shop 10 and by not paying the rent demanded of it Duffy Bros had evinced an intention to fulfil its contract only in a manner substantially inconsistent with its obligations under the Lease and not in any other way.

197 Repudiation of a contract “is a serious matter, not to be lightly found or inferred”: per Lord Wright in Ross T Smyth & Co Ltd v T D Bailey Son & Co at 71. That an inference of repudiation is not lightly to be inferred was endorsed in The Progressive Mailing House Pty Ltd v Tabali Pty Ltd at 32 and Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd at 633, 643, 657.

198 By its solicitors’ letters of 24 April and 12 June 2002 Duffy Bros made plain that it intended to perform the lease, and it left its plant and equipment in place. Repudiation is not obviated by assertions of good intent, but it is relevant that thereafter Gumland does not appear to have complained to Duffy Bros that it was not trading at Shop 10; nor did it rely on that as a ground for determination of the Lease in July-August 2003. Similarly, the meeting with Gumland representatives and its solicitor of which Mr Roach gave evidence communicated a difference of opinion on Duffy Bros’ liability for rent unpaid by Woolworths, but thereafter Gumland does not appear to have pressed the matter until the notice of 3 July 2003.

199 For the reasons earlier given, I do not think that cl 3 of the 1999 Deed imposed a mandatory obligation, but even if it did and was regarded as a variation of the Lease it was not of an essential character. Duffy Bros was paying the Higher Rents. A reasonable person in the position of Gumland would have appreciated that it was not paying the rent unpaid by Woolworths because of a view of its liability for the cl 10.2(c) amount different from that of Gumland, but until the notice of 3 July 2003 without great complaint from Gumland; for the best part of a year Gumland let that situation exist. In all the circumstances, Duffy Bros’ conduct was not repudiatory.

(e) Assessment of loss of bargain damages?

200 Gumland was not entitled to loss of bargain damages, and this issue need not be decided.

201 In the course of Gumland’s submissions there was passing mention of cl 16 of the Lease as a basis for recovery of an equivalent to loss of bargain damages. I do not understand Gumland to have relied on cl 16 for that purpose, or on cl 7.3, 7.4 or 7.5, and its notice of contention did not raise reliance on these provisions. Clause 16 required that the Lease was “determined consequent upon default of the Lessee”, which for the foregoing reasons did not occur, and the sub-clauses of cl 7 required breach of an essential term of the Lease, repudiation, or breach of a covenant of the Lease, which also did not occur. It is not necessary to consider Duffy Bros’ anticipatory submissions, additional to the over-arching issue concerning privity of contract, that cll 16 and 7.3, 7.4 and 7.5 so far as they purported to entitle recovery of future rent or loss of bargain damages (which Duffy Bros described as “anti-Shevill clauses”) were void for uncertainty or because they were penal.

Conclusion

202 It follows from the determination of these issues that Duffy Bros was not liable to Gumland for constituent (iii) in the judgment, the damages for loss of bargain.

F. The costs of making the premises good and re-leasing them

203 The trial judge dealt with this briefly -

“157 The claim for these costs consist of the costs of preparing the premises for reletting ($43,146), commission payable to agents for locating new tenants ($18,671) and legal fees re new tenants ($1,575), making a total of $63,392.25.

158 It was submitted such costs would not have been incurred had Duffy Bros performed its obligations under the lease. They are costs that arise naturally, ie according to the usual course of things, from Duffy Bros’ breaches and, accordingly, are recoverable under the first limb of Hadley v Baxendale (1854) 9 Ex 341 at 354. They are also recoverable under clause 16 of the lease which requires Duffy Bros to pay Gumland for the costs of finding new tenants and preparing the premises for reletting and of reletting the premises.

159 I am satisfied that the evidence demonstrates that the cost of commission payable to leasing agents is $18,672.25 plus GST, cost of preparing the premises is $42,164.09 plus GST and legal fees are $1,575.00 plus GST. This is a total of $62,411.34 plus GST.”

204 It follows from what I have said that I do not think these costs were recoverable by Gumland as damages. Duffy Bros accepted that the costs would be recoverable under cl 16 of the Lease if the Lease was validly terminated by Gumland for breach by Duffy Bros. For the reasons earlier given, I do not think it was.

205 In the hearing of the appeal there was raised whether cl 8.8 of the Lease entitled Gumland to recover part of the costs. Duffy Bros pointed out that the trial judge’s acceptance of the costs was relevantly as costs of preparing the premises for re-letting, language found in cl 16 of the Lease, rather than as costs of making good damage from, by or through the lessee’s machines, plant, fixtures or fittings within cl 8.8. Gumland did not seek to support the $42,164.09 as costs of making good damage within the words of cl 8.8, and it is not clear in the light of the letters of 4, 13 and 14 August 2003, and the evidence that a lot of the equipment was still in Shop 10 in 2005, what damage within cl 8.8, if any, was made good.

206 In my opinion, Duffy Bros was not liable to Gumland for constituent (iv) in the judgment, the costs of making good the premises and re-leasing them.

207 In the hearing of the appeal there was also raised whether, if the Lease was terminated by Duffy Bros’ acceptance of Gumland’s repudiation by its solicitors’ letter of 18 August 2003, Gumland was entitled to rent and outgoings to 18 August 2003 as part of the cl 10.2(c) and (d) amounts. The amounts awarded by the trial judge were calculated to 31 July 2003. The parties agreed that, if calculated to 18 August 2003, the $57,415 became $60,193.15 and interest became $22,287.24m a total of $82,287.24 in lieu of $78,635; and the $215,724, a total of $82,287.24 became $235,115.13 and interest became $73,865.93, a total of $308,981.06 in lieu of $238,597.

208 Duffy Bros submitted that the calculations should be to 1 August 2003 because Duffy Bros was thereafter excluded from Shop 10. Gumland submitted that they should be to 18 August 2003 because, if the Lease did not come to an end until that date, the liability to pay rent and outgoings also continued, and according to the written submission it “dispute[d] that Duffy Bros was excluded from the premises on 1 August 2003 and contend[ed] that Duffy Bros had already vacated the premises some 12 months earlier”.

209 Duffy Bros had ceased to carry on business at Shop 10, but it had not vacated. It left plant and equipment in place, and remained entitled to possession. On the uncontested evidence of Mr Roach, it was denied entry. The letters from Gumland’s solicitors demanding removal of chattels and fittings and fixtures and carrying out work were well short of allowing possession, and were in any event negated by the instructions conveyed by the shopping centre manager to Mr Roach. The calculations should remain as calculations to 1 August 2003.

G. Liability of the Messrs Pisciuneri as guarantors

210 The trial judge accepted, with particular reference to Holme v Brunskill (1878) 3 QBD 495 at 505-6 and Ankar Pty Ltd v National Westminister Finance (Australia) Ltd at 558-9, that any departure from the terms of a guarantee or from the principal transaction by the creditor without the guarantor’s consent discharged the guarantor, unless the departure was obviously and without inquiry unsubstantial (“the discharge principle”). The departure in question was variation of or departure from the principal transaction because the Sub-lease did not contain a direct payment term. The trial judge held that the Messrs Pisciuneri were discharged from their obligations as guarantors because, contrary to cl 4.2 of the 1999 Deed, the Sub-lease did not contain a direct payment term.

211 The trial judge said -

“179 If one looks at the obligations which the guarantors were guaranteeing after the 1999 deed and their confirmatory deeds executed at the same time one sees that the guarantors are guaranteeing to the lessor the payment of ‘all monies now or hereafter to become payable to the lessor or by reason of the use or occupation of the said premises....’.

180 What would become payable in the future would include rent payable by Duffy Bros to Gumland under the lease and also any rent under the proposed sub-lease the benefit of which was to accrue to the lessor by virtue of the terms of the 1999 deed. The sub-lease might never have come into effect in which case there would be no additional liability. The rental which might be payable if any such sub-lease was entered into was not fixed in the agreement and, accordingly, the guarantee clearly envisaged a liability in respect of an amount which was not fixed.

181 In the factual circumstances of this case the absence of the clause made no difference in the sense that there was no rent received from Woolworths pursuant to the sub-lease which was not passed on to the lessor Gumland as it was paid directly. However that is not the question for determination by this Court. The question here is whether the alteration is insubstantial and not prejudicial to the surety's rights, not whether there has been any injury to the guarantor.

182 A possible benefit of adhering to the arrangement in 1999 by including the relevant term in the sub-lease in the guarantors’ submissions is that another person, namely, the lessor might have the opportunity to sue for some arrears of rent. I have already pointed out earlier when discussing the absence of this clause in the context of whether the sub-lease was granted pursuant to clause 4.2, that it was the sub-lessor, namely, Duffy Bros who had the effective control over the sub-lease. They were the ones who could determine it or threatened to do so if the rent under the sub-lease was not paid.

183 Even if the term which was inserted in the sub-lease pursuant to clause 4.2 were merely a direction to pay, any payment by the sub-lessee would have satisfied his obligation to pay rent under the sub-lease. Absent any such direction to pay a sub-lessee would be at risk in paying direct to the head lessor because he would be liable on the covenant to pay rent in the sub-lease. Effectively in the regime which was adopted by not including the term the sub-lessee was obliged to pay the rent to the sub-lessor, Duffy Bros, and they were then obliged, under the terms of the 1999 deed, to pass that amount on to the lessor. Thus the guarantors were at risk that Duffy Bros might not pass on the rent received. If the term had been included then this risk would be absent because the sub-lessee would be obliged to pass on the rent to Gumland and thus reduce the guarantors’ liability.

184 In these circumstances it seems to me that the variation is not unsubstantial and is prejudicial to the surety's rights.”

212 The trial judge turned to whether cl 10(a) or cl 11(c) or (j) of the 1994 Guarantee excluded the operation of the discharge principle. He considered that cl 10(a) did not, because it addressed inconsistency with provisions of the guarantee and did not extent to variation of the principal contract. As to cl 11(c) and (j), he said -

“188 It was suggested that the proviso to sub-clause (c) by its use of the word ‘paragraph’ applied to the whole of paragraph 11 but I do not think this is correct. Clearly the reference should be taken as a reference to the particular sub-clause. So far as sub-clause (j) is concerned the relevant inquiry is whether it waives any variation of the agreement for which the guarantor is liable. In the second part of the clause the words used contemplate the making of any agreement. In the ordinary course an ‘agreement’ would encompass a variation of the terms of the original contract. However in the context of guarantees it is to be borne in mind that a question often arises as to whether a subsequent agreement between the principal and the creditor amounts to the formation of a new contract rather than a variation of the original agreement. If the former applies there is not normally a discharge of the guarantee. In these circumstances it seems to me that the clause under consideration is merely referring to this principle. Having regard to the principles of discharge by variation without the guarantor’s consent, the proper construction of the clause, it being construed strictly and contra preperem [sic: proferentem], I would construe the word ”agreement” in sub-clause (j) as not encompassing a variation of the original contract the subject of the guarantee.”

213 The trial judge then considered submissions concerned with the term of operation of the 1994 Guarantees, see their cl 4. He resolved that matter adversely to the Messrs Pisciuneri. It was not raised on appeal, and need not be further considered.

214 The trial judge finally turned to Gumland’s reliance on the indemnities in para 3 of the 1999 Guarantees and para 3 the 1999 Confirmations. He said -

“201 The principles applicable to construction of guarantees (which are favourable as a matter of interpretation to the guarantor) apply to indemnities: See Andar Transport v Brambles (2004) 78 ALJR 907 [2004] HCA 28 at para 23.

202 It is clear that an indemnity will not be construed as entitling the person in whose favour it was made to an indemnity against the consequence of that person's own negligence unless there is a clear provision to that effect. There is no such provision in this case. It also follows that the indemnity will not readily be construed as extending to liabilities incurred through deliberate breaches of contract by the person in whose favour it was given. See Smith v South Wales Switchgear Ltd [1977] UKHL 7; (1978) 1 All ER 18 at 22 and the cases referred to in “Modern Contract of Guarantee” by Donovan and Phillips at Para 5.140.

203 In the circumstances of this case the reason why the indemnity may apply is a result of the failure of Gumland's predecessor to comply with the contractual requirement contained in the 1999 deed. There was no investigation in the evidence before me of the reason why the clause required by clause 4.2 of the deed was omitted from the sub-lease. However, there is at least a clear breach of the terms of the 1999 deed. In these circumstances it would seem that the indemnity should not apply to enable recovery.”

215 There were extensive submissions on appeal in relation to -

(a) whether on its proper construction cl 2 of the 1994 Guarantees caught the constituents of the judgment against Duffy Bros, or at least the loss of bargain damages;

(b) whether the discharge principle applied;

(c) whether obvious unsubstantiality was necessary;

(d) whether the departure in the present case was unsubstantial; whether cl 10(a) or cl 11(c) or (j) applied on its proper construction;

(e) whether in any event there could be recovery under the indemnities; and

(f) whether Gumland was not entitled to enforce the guarantees because it was not in privity of contract with the Messrs Pisciuneri.

216 As to issue (a) the constituents of the judgment against Duffy Bros presently material are constituent (i), the amount of the shortfall in payment by Woolworths payable under cl 10.2(c) of the 1999 Deed and constituent (ii), the rent and outgoings payable under cl 10.2(d) of the 1999 Deed. They were monies payable to the Lessor “by reason of the use or occupation of the premises or by reason of any provisions of any relevant lease”. As a matter of construction, cl 2 caught these constituents.

217 For issues (b) to (e) the inquiry begins with issue (b), whether the discharge principle applied. In my opinion it did not. As submitted by Gumland, the 1994 Guarantees were of a “course of dealing” which encompassed the circumstance of a sub-lease without a direct payment term.

218 Halsburys Laws of England, 4th Ed Re-issue (2004), para 323 states -

“The principle. When considering the effect upon the liability of a guarantor of an agreement between the creditor and the principal debtor to vary the principal contract, the construction of the contract of guarantee is of critical importance, because it is vital to identify the precise nature of the obligation or obligations guaranteed.

Where the obligations are those arising from a specific contract between debtor and creditor, the terms of the contract giving rise to the obligations guaranteed may sometimes be embodied or incorporated expressly or impliedly in the contract of guarantee. If in such a case the creditor, without the guarantor’s consent, enters into a binding agreement which varies the principal contract in a way which is not manifestly insubstantial or incapable of prejudicing the guarantor, the guarantor will be discharged from his obligations under the contract of guarantee. ...

Where on the other hand the guarantee is given in respect of obligations arising out of a contemplated course of dealing without incorporating, expressly or impliedly, the terms of any specific contract, it is open to the creditor to vary the terms applying to the course of dealing so long as that course of dealing remains within the scope of the guarantee.” (references omitted)

219 The references given for the third paragraph of this extract are City of London v New Hampshire Insurance Co, Phillips J, 18 January 1991, unreported; Stewart v M’Kean [1855] EngR 170; (1855) 10 Exch 675; 156 ER 610; Sanderson v Aston (1873) LR 8 Ex 73; and National Westminster Bank plc v Riley (1986) BCLC 268.

220 According to the note of his decision, under the name City of London v New Hampshire Insurance Company, in Butterworth’s Journal of International Banking and Financial Law, March 1991, pp 144-5 -

“Phillips J held that the bond, being a contract of guarantee, was subject to the special principles of law and equity applicable to guarantees. The law favours the guarantor by restricting his obligations according to a strict construction of the contract that gives rise to them and by holding him discharged from those obligations if the creditor acts in a manner which adversely threatens the guarantor’s equitable rights. The principles relevant to this case were:

(1) Where the obligations guaranteed are obligations arising under a specific contract between the principal obligor and the beneficiary (of the guarantee), any variation of that underlying contract which is not manifestly insubstantial or incapable of prejudicing the guarantor will discharge the guarantor from his obligations under the contract of guarantee. This is the so called rule in Holme v Brunskill (1878) 3 QBD 495.

(2) On the other hand, where the guarantee is given in respect of obligations arising out of a contemplated course of dealing without reference, express or implied, to any specific underlying contract it will be open to the beneficiary to vary the terms applying to this course of dealing so long as that course of dealing remains within the scope of the guarantee.”

221 The note records that his Lordship held that the rule in Holme v Brunskill applied because the building contract a payment under which was secured by the bond was varied. An appeal from his decision was allowed, reported as Wardens and Commonalty of the Mystery of Mercers of the City of London v New Hampshire Insurance Co (1992) 2 Ll R 365, on the ground that the bond was not a guarantee of performance of the building contract and in any event the variation to the building contract was unsubstantial. The Court of Appeal did not comment on a course of dealing.

222 Stewart v M’Kean was an early illustration of a guarantee of the kind to which Phillips J referred. In that case the guarantee was of a person’s “intromissions as your agent”. The accounting required of the person as agent was thereafter altered. It was held that the guarantor remained liable. Alderson B said (at 687; 612) that even with the changed accounting the person’s activities remained within meaning of “intromissions” in the guarantee.

223 In Sanderson v Aston the plaintiff sued on a bond given by the defendant for faithful accounting by a person taken into the plaintiff’s service as “clerk and traveller”. The terms of service were not further stated. A plea that the defendant was discharged because the terms of service had then been varied from termination on one month’s notice to three month’s notice, was held bad, with observations that the terms of service had not been made the basis of the surety’s contract (per Kelly CB at 76) or were not made part of the surety’s agreement (per Piggott B at 78 and Pollock B at 79).

224 In National Westminster Bank plc v Riley it was held that the breach of the principal contract was unsubstantial, but with reference by May LJ at 276 to discharge where there was departure from a term of the principal contract “which has been ‘embodied’ in the contract of guarantee”.

225 In Commonwealth Bank of Australia v McArthur [2003] VSC 31 Dodds-Streeton J said of the discharge principle -

“194 The special principle has application in cases where a particular liability is guaranteed, but it is altered or varied without consent, or the surety has certain contractual rights which are disregarded.

195 Limitations upon, or reservations concerning, the special principle endorsed in Ankar Pty Ltd v National Westminster Finance Australia Ltd have been applied. For example, in The Wardens and Commonalty of the Mystery of the Mercers of the City of London v New Hampshire Insurance, Phillips J considered that the principle applies only in relation to obligations arising under a specific contract which are guaranteed and not to obligations arising from a future course of dealings. Accordingly, if there is a guarantee in respect of all loans without reference to any particular contract, the creditor and principal could conclude a new loan and proceed to vary its terms without that variation operating to discharge the guarantor.

...

198 Therefore, where there is a widely drafted "all moneys" guarantee or mortgage clause, as in the present case, and as widely employed in modern commercial practice, a fresh advance or a subsequent loan would be within the scope of the guarantee. Moreover, a variation of a single agreement would also appear to be within the scope of such a guarantee.

199 Where an "all moneys" guarantee or mortgage is executed, the guarantor has undertaken to guarantee an indefinite number of liabilities without limit. In such a context, it is artificial to distinguish between original and subsequent independent agreements, on the one hand, and variations of a single agreement, on the other hand. In the absence of misrepresentation as to the effect of the "all moneys" guarantee or mortgage, or other vitiating factors, there appears to be no reason why equity should require the discharge of the guarantor's obligation in either case.”

226 In Bakarich v Commonwealth Bank of Australia [2004] NSWSC 283 at [282]- [285] Nicholas J adopted these observations and applied them to guarantees and a mortgage containing “all moneys” clauses. His Honour observed at [283] that guarantees and mortgages of that kind “are intended to operate in a highly practical commercial setting and their scope should be determined with reality in mind”.

227 I respectfully have some difficulty with “embodiment” of the principal contract in the contract of guarantee, but it is a way of directing attention to what has been guaranteed, and that is the point of the paragraph in Halsbury founded on City of London v New Hampshire Insurance Company.

228 O’Donovan and Phillips, Modern Contract of Guarantee at 7.170 notes the cases to which I have referred without casting doubt on them. The learned authors suggest, however, that once a specific contract is made it may be that “the guarantee obligation is crystallised and a subsequent variation means that the obligation in its altered form is not that which is guaranteed”.

229 In my opinion, the approach described by Phillips J by reference to a contemplated course of dealing is correct in principle. The reason for discharge of a guarantor is that, with the variation of the principal contract, there has been an alteration without his consent in the guarantor’s obligations; see Ankar Pty Ltd v National Westminster Finance (Australia) Ltd at 558-90. The alteration comes when there is variation of what the guarantor has guaranteed, and it is necessary to determine what was guaranteed before it can be said that there has been variation in what he has guaranteed. If what was guaranteed extended to the varied principal contract, then there is no occasion for the guarantor to be discharged from liability. Indeed, a similar approach underlies provisions commonly found in guarantees to the effect that the guarantor is not discharged by any variation of the principal contract. These provisions preserve the guarantor’s liability. They extend what was guaranteed to the varied principal contract.

230 The 1994 Guarantees were striking in the scope of what was guaranteed. Clause 2 began with monies payable to the Lessor. The reason for monies being payable did not specify the Lease, indeed was not confined to a lease but extended to monies payable “by reason of the use or occupation of the said premises” and monies payable “by reason of any provisions of any relevant lease”. “Any relevant lease” was any lease relating to the use or occupation of Shop 10. The clause expressly extended to money payable whether by the Lessee or by any other person. “Lessee” had an expanded meaning, referring to Duffy Bros until it assigned its right of occupation of the premises with the consent of the Lessor and thereafter to any occupant of the premises. By cl 3, the term of operation of the 1994 Guarantees was effectively so long as anyone was in possession of the original Shop 10 with the consent of Duffy Bros.

231 What was guaranteed was clearly, even extravagantly, not described by regard to the Lease, or any particular tenancy arrangement, but by regard to occupation of Shop 10 by or with the consent of Duffy Bros. Assuming that the Lease was varied by the 1999 Deed, even without the 1999 Confirmations the payments required by cl 10.2 of the 1992 Deed were monies payable to the Lessor within cl 2 of the 1994 Guarantees. Assuming also, as was the basis for the trial judge’s decision in this respect, that the 1999 Deed and consequently the Lease was then further varied or there was departure from the Lease when the Sub-lease did not contain a direct payment term, the payments required by cl 10.2 of the 1992 Deed were still monies payable to the Lessor within cl 2 of the 1994 Guarantees. They were monies payable by reason of the use or occupation of Shop 10 and by reason of a relevant lease. Whether the use and occupation was pursuant to the Sub-lease and whether the Sub-lease was with or without a direct payment term was immaterial to what was guaranteed.

232 Accordingly, what was guaranteed extended to the situation that came about, a Sub-lease without a direct payment term, and the language of cl 2 was such that the suggestion in O’Donovan and Philips earlier mentioned does not apply.

233 It is not necessary to consider issues (c), (d) or (e). It remains to consider issue (f), whether Gumland was not entitled to enforce the guarantees because it was not in privity of contract with the Messrs Pisciuneri.

234 The trial judge did not deal with this issue. The Messrs Pisciuneri conceded at the trial that Ryde Joinery Pty Ltd v Zisti (1997) 7 BPR 97 638 was authority that a covenant by way of guarantee could “touch and concern the land” and be enforced by the assignee of the reversion without express assignment, but reserved the right to argue on appeal that the decision was wrong.

235 In Ryde Joinery Pty Ltd v Zisti at 15,237-8 Cohen AJA, with whose reasons Priestley and Cole JJA agreed, noted cases suggesting that a guarantor’s covenant did not run with the land, and continued -

“There have been a number of more recent decisions to the contrary, although they must depend on the wording of the guarantee in each case. In Kumar v Dunning [1989] QB 193 the Court of Appeal held that a successor in title could sue the guarantors of the payment of rent by a lessee. This was approved by the House of Lords in P & A Swift Investments v Combined English Stores Croup Plc [1988] UKHL 3; [1989] 1 AC 632. In that case, Lord Oliver at 642 set out four matters which, without claiming that they were exhaustive, he considered provided a satisfactory test for whether a covenant touches and concerns the land. These were:

1. The covenant benefits only the reversioner for the time being, and if separated from the reversion ceases to be of benefit to the covenantee.

2. The covenant affects the nature, quality, mode of user or value of the land of the reversioner.

3. The covenant is not expressed to be personal (that is to say neither being given only to a specific reversioner nor in respect of the obligations of a specific tenant).

4. The fact that a covenant is to pay a sum of money will not prevent it from touching and concerning the land so long as the three foregoing conditions are satisfied and the covenant is connected with something to be done on, to or in relation to the land.

In Lang v Asemo Pty Ltd [1989] VR 773 the Full Court of the Supreme Court of Victoria applied P & A Swift Investments v Combined English Stores and held that the benefit under a covenant by way of guarantee could be enforced by the assignee of the reversion without express assignment if the covenant touched and concerned the land. This could occur in an appropriate case where a guarantee of the lessee's obligations had been given. These cases were referred to with apparent approval by Giles J in Showa Shoji Australia Pty Ltd v Oceanic Life Ltd (1994) 34 NSWLR 548. In my opinion they correctly set out the law.

The covenant in this case was made by the second and third appellants and is stated to be with the lessor, its successors and assigns. It provided that the covenantors would be jointly with the lessee and severally liable to the lessor for the payment of rent and performance of the terms and covenants. In my opinion it satisfies the tests set out by Lord Oliver. The benefit of the covenant was intended to be given not only to the lessor named in the lease but its successors and assigns. It was clearly intended to run with the land and accordingly the second and third appellants are liable for the payment of rent due by the lessee.”

236 The guarantee in the 1994 Guarantees was also clearly intended to run with the land, see recital B and the definition of “Lessor”. The Messrs Pisciuneri submitted on appeal that this was changed with the 1999 Confirmations, because they were expressed to be made with Transit rather than with Transit and its successors, and referred to covenants with and guarantees in favour of Transit rather than with and in favour of Transit and its successors. There is nothing in this. The 1999 Confirmations affirmed the 1994 Guarantees. They referred only to Transit, but that was descriptive rather than substantive and the breadth of the 1994 Guarantees was not cut down.

237 The Messrs Pisciuneri further submitted on appeal that the decision in Ryde Joinery Pty Ltd v Zisti was incorrect, but did not present any argument in support of error or, apart from the submission in the preceding paragraph, that the decision did not apply in the present case. Following Ryde Joinery Pty Ltd v Zisti, Gumland was entitled to enforce the guarantees.

238 Although neither Gumland nor the Messrs Pisciuneri made any submissions concerning it, Gumland may in any event have been entitled to succeed against the Messrs Pisciuneri by reason of the Deed of Assignment of the guarantees of 5 May 2005.

H. The result

239 Gumland’s judgment against Duffy Bros should be reduced to constituents (i) and (ii), a judgment for $362,232 in lieu of $2,096,514; the substituted judgment should take effect on 28 March 2006, on which date the trial judge’s orders took effect. The Messrs Pisciuneri are liable to Gumland for that amount, and the judgment against them should also take effect on 28 March 2006.

240 Duffy Bros has partly succeeded in its appeal, to a significant monetary extent. In my opinion a just disposition of costs on the appeal should reflect the monetary result, and Gumland should be ordered to pay 80% of those costs. As to the costs of the trial, Gumland succeeded in its claim although not for the full amount. However, Duffy Bros resisted the proposition that it was required to make any payment at all. In the circumstances my opinion a just disposition is that Duffy Bros should pay 50% of Gumland’s costs of the trial. The costs may be set off against each other. Gumland has succeeded in its appeal, and Messrs Pisciuneri should be ordered to pay its costs of the claim against them at the trial and Gumland’s costs of the appeal, and they should have a certificate under the Suitors Fund Act.

Orders

241 I propose the orders -

A. In 40210/06 –

1. Appeal allowed in part.

2. Set aside the judgment against the first defendant for the plaintiff in the amount of $2,096,574 and in lieu thereof judgment for $362,232 taking effect on 28 March 2006.

3. Set aside the order that the first defendant pay the plaintiff’s costs of the proceedings on a party/party basis and in lieu thereof order that it pay 50% of the plaintiff’s costs of the claim against it.

4. Order that the respondent pay 80% of the appellant’s costs of the appeal.

B. In 40224/06 -

1. Appeal allowed.

2. Set aside the judgment in favour of the second and third defendants and in lieu thereof judgment for the plaintiff against the second and third defendants for $362,232 taking effect on 28 March 2006.

3. Set aside the order that the plaintiff pay the costs of the second and third defendants and in lieu thereof order that the second and third defendants pay the plaintiff’s costs of the claim against them.

4. Order that the respondents pay the appellant’s costs of the appeal.

5. Order that the respondents have a certificate under the Suitors Fund Act if otherwise qualified.

242 SANTOW JA: I agree with Giles JA.

243 TOBIAS JA: I agree with Giles JA.

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