LEASK v FARLMIST PTY LTD SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL SHELLEY, BEAZLEY JJA and FITZGERALD AJA 5 November 1998, 18 December 1998 COMMERCIAL LEASE — terms of lease — rent holiday period to be taken into account This appeal concerned the lease of commercial premises owned by the respondent in Erina. The appellant entered into negotiations with the real estate agent to lease the premises for a shop selling cane products. That use was prohibited by the then current zoning and it was necessary to lodge a development application with Gosford City Council. The appellant claimed that the real estate agent assured them the change in zoning was "just a paper entry at council" and he would take care of it. The agent filled out an application and lodged it with Council on the appellant's behalf. The terms of the proposed lease as outlined in a Commercial Lease Advice and correspondence between the appellant and the respondent's solicitors included rental at $8,500 per month, a term of 3 years with a 3 year option commencing on 18 February 1994 with a 3 months rent holiday and that the lease was subject to Council consent. The appellant paid one months rental in advance and occupied the premises on or about 18 February 1994, before Council consent had been given. On 10 May 1994 the appellant was advised that Council consent would be granted subject to the payment of a car parking contribution which the respondent was prepared to pay. After receipt of a letter of demand for rental due date 22 June 1994, the appellant vacated the premises on 27 July 1994. The trial Judge held that when the appellant had occupied the premises he had done so as a monthly tenant at rental of $8,500 a month, the lease for a 3 year term had never been entered into because Council consent had never been granted, the respondent was therefore entitled to rent from 18 February 1994 27 July 1994 and the appellant was entitled to the $8,500 paid in advance. On appeal, the appellant argued that he was not required to pay rent for the period of occupation because he was a licensee occupying gratuitously until Council consent was given and that but for the real estate agent's representation the appellant would not have entered into possession. It was also argued that there was insufficient evidence to support the trial Judge's conclusion that the monthly tenancy was at a rental of $8,500 a month and that the three month rental free period should have been taken into account. Held: 1. The trial Judge was correct in holding that the appellant had entered into the property as a tenant at will at a rent of $8,500 per month terminable by a months notice: s127 Conveyancing Act 1919, Dockrill vy Cavanagh (1994) 45 SR (NSW) 78 and Turner v York Motors Pty Ltd (1951) 85 CLR 55 applied. 2. No damage flowed from the real estate agent's representation because the effect of it was exhausted when the appellant was informed of Council's requirement for car parking contribution on 10 May 1994. Furthermore, them was nothing to suggest that at the time of the letter of demand the respondent would not pay the contribution and, that if paid, the development application would not have been approved. 3. The trial Judge's conclusion that the rent for the monthly tenancy was $8,500 per month was correct because it was arrived at through arms length negotiations; and there was no evidence that any other rental was more appropriate. Australian Provincial Assurance Association Ltd v Rogers (1943) 60 WN (NSW) 111. 2 UNREPORTED JUDGMENTS 4. In the circumstances the three month rent holiday should have been taken into account. Authorities: Australian Provincial Assurance Association Ltd v Rogers (1943) 60 WN (NSW) 111 Dockrill v Cavanagh (1944) 45 SR (NSW) 78 Turner v York Motors Pty Ltd (1951) 85 CLR 55 Sheller JA INTRODUCTION This is an appeal from a decision of Acting Judge Blackman given on 24 October 1996. The respondent, Farlmist Pty Ltd (Farlmist), owned premises at 164 The Entrance Road, Erina. The premises became vacant at the end of 1993. Mr Noble, a director of Farlmist, engaged Mr Murdoch of Citicoast Realty to find a tenant. Discussions took place between Mr Murdoch and the appellant, Stephen Leask, in January and probably February 1994 about Mr Leask leasing the premises. Mr Murdoch acted as Farlmist's agent in these discussions. Mr Michael Leask, the appellant's son, was present. The current zoning of the premises presented an obstacle to the lease. Mr Leask wanted to use the premises for a shop. The current zoning did not allow such a use and it was necessary for a development application to be made to Gosford City Council and approved. According to Mr Michael Leask, Mr Murdoch had said during the discussions between the parties that zoning was not a problem "just a paper entry at the Council" and that he, Mr Murdoch, would take care of it. Mr Murdoch filled out a development application on behalf of the appellant and lodged it with the Council. From time to time he inquired about the progress of the application. By 8 February 1994 discussions between the parties had reached the stage where somebody in Citicoast Realty prepared a document called a Commercial Lease Advice dated that day giving particulars of the proposed lease which amongst other things, described the use as "warehouse/display/showroom cane goods & allied products", a commencement date "to be advised", a commencement rental of "$102,000 per annum or $8,500 per calendar month", a term of three years plus three year option and special conditions, relevantly, as follows: "The lessee is to provide a rental surety equivalent to one months rental, viz $8,500. This surety may be in either of the following forms: (a) A bank guarantee in the names of both lessee and lessor. (b) An interest earning trust account in a recognised financial institution in the name of the lessee, with any interest earned being the property of the lessee. Subject to Gosford City Council Consent for usage.......... While the appellant did not recall receiving this document he did not deny he could have received it. NEGOTIATIONS On 21 February 1994 Yeldhams, the respondent's solicitors, wrote to the appellant enclosing lease documents (which were not in evidence) for "your approval and execution and subject also to their return to us, payment of our account as per the enclosed and final approval by our client, the Lessor" and stating that the lease was to commence on 18 February 1994 but that, notwithstanding the provisions of the lease, no rent was payable by appellant for URJ LEASK v FARLMIST PTY LTD (Sheller JA) 3 a period of three months from the date of the commencement of the lease. They further confirmed that the lease arrangements were subject to the appellant gaining consent from the Gosford City Council for the usage as set out in the real estate agent's letter. On 22 February 1994 Mr Michael Leask went to Citicoast Realty and paid Mr Murdoch $8,500. A document was prepared the front of which was signed by Mr Murdoch and acknowledged receipt by Citicoast of $8,500 "lease 164 The Entrance, Erina. First months rental in advance." On the back was the printed impression of a stamp altered to read: "INFORMATION (a) The Principal has no obligation to lease this property and you have no obligation to buy [sic] this property. (b) The deposit is repayable to you in the event that a contract is not entered into between you and the principal for the lease of this property." In each paragraph the word "lease" had been inserted and the word "sell" and "sale" crossed out. Both Mr Murdoch and Mr Michael Leask initialled this document. OCCUPATION Judge Blackman accepted that a deal was struck even though negotiations were continuing. Her Honour said: "The only problem for me to decide, is whether the deal which was struck was (a) that a lease would be entered into containing a clause which allowed the defendant to terminate the lease in the event of development approval not being received from the Council, or (b) that a lease would be entered into when the development approval was given." A reading of the documents led her Honour to conclude that the parties had come an arrangement that they would enter into a lease once the Council gave development approval. However, Mr Leask was anxious to go into occupation of the premises before entering into the lease. "He was losing money because the premises he then occupied were being affected by road works. He paid the $8,500, or his son did on his behalf, in order to obtain the keys which were probably handed over on 18 February 1994. Her Honour was of the view that this was tantamount to giving occupation to Mr Leask. Whether or not he then began trading or his workmen started painting the premises, he had the opportunity of getting ready for trading. He said that as soon as he obtained possession of the premises they began to prepare for business. Her Honour thought that occupation was not on the basis of the three year lease. This lease was not to be entered into until the Council had given development approval. CONDITION OF APPROVAL On 10 May 1994 Mr Murdoch wrote to the appellant and told him that after speaking to the Council it was understood that approval would be granted subject to payment of car parking contributions. The letter continued: "We have subsequently contacted the lessor, who has indicated before any consideration of contributions being borne by himself, we would require the execution and return of the lease documents along with the payment of the bond money, viz $8,500." 4 UNREPORTED JUDGMENTS "We understand from the agent that the lessor is agreeable to pay such car parking contributions and we would also seek to have this included in the lease." On 6 June 1994 the Council advised the appellant that he would have to pay a $14,625 car parking contribution before the Council would consider the application. "Should no written agreement be received by Council within 14 days of the date of this letter then the application will be determined on the information submitted to date." The last paragraph of this letter carried a warning: "The information contained in this letter does not infer or promote that an approval will be issued concerning the stated proposal." On 10 June 1994 Yeldhams wrote: "Our understanding is that our client is agreeable to meeting the condition from the council in relation to the contribution required. We note your advices as to the date of commencement of the lease and seek return of the documentation. Our client is agreeable to the other amendments referred to in your correspondence to us." On 15 June 1994 Yeldhams sent a fax to John Brent & Co "As your client now has a DA - cl3 not required". This was a mistake. On 22 June 1994 Mr Murdoch sent the appellant a letter of demand "Rental Due as of 18 June 1994 in the sum of $8,500". The final paragraph of the letter was: "Failure to comply will leave the owner with no alternative but to withdraw the offer to lease and regain immediate possession of these premises." Mr Leask was in Melbourne at the time but instructed his son to move out of the premises straight away. Trading was to stop immediately and the goods were to be stored in his warehouse. The appellant took the letter of demand as requiring vacation of the premises. By letter of 27 June 1994 he acknowledged the letter of 22 June and advised "we have vacated the premises as demanded in your letter by Spm 23" June 1994. We also request the immediate return of our deposit of $8,500." On 10 August 1994 the Council gave notice to the appellant that the application had been refused for reasons which included the fact that it did not provide adequate provision for the parking of vehicles on the land. PROCEEDINGS On 17 November 1994 the respondent began proceedings against the appellant claiming damages of $80,214 for loss of rent during the period of occupation from 22 February 1994 to 22 May 1994 and thereafter until 22 October 1994 when a subsequent tenancy began. There were also claims for work done on the premises. An alternative claim was made for rent under a tenancy at will The appellant filed a notice of defence which contained an allegation that the respondent represented and warranted to the appellant that the premises could be used in the manner described in the Commercial Lease Advice dated 8 February 1994 and "that approval from Gosford City Council could easily be obtained therefor." The appellant alleged that in reliance on the representation and warranty of the respondent he took possession of the premises and paid "a bond of $8,500." The appellant filed a notice of cross-claim again alleging the same representation and warranty and claiming to recover resultant financial loss being the "payment of the $8,500 and costs of painting, advertising and transportation. The appellant also alleged deceptive and misleading conduct within the meaning of s52(1) of the Trade Practices Act 1974. URJ LEASK v FARLMIST PTY LTD (Sheller JA) 5 TRIAL JUDGE'S FINDINGS Judge Blackman found that when Mr Leask entered into occupation on 8 February 1994 he did so "as a tenant at will, who could give or receive notice to vacate"; see Dockrill v Cavanagh (1944) 45 SR (NSW) 78 at 84-85; Turner v York Motors Pty Ltd (1951) 85 CLR 55 at 64-65. Later in her reasons for judgment, her Honour said: "Tn this instance the Council was given the application after he had moved in, spent money on the opening, and then he found that the Council was not going to give approval. What he did, in my opinion, was to move in as a monthly tenant, expecting that that monthly tenancy would be turned into a lease for three years, as per [the Commercial Lease Advice dated 8 February 1994]. I do not consider that the letter from Mr Murdoch of 22 June is a notice to vacate. It is a letter of demand, which says that the owner may take certain steps. However, the letter from Mr Leask of 27 June is, in my opinion, a notice that the tenancy at will is being concluded, and as it was a monthly tenancy, he is required either to give one month's notice or to pay one month's rent in lieu thereof. It was said on behalf of the defendant that he would not have moved into the premises except for the representations, which were in effect misrepresentations, by Mr Murdoch on behalf of the plaintiff, that the approval of the Council was "a mere formality', also that these representations should have been known to be false." Judge Blackman did not consider that these representations were made on behalf of the owner and said that it would have been obvious to Mr Leask that Mr Murdoch's' involvement in the obtaining of Council approval was something beyond his usual role as agent for the owner. On the cross-claim her Honour thought the payment of the $8,500 could be characterised as payment of a rental surety bond. She recapitulated her findings as follows: "1. There was an agreement for lease, which lease would be entered into once the Council gave development approval. 2. This approval was never given by the Council. 3. Mr Leask moved into the premises as a monthly tenant, at rental of $8,500 a month. 4. Mr Leask gave a notice dated 27 June terminating this monthly tenancy. 5. The plaintiff is therefore entitled to rent for the premises from 18 February to 27 July 1994. 6. The defendant is entitled to the repayment of the $8,500 paid on 22 February 1994." Accordingly, her Honour gave judgment for the respondent on its amended statement of claim in the sum of $45,050, which represented rent at the monthly rate of $8,500 calculated over five months and nine days and judgment for the appellant on his cross-claim in the sum of $8,500 In the result there was judgment for the respondent for the difference, $36,550. APPEAL Mr Leask appealed from this decision. He submitted there was no arrangement between the parties, be it a lease or otherwise, which required the appellant to pay any amount by way of rent or occupation fee for the time he was in occupation of the premises. This submission flies in the face of what Dixon J said in Turner v York Motors, particularly at 64 and following. The appellant sought to distinguish this decision because the condition of Council approval made the 6 UNREPORTED JUDGMENTS existence of the lease dependent upon the act of a third party which meant, so it was said, that the parties did not anticipate an agreement for lease or a lease. The appellant submitted that he occupied the premises merely as a licensee and, presumably, gratuitously until Council approval was obtained. Judge Blackman found that the parties had come to an arrangement that they would enter into a lease once the Council gave development approval and that pending the Council's decision, the appellant would occupy the premises. While the facts in Turner v York Motors were not exactly the same as the facts of this case, the principle there stated applies. At 65 Dixon J said: "The first of these five views [that the defendants may have been tenants at will only] is based upon the notion that the defendants went into possession of the premises provisionally pending agreement upon and the execution of a lease and that from beginning to end the defendants' possession remained of this character so that no fixed or periodical term arose and the defendants held as tenants at will only. 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, it is of course true that in the meantime the intending lessee holds as a tenant at will only. 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. But the reservation and receipt of a periodical rent as such affords strong evidence of the creation of a periodical term. 'Where parties enter under a mere agreement for a future lease they are tenants at will; and if rent is paid under the agreement, they become tenants from year to year, determinable on the execution of the lease contracted for, that being the primary contract' per Littledale J in Hammerton v Stead (1824) 3 B & C 478 at 483; 107 ER 811 at 813. The case where the parties have not actually reached an agreement for a future lease depends upon the same principle, that is upon the implication from the receipt of a compensation for the use of the land, but the inference to be drawn from the circumstances may be less certain." Judge Blackman found, as I understand her judgment, that the appellant went into occupation as a tenant at will and at a rent of $8,500 per month the effect of which when combined with the operation of s127 of the Conveyancing Act 1919 made the lease at will terminable by a months notice; Dockrill v Cavanagh at 84. There is no reason to disagree with this conclusion. In their letter of 12 April 1994 John Brent & Co wrote to Yeldhams stating that if "the lessee is not granted the development consent for use of the premises for which he has applied, then, as we understand it, he is entitled to terminate the lease." This supports a conclusion that the appellant intended that occupation would be under the three year lease with a right to terminate. But Judge Blackman thought otherwise and in that respect neither party challenged her conclusion. The respondent in its notice of contention relied, as an alternative, on s127 of the Conveyancing Act to submit that there was a statutory tenancy determinable at the will of either party on one months notice in writing at any time. This produces the same result. The appellant further submitted that but for the misrepresentation which her Honour found Mr Murdoch to have made and to have induced the appellant to enter into possession, he would not have done so. I am inclined to agree, although URJ LEASK v FARLMIST PTY LTD (Sheller JA) 7 it is unnecessary to decide it, that her Honour erred in concluding that Mr Murdoch's misrepresentation that approval by the Council would be mere formality" was not within the scope of his implied or ostensible authority from the respondent. However, the effect of this misrepresentation on the appellant must have been exhausted when he was first informed on 10 May 1994 that the Council was seeking contribution for car parking as a condition of the development consent. On 10 June 1994 his solicitors were told by the respondent's solicitors that it was their understanding that the respondent was agreeable to meet the condition in relation to the contribution required and asked to return the documentation. Nothing further happened until 22 June 1994 when Mr Murdoch sent the letter of demand as a result of which the appellant vacated the premises. The letter of demand on its face was a claim for rent for a period after the end of the proposed three month rent holiday. At that point there was nothing to suggest that the respondent would not meet the condition from the Council for contribution and that, if this were done, the development application would not have been approved. Accordingly, it is difficult to see what damage flowed from the misrepresentation. The appellant also submitted that there was insufficient evidence to support her Honour's conclusion that the appropriate rent for the conditional lease was $8,500 per month. This was a rent arrived at as a result of agreement between parties at arms length. There was no evidence that in the circumstances any other monthly rate was more appropriate; Australian Provincial Assurance Association Ltd v Rogers (1943) 60 WN (NSW) 111 at 113. Finally, the appellant submitted that in calculating the amount owing her Honour should have allowed for the proposed three month rent holiday. The respondent submitted that this only applied if the three year lease were entered into. This lease however was to begin from the date on which the keys were handed over, 18 February 1994, and effectively subsumed the conditional common law lease. Undoubtedly, if the appellant had remained in occupation and Council approval had been granted, the appellant would have been entitled to the three month rent holiday. Moreover the letter of demand of 22 June 1994 for rental due as of 18 June 1994 in the sum of $8,500 assumed, no rent having been paid between 18 February and 18 May 1994, that none was payable for this period. I agree with the submission that in the circumstances any calculation of the amount owing for the period of occupation over the initial three month period should have allowed for the rent holiday. To this extent, the appeal succeeds. CONCLUSION In my opinion, the appeal should be upheld and the verdict for the respondent on its statement of claim set aside. In lieu thereof there should be a verdict and judgment for the plaintiff in the amount of $19,550, which is the amount of the judgment below less $25,500 representing three months rent at $8,500 per month. The judgment on the cross-claim remains. Accordingly, there should have been judgment for the plaintiff in the amount of $11,050. The appellant has succeeded in part on the appeal and should have his costs of the appeal. ORDERS I propose the following orders: 1. Appeal allowed; 2. Set aside the judgment or Blackman ADCJ of 24 October 1996 and it lieu thereof enter judgment for the plaintiff in the amount of $11,050; 8 UNREPORTED JUDGMENTS 3. Defendant to pay the plaintiff's costs of the proceedings in the District Court; 4. Respondent to pay the appellant's costs of the appeal but to have certificate under the Suitors' Fund Act 1951 if qualified. Beazley JA I agree with Sheller JA. Fitzgerald AJA I agree with Sheller JA. 1. Appeal allowed; 2. Set aside the judgment or Blackman ADCJ of 24 October 1996 and in lieu thereof enter judgment for the plaintiff in the amount of $11,050; 3. Defendant to pay the plaintiff's costs of the proceedings in the District Court; 4. Respondent to pay the appellant's costs of the appeal but to have a certificate under the Suitors' Fund Act 1951 if qualified. Counsel for the appellant: A Radojev Solicitors for the appellant: KNPW Lawyers Counsel for the respondent: M M Macrossan Solicitors for the respondent: Roper & Stegall