NATIONAL MUTUAL LIFE NOMINEES LTD v TRAVELLERS (NSW) PTY LTD SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL MAHONEY ACJ, CLARKE and SHELLER JJA 19 September 1996, 4 October 1996 [1996] NSWCA 384 LANDLORD AND TENANT — unregistered lease — third party takes over possession of premises — whether this constitutes abandonment — tenancy at will — whether occupation fee payable by third party Konica Machines Australia Pty Ltd v Tizene Pty Ltd (1992) 26 NSWLR 687 The appellant (NML) was the registered proprietor of property of which it agreed to grant a lease to The Travellers Organisation Pty Ltd (TOL). The agreement was by way of a deed dated 19 February 1990, and the term of the lease was to be for a period of six years commencing on 29 August 1990. TOL entered into occupation, although the lease was never registered. TOL's business was subsequently taken over by a company known as The Travellers Corporation Pty Ltd (TCL), and the respondent (TPL) took possession of the premises from TCL on or about 7 February 1992. On 7 July 1992, NML and TPL agreed that TPL should pay an occupation fee for the following seven weeks. In addition, NML argued that TPL had been a tenant at will since taking possession in February, and claimed an occupation fee for those preceding five months. The appellant relied on the principle stated by Dixon J in Turner v York Motors Pty Ltd (1951) 85 CLR 55 to the effect that it would not be inconsistent for an intending tenant holding at will to pay compensation to the owner for the use and occupation of the land. Giles J found that there was no implied tenancy at will and that the principle in Turner did not apply. NML appealed, arguing that it was intending to sub-let the premises on TOL's behalf, and that consequently it was entitled to recover an occupation fee from TPL. HELD: 1. If a tenant abandons leased premises during the period of the lease, the landlord's acceptance of the tenant's abandonment determines the tenancy. If a landlord re-lets the premises to another tenant, the Court may find as a fact that the landlord has accepted the original abandonment, with the consequence that the lease will be terminated. 2. The decision of Konica Machines Australia Pty Ltd v Tizene Pty Ltd (1992) 26 NSWLR 687 stands for the proposition that, if during the currency of the lease a tenant abandons the premises, the landlord may re-let them on the tenant's behalf without bringing about a termination of the lease. 3. (per Mahoney ACJ) The right to rent and to compensation now depends upon matters of substance rather than upon matters of form. It is derived not, or not solely, from the existence of a term but from a lease viewed as a contractual arrangement: Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17 at 27. 4. The position in this case was that TPL occupied the land as a successor of the previous occupants and in contemplation that it would be treated as a sub-lessee. This occupation continued on the basis that the original lease still existed. TPL did not occupy the land simply as one who had been let into possession pending the negotiation of a lease. 5. NML had not accepted TOL's abandonment, rather it claimed that it was negotiating to re-let the premises on TOL's behalf. In these circumstances the lease was still on foot. TPL went into occupation as a sub-occupant only, and a tenancy at will did not exist between the parties. ORDER 2 UNREPORTED JUDGMENTS Appeal dismissed with costs. Mahoney ACJ The facts are set forth in the judgment of Sheller JA which I have had the advantage of reading. I agree with his Honour's analysis of the facts and of the effect of them. In my opinion, the determination of the present appeal depends upon the analysis of the basic facts and the inferences which are to be drawn from them. Mr Robb QC, for the appellant, has limited his submissions in the manner to which Sheller JA has referred. Oversimplified, his main submission has been to the following effect. The appellant, as owner of the premises, had leased them to the first Travellers company ("TOL"). TOL had, on entry into possession of the premises, an agreement for lease for a period of years and a legal lease interest which, under the general law, would be a lease at will. By virtue of the Conveyancing Act 1919, s127, the lease became a statutory tenancy of the kind there referred to, being essentially a monthly tenancy. TOL ceased to be in occupation of the premises. What it did constituted an offer to the appellant to surrender the lease. The appellant refused to accept that offer and, accordingly, the lease remained in force. It was, Mr Robb QC accepted, the intention of the appellant that the leasehold interest of TOL continue in existence: that intention was evidenced by, inter alia, the rent accounts that were sent to TOL. Without the knowledge initially of the appellant, TOL vacated the premises and Travellers Corporation Pty Ltd ("TCL") took its place. When it discovered this, the appellant did not accept TCL's occupation and so accept the repudiation of the lease by TOL. It continued to insist upon the continuation of that lease. When TCL left the premises and Travellers (NSW) Pty Ltd ("TPL") took its place, the appellant continued to insist upon the continued existence of the lease of TOL. However, it permitted or acquiesced in the continuation of TCL in the premises. It did so upon the basis that it was negotiating with TCL for a lease That negotiation came to nothing. But the appellant claims appropriate compensation for the time that TCL was in the premises in that way. (Ihave stated what, I think, is the position taken by the appellant. Mr Robb QC dealt with the facts in an expansive fashion and I do not purport to set out every variation of his presentation. But in the end his position was, I think, that which I have stated). The contention for the appellant was that his Honour, having found that the lease to TOL continued (this was not in issue before this Court), concluded that appropriate compensation could not be recovered from the last occupant TPL because of the continued existence of that lease. His Honour, the argument was, did not hold that a sub-lease had been granted to TPL and accordingly that the compensation for its occupancy was payable not to the appellant as head-lessor but to the mesne lessor. It was not open to the appellant to grant an effective sub-lease: that could be done only by TOL. But notwithstanding this his Honour, the argument suggested, refused to order compensation against TPL because merely of the existence of the original lease. I do not think that that was the basis of the judge's decision. In earlier times, the right to recover rent and the right to recover mesne profits or other compensation for unauthorised occupation was surrounded by what now would be seen as technicalities. The right to recover rent was dependent upon the existence of a term, the accepted view being that rent issued only out of a lease and the grant of a term by it. Where a lease was in existence, an unauthorised WRTIONAL MUTUAL LIFE NOMINEES LTD v TRAVELLERS (NSW) PTY LTD (Mahone? ACJ) occupant pre-empted the rights of the lessee and accordingly the lessor suffered no loss and could recover no compensation from that occupant. At least, that was the position in principle. However, in my opinion, the right to rent and to compensation now depends upon matters of substance rather than upon matters of form having their origin in the incidents of an ancient system of property law. The right to rent now derives not, or not solely, from the existence of a term but from a lease viewed as a contractual arrangement: see Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17 at 27. In my opinion the right to compensation for unauthorised occupation of land is not circumscribed as it previously was. It is not necessary to attempt to mark out the boundaries of a claim which a lessor may make against an unauthorised occupant of lease land. The mere fact that a lease exists does not, I think, prevent a lessor/owner from recovering compensation from an unauthorised occupant. The matter, I think, can be tested by an example. Assume the owner has leased land to X. X has left the land but the lease continues. Y comes onto the land and remains there while negotiating with the owner for a lease. The owner acquiesces in Y remaining on the land while the negotiations proceed. Y then departs without a lease having been negotiated. In such a case it is, in my opinion, possible to envisage circumstances in which the owner may recover compensation for Y's occupation of the land notwithstanding the continued existence of the lease. I see no reason why a personal arrangement made between Y and the owner which otherwise would give rise to a right of compensation for Y's occupancy should not have that effect because of the existence of a lease where the lessee has gone out of possession of the land. Otherwise, the fact that the owner desired to preserve its rights against X under the lease could not, pending endeavours to do so, turn the land to proper account. The land would, in effect, be sterilised. I appreciate the fact that, if the concepts involved in leases and occupations be pursued to the extremes, the continued existence of a lease and the lessor's loss of the right of occupation of the land is conceptually inconsistent with the lessor's capacity to grant to a third party permission to be on the land. But, in my respectful opinion, there are limits to the extent to which concepts should govern the law. Where the pursuit of a concept to its logical conclusion produces a practical injustice, the law has the capacity to limit the lengths to which concepts will be taken. Extremes may be both logical and absurd. Accordingly, in a proper case, I do not doubt that the owner could recover compensation from such a third party. But that approach is not applicable to the present case. The distinction lies in the circumstances in which TPL came to occupy or continue to occupy the premises. TPL did not occupy the land simply as one who, pending the negotiation of a lease, has been let into possession. TPL came to occupy the land as a successor, in a relevant sense, of the previous occupants and upon the basis that the original lease continued in possession. The appellant had treated its possession as being one under the lease by virtue of its intimation to TPL and others that TPL would, with its consent, take a sub-lease of the premises. TPL was in the premises, not as part of its negotiation with the appellant for a lease but in contemplation that it would be or would be treated as a sub-lessee. The fact that it might, as the result of negotiations, persuade the appellant to grant a lease directly to it does not, I think, alter that position. Upon that basis, the decision of the learned trial judge was in my opinion correct. 4 UNREPORTED JUDGMENTS I agree with the orders proposed by Sheller JA. Clarke JA I agree with Sheller JA. Sheller JA INTRODUCTION National Mutual Life Nominees Ltd (NML) was the registered proprietor of the property 210 George Street, Sydney which it held as trustee for the Mercantile Mutual Global Fund. Mercantile Mutual Global Ltd (Global) was the Manager of the Fund. NML appeals from that part of a decision of Giles J of 27 October 1993 wherein his Honour dismissed NML's summons claiming from the respondent, Travellers (NSW) Pty Ltd (TPL), an amount of $240,899.69 as an occupation fee for TPL's occupation of three floors at 210 George Street, Sydney (the premises). After Giles J's decision, TPL went into liquidation. Before hearing the substantive argument this Court, on the application of NML, made an order giving it leave to proceed with the appeal on condition that if the appeal were successful it would not take steps to enforce the judgment without the leave of a Judge of the Equity Division. The proceedings involved three companies with similar names. By deed dated 19 February 1990, NML agreed to grant a lease of the premises to The Travellers Organisation Pty Ltd (TOL) for a term of six years commencing on 29 August 1990. The formal lease was not executed and a lease was not registered. TOL entered into occupation. In early 1991 The Travellers Corporation Pty Ltd (TCL) took over TOL's business and entered into occupation in place of TOL, initially without the knowledge of NML. On or about 7 February 1992 the respondent, TPL, took possession of the premises from TCL. No rent was paid for November 1991 and thereafter. On 7 July 1992 an agreement was made between NML and TPL that TPL would remain in occupation of the premises until 7 August 1992 on payment to NML of an occupation fee of $48,000. Subsequently this was extended by a further three weeks in return for an occupation fee of $12,000 per week. The occupation fee NML claimed for the five months to 7 July 1992 was at the rate of $26,911.50 per month. Giles J held that none of the bases upon which NML claimed to be entitled to recover this amount was made out. The issues raised on appeal fall within a narrow compass. FACTUAL BACKGROUND NML's primary submission before Giles J was that TPL had occupied the premises as tenant at will over the period in question. NML relied upon the principle stated by Dixon J in Turner v York Motors Pty Ltd (1951) 85 CLR 55 at 65 that if an intending lessor lets the intending lessee into occupation of the premises in anticipation of an agreement for a lease or of a lease, "simply so that he may temporarily occupy while they proceed to negotiate concerning the conditions upon which the intending tenant shall hold", the intending lessee in the meantime holds as a tenant at will only. Dixon J said: "It is not inconsistent with the intending lessee's continuing so to hold that he pays the landowner some compensation for the use of the land and indeed if it is not intended that his occupation of the land shall be gratuitous the owner may recover from him upon a quantum valebat for use and occupation." WRATIONAL MUTUAL LIFE NOMINEES LTD v TRAVELLERS (NSW) PTY LTD (Sheller JAB After reviewing the facts, Giles J concluded that there was no implied tenancy at will between NML and TPL. NML did not press the argument that there was. It seems to follow that the principle in Turner v York Motors would not apply. However NML submitted that, TOL having abandoned the premises, NML was intending to sub-lease on its behalf and on this basis was entitled to recover an occupation fee from the intending sub-lessee, TPL. NML'S ARGUMENT ON THE APPEAL If a tenant abandons the leased premises during the period of the lease, the landlord's acceptance of the tenant's abandonment determines the tenancy. If the landlord re-lets the premises to another tenant, the Court may find as a fact that the landlord has accepted the original tenant's abandonment. But this will not always be so. In Konica Business Machines Australia Pty Ltd v Tizine Pty Ltd (1992) 26 NSWLR 687 at 693-5, Clarke JA said: "A tenant may, however, place the landlord in a difficult position when it abandons the leased premises. The market for leasehold premises may be depressed and there may be no potential tenants prepared to pay the same rent or one which is reasonably comparable. In circumstances where the landlord is dependent on rent to pay, for instance, interest on a mortgage its financial position could be considerably embarrassed should the premises remain vacant. On the other hand the rent it will receive if it re-lets may be considerably less than the rent previously reserved....... In principle it would seem odd that a tenant, and its guarantor, could escape liability for future rent upon the tenant, in contravention of its contractual obligation, abandoning the premises in the knowledge that the landlord would, almost certainly, be obliged to find another tenant. Such a result would, however, only follow if there was a universal rule to the effect that once the landlord re-lets the premises a surrender by operation of law would occur. I do not think there is such a rule. Although many of the cases are expressed in terms which indicate the existence of a rule of that nature, there is a line of authority supporting the principle that a surrender will not occur if the landlord re-lets the premises on the tenant's account. Walls v Atcheson [1826] 3 Bing 462; 130 ER 591, is usually cited as the case which laid down that proposition. In that case there is a suggestion but not a positive statement that that is the law. What the case did positively state was that if the landlord did not give prior notice to the tenant that it was re-letting on the tenant's behalf then once the re-letting occurred a surrender would be complete...... In determining whether a surrender by operation of law has taken place the courts look to the actions of the parties in order to determine whether they have conducted themselves in a manner inconsistent with the continued existence of the lease. Where it is found that both parties have so conducted themselves then the conclusion will be that a surrender by operation of law has taken place. In this context abandonment by a tenant and re-letting by a landlord have generally been found to be acts inconsistent with the continuation of the lease.... Where, however, the proper inference to be drawn in all the circumstances is that the landlord has re-let the premises on behalf of the tenant then I can see no reason in principle or logic to hold that a surrender has occurred. That is not conduct inconsistent with the continued existence of the lease. On the contrary it would seem to me that the distinction which should be drawn is between cases in which the landlord re-lets on its own account and those in which it re-lets for the benefit of the tenant, either expressly or by applying rent received in part satisfaction of the tenant's liability under its lease." 6 UNREPORTED JUDGMENTS Priestley JA agreed with the views expressed by Clarke JA and by Handley JA who noted at 698 that the correct legal basis for Walls v Atcheson remained obscure. Handley JA said: "It seems to me that it can only be agency. The landlord's notice that he will re-let the premises on the tenant's account and the tenant's acceptance or acquiescence confers the necessary authority on the landlord to sub-let the property on behalf of the tenant and apply the sub-rent in or towards payment of the head-rent." NML submitted that it had not accepted TOL's abandonment of the lease but was negotiating with TPL to re-let the premises on behalf of or for the benefit of TOL. To deal with this argument it is necessary to summarise some of the findings Giles J made. In December 1991 discussions took place between Mr Reid of TCL and Mr Burnard of Global to formalise TCL's occupation of the premises. A proposal that TOL assign the lease to TCL was overtaken by the sale of the business to TPL. On 6 February 1992 Mr Reid told Mr Burnard of the sale. During the conversation reference was made to the occupancy of the premises and as a result Global wrote to Mr Reid agreeing to the sub-leasing of space to TPL. According to Mr Burnard, he was told that in order that TPL could transfer its travel agent's licence to the premises, a letter was needed "to the effect that you will consent to the sub-lease of the premises at 210 George Street, Sydney" and that "the letter is to be used just for this purpose only", and he agreed but stipulated there would have to be either an assignment of the existing lease from TOL or a sub-lease or a new lease granted and formal documents to the satisfaction of Global's solicitors. Giles J found that the conversation was in terms of a sub-lease but included (as Mr Burnard said) contemplation of an assignment or a new lease as alternative to a sub-lease. By letter dated 5 February 1992 TCL wrote to TPL stating that it agreed to sub-let space in the building to TPL with immediate effect. Shortly after 6 February 1992 Mr Reid introduced Mr Robins of TPL to Mr Burnard and negotiations began for a new lease. At the meeting Mr Robins said that TPL could move out at any time unless new lease terms were agreed upon. Mr Burnard said that he would like TPL to stay if possible. By a letter to Mr Robins dated 4 March 1992 Mr Burnard offered a lease of the premises to TPL for three years commencing | March 1992. Mr Meissner of TPL responded by letter dated 18 March 1992 with a counter offer for a lease of three years but commencing on | April 1992. By letter dated 20 March 1992 Mr Burnard rejected the counter offer and renewed the original offer with the change that the lease should commence from 7 February 1992. This produced a qualified acceptance from Mr Robins in a letter dated 24 March 1992 which questioned whether a commencement date of | April was offered or a retrospective lease agreement. By 25 March 1992 Mr Burnard had instructed NML's solicitors to prepare a lease. The solicitors sent the lease, as prepared, to Mr Robins under cover of a letter dated 27 March 1992. It provided for a term of 3 years commencing on 7 February 1992. Despite further communications about the wording of the lease no agreement was reached. On 26 May 1992 Mr Burnard wrote to Mr Robins saying that if the new lease had not been executed by 5 pm on Friday, 29 May "we will enforce the terms of the lease to" TOL. The letter went on: WRATIONAL MUTUAL LIFE NOMINEES LTD v TRAVELLERS (NSW) PTY LTD (Sheller JAY "As well as the ongoing payment of rent at the rate required in this lease we will recover the rent accrued at this rate since February 7 1992. Our estimates are that this will be $172,364 by 31 May 1992 not including car parking, or naming rights." $172,364 represented rent at the rate under the TOL lease. On 24 June 1992 NML's solicitors wrote to TPL: "We are instructed by our client that you are in arrears in payment of rent in the amount of $172,364 being rent payable from February 7 1992. As this amount currently remains in arrears, you are in default under the terms of your occupancy of the premises and our client considers this course of conduct as totally unacceptable. Unless our client receives a cheque for all outstanding amounts by 5 pm on Thursday 2 July 1992, our client will commence proceedings for recovery of all arrears and reserves its rights to re-enter upon the premises." On | July 1992 NML withdrew its offer to lease and alleged that TPL had occupied the premises as tenant at will. Giles J said: "In my opinion, in the circumstances I have set out no tenancy at will between NML and TPL was to be implied. NML continued to assert a tenancy in TOL and that TOL was liable to pay rent. It forbore from taking any step to terminate the tenancy of TOL and from objecting to TPL's occupation, and indicated in the meantime a willingness to see TPL as some kind of sub-tenant or prospective sub-tenant, clearly enough because it hoped that in due course a new lease would be entered into and was content to have TPL in occupation of the premises rather than have them vacant. It did not let TPL into occupation in anticipation of an agreement for lease; TPL's occupation was referable to a sub-occupation (if in fact there was no effective sub-lease) thrust upon NML by Messrs Reid and Robins, condoned by NML for commercial reasons, and not to consensual entry into occupation as intending lessee. That occupation was not treated by NML as displacing the TOL lease, and NML continued to demand rent from TOL for the period of TPL's occupation and to take steps to enforce its claim for that rent. All this negates an implied tenancy at will." With respect these conclusions are clearly correct. The TOL lease continued. NML had not accepted TOL's abandonment. TPL went into occupation as a sub-occupant and not in anticipation of an agreement for a lease. NML did not consent to its entry into occupation as an intending lessee. Even so NML argued that, taking account of what this Court said in Konica, TPL should pay an occupation fee for the period of occupancy. Dealing with this claim Giles J said: "So far as the principle for which Walls v Atcheson is cited might suggest that NML's maintenance that the TOL lease was on foot was consistent with claiming an occupation fee from TPL, in the present case there was really nothing akin to a re-letting by NML on behalf of TOL. Occupation by TPL was thrust upon NML,; at the least, by the letter of 6 February 1992 NML indicated willingness to see TPL as a sub-lessee; although there were negotiations for a new lease, there was no consensus upon whether the new lease would run from 7 February 1992 or 1 April 1992; it was not until the letter of 26 May 1992 (or perhaps the letter of 24 June 1992) that there was any mention of payment by TPL, at a time when the negotiations were breaking down. Moreover, it was not a question of re-letting for some or all of the balance of the original term, but of a new lease intended to go beyond the original term - something which could not be treated as a sub-lease entered into on behalf of TOL. Whatever be the basis for the 8 UNREPORTED JUDGMENTS principle for which Walls v Atcheson stands, it would not extend to making a new lease going beyond the original term something done by way of sub-lease on the tenant's account, and I do not think that NML's maintenance of the TOL lease and a claim upon TPL for an occupation fee can be reconciled on the ground that the latter was a corollary of a proposed sub-lease on behalf of TOL. It follows, in my opinion, that NML is not entitled to succeed in its claim against TPL." I entirely agree with Giles J. Konica is authority for the proposition that, if during the currency of the lease a tenant abandons the premises, the landlord may re-let them on the tenant's behalf without bringing about a termination of the lease. In the present case the lease from NML to TOL continued during the period for which the occupation fee was claimed. TPL did not occupy the premises as an intending lessee. There was a lease on foot. Nor, for the reasons that Giles J has stated, did it occupy them as an intending sub-lessee. In my opinion the appeal should be dismissed with costs. Appeal dismissed with costs. Counsel for the Appellant: SD Robb QC/J Bartos Solicitors for the Appellant: Middletons Moore and Bevins Counsel for the Respondent: A Radojev Solicitors for the Respondent: Humphryes and Corish