New South Wales Supreme Court CITATION : Indian Taj v Gilany [2004] NSWSC 1193 HEARING DATE(S) : 8/12/04 JUDGMENT DATE : 10 December 2004 JUDGMENT OF : Gzell J DECISION : Declaration that lease was valid, subsisting and enforceable. Defendants to pay the plaintiff's costs. CATCHWORDS : LANDLORD AND TENANT - Termination of the Tenancy - Lease registered under Real Property Act 1900 - Notice of surrender signed by one director of corporate tenant the day before its winding up for irreconcilable differences between directors - Whether it and notice of termination issued by landlord on same day together constituted a surrender under the Real Property Act 1900, s 54(1) - Whether there was a surrender by operation of law - Whether other director's actions constituted ratification by company - Whether landlord entitled to terminate for breach of "essential" term to open restaurant during business hours - Whether landlord bound to give 14 days' notice of breach of lease - Whether company repudiated the lease Retail Leases Act 1994 LEGISLATION CITED : Corporations Act 2001 (Cth) Real Property Act 1900 Conveyancing Act 1919 Northside Developments Pty Ltd v Registrar-General (1989-1990) 170 CLR 146 Pacific Carriers Ltd v BNP Paribas [2004] HCA 35 CASES CITED : Zorbas v McNamara (1962) SR (NSW) 159 Gorman v Pye (1951) 68 WN (NSW) 180 Land Law, 4th ed, Lawbook Co, Sydney Indian Taj Pty Ltd (in liq) ACN 103 803 676 - Plaintiff PARTIES : Soliman Gilany - 1st Defendant Brenda Mary Gilany - 2nd Defendant FILE NUMBER(S) : SC 4996/04 COUNSEL : Mr C Wood - Plaintiff Mr D Smallbone - Defendants SOLICITORS : Hugh & Associates Lawyers AAT Legal Solicitors IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION GZELL J FRIDAY 10 DECEMBER 2004 4996/04 INDIAN TAJ PTY LTD (IN LIQUIDATION) v SOLIMAN GILANY & ANOR JUDGMENT 1 The plaintiff, Indian Taj Pty Ltd (in liquidation) was the lessee under a registered lease from the defendants, Soliman Gilany and his wife Brenda Mary Gilany. The issue before the Court was whether the lease was validly terminated. 2 The directors of Indian Taj were Ramesh Kumar Sharma and Daljit Bhardwaj. They were at loggerheads. Mr Gilany was aware of this fact probably as early as March 2004. On 23 August 2004, Mr Bhardwaj locked the leased premises. Mr Sharma informed Mr Gilany of this fact and said it was Mr Gilany's responsibility to look after the premises because they were now closed. Mr Gilany spoke with Mr Bhardwaj who said he put a lock on the front door and he held Mr Gilany responsible for the building from then on because the business was closed and was no longer operating. Mr Bhardwaj said he was terminating the lease agreement on the building and would confirm it by a letter later in the day. He said he withdrew as a personal guarantor of the building. 3 Mr Gilany went to the premises that day. He met Mr Bhardwaj who handed him a document and said it was a notice of termination and a written advice that the company was surrendering the lease. The letter was headed "David Bhardwaj Indian Taj Pty Ltd". It was addressed to Mr and Mrs Gilany. It identified the leased premises and stated: "I am writing on behalf of the company to advise that the company is surrendering the lease(s) to you forthwith as of today's date and the leases are to be regarded as terminated." The letter was signed by Mr Bhardwaj as a director of Indian Taj. 4 Indian Taj also held a residential lease from Mr and Mrs Gilany of premises nearby. It was also identified in the letter. Hence the reference to "lease(s)". I am not concerned with the residential lease. 5 Mr Gilany spoke again by telephone to Mr Sharma on the same day. He informed Mr Sharma of Mr Bhardwaj's action. Mr Sharma said he withdrew as guarantor as well and said the responsibility for the building and lease was with Mr Gilany. 6 Also on 23 August 2004, Mr Gilany served a notice on Mr Sharma and Mr Bhardwaj. It was headed in his name and that of his wife. It was addressed to the directors of Indian Taj. It referred to the commercial lease. It was signed by Mr Gilany. It was in the following terms: "I, Soliman Gilany and as authorised on behalf of my wife hereby advise that this lease is terminated forthwith on the grounds of the evident insolvency of the company as evidenced by (1) the winding up application if (sic) the Supreme Court. (2) The fact that Mr Ramesh Sharma informed me by telephone today that the restaurant at the premises operated by the Company has stopped trading because the other director has put locks on the premises & (3) Mr Daljit Bhardwaj advised me by telephone today on behalf of the company that it wished to surrender the lease on behalf of the company and I have agreed with his request." 7 On the next day, Ronald Bentley Brown was appointed liquidator of Indian Taj because of the irreconcilable differences between Mr Sharma and Mr Bhardwaj. 8 On 26 August 2004, the liquidator was informed by Mr Sharma that he intended to buy the leased premises. There was a condition precedent in the sale agreement in the following terms: "49.1 All of the obligations under this document are subject to the satisfaction, at Completion of each and every one of the following conditions: (a) The Vendors acknowledges ( sic ) that the property is currently subject to a lease, however the said lease is terminated on the ground that the current lessee is in breach of the conditions of the lease. The Vendors warrant that prior to or at Completion, the Purchaser will be given vacant possession without any encumbrances." 9 On 30 August 2004, the liquidator informed the solicitors for Mr and Mrs Gilany that he did not accept that the lease had been validly terminated and he intended to continue to operate the business in order to sell it as a going concern. 10 The question whether the commercial lease was validly terminated was a retail tenancy dispute for the purposes of the Retail Leases Act 1994, s 68(1). Under that provision, the dispute could not have been the subject of proceedings before any court unless there was a certificate as to the failure of meditation or the court was otherwise satisfied that mediation was unlikely to resolve the dispute. On 8 December 2004, Windeyer J held that it was appropriate for the court to proceed with the matter in the absence of mediation. 11 The dispute raises two questions: was the notice of surrender valid? and was the notice of termination valid? Notice of surrender 12 The notice was signed by Mr Bhardwaj. It was not signed by Mr Sharma. The Corporations Act 2001 (Cth), s 127(1) provided that a company might execute a document without using its common seal if it was signed by two directors, or a director and a company secretary, or a sole director who was also the sole company secretary. The notice of surrender did not comply with that provision but s 127(4) provided that the section did not limit the ways in which a company might execute a document. 13 Reliance was placed upon the Corporations Act 2001 (Cth), s 126(1). It provided that a company's power to make, vary, ratify, or discharge a contract might be exercised by an individual acting with the company's express or implied authority and on behalf of the company. 14 In my view, that provision did not render the notice signed by Mr Bhardwaj a surrender of the lease by Indian Taj. There was a specific method by which a registered lease might be surrendered in the Real Property Act 1900, s 54(1). It was in the following terms: "Whenever any lease which is required to be registered by the provisions of this Act is intended to be surrendered, and the surrender thereof is effected otherwise than through the operation of a surrender in law or than under the provisions of any law at the time being in force relating to bankrupt estates, the lessee and lessor shall execute a surrender of the lease in the approved form." 15 That specific provision was not overruled by the general provision in the Corporations Act 2001 (Cth), s 126(1). Section 126(2) provided that the section did not affect the operation of a law that required a particular procedure to be complied with in relation to the contract. 16 In any event, there was no suggestion that Mr Bhardwaj had the express authority of Indian Taj to surrender the lease and no implied authority could arise in circumstances in which the lessor was aware that there were irreconcilable differences between the two directors of the company. That circumstance should have put Mr Gilany on notice that Mr Bhardwaj's ostensible authority to surrender the lease required further examination (Northside Developments Pty Ltd v Registrar-General (1989-1990) 170 CLR 146 at 212). It is not enough that Mr Bhardwaj asserted the authority of Indian Taj to surrender its lease. There had to be a holding out by the company that its officer had the necessary authority. The company's conduct must have been the source of the representation that grounded the estoppel (Pacific Carriers Ltd v BNP Paribas [2004] HCA 35 at [36]). 17 The Corporations Act 2001 (Cth), s 128(1) provided that a person was entitled to make the assumptions in s 129 in relation to dealings with the company, and the company was not entitled to assert in proceedings in relation to the dealings that any of the assumptions were incorrect. Section 129(1) provided that a person might assume that the company's constitution and any provisions of the Act that applied to the company as replaceable rules had been complied with. There was, however, nothing in the constitution of the Indian Taj that enabled one director to act to the exclusion of the other. 18 The Corporations Act 2001 (Cth), s 129(3) provided that a person might assume that anyone who was held out by the company to be an officer or agent had been duly appointed and had authority to exercise the powers and perform the duties customarily exercised or performed by that kind of officer or agent of a similar company. There was no evidence, however, that Indian Taj held Mr Bhardwaj out other than as a director of the company and there was no evidence that the power to surrender a registered lease was customarily exercised by a single director of a company similar to Indian Taj. 19 The Corporations Act 2001 (Cth), s 129(4) provided that a person might assume that the officers and agents of a company properly performed their duties to the company. That provision, however, did not overcome the singular action of Mr Bhardwaj nor the specific requirement of the Real Property Act 1900, s 54(1). 20 It was submitted that the combination of the notice of surrender signed by Mr Bhardwaj and the notice of termination signed by Mr Gilany constituted a surrender of the lease for the purposes of the Real Property Act 1900, s 54(1). While item (3) of the notice of termination purported to accept the surrender of the lease, for the reasons already mentioned, the notice of surrender did not constitute a surrender by Indian Taj. Furthermore, the Real Property Act 1900, s 54(1) required execution of an approved form. The approved form 07DL was not executed by the parties to the lease. 21 Finally, on this topic, it was submitted that the conduct of Mr Sharma and Mr Bhardwaj constituted a surrender by operation of law of the lease by Indian Taj. It was submitted that Mr Bhardwaj had evinced an intention to surrender the lease and Mr Sharma, by his conduct, had ratified Mr Bhardwaj's actions. 22 The Conveyancing Act 1919, s 23B(1) provided that no assurance of land should be valid to pass an interest at law unless made by deed. Section 23B(3) provided that the section did not apply to land under the provisions of the Real Property Act 1900. An express surrender of a lease not registered under the Act, therefore required a deed (Zorbas v McNamara (1962) SR (NSW) 159). An express surrender of a lease registered under the Real Property Act 1900 required the execution by lessor and lessee of a document in approved form under s 54. 23 In each case there was an exception for a surrender by operation of law. Section 23B(2)(c) of the Conveyancing Act 1919 provided that the section did not apply to a surrender by operation of law. 24 Such a surrender is based upon the notion of estoppel. There must be some act short of express surrender assented to by the other party that is inconsistent with the continued existence of the lease. As Professor Butt puts it in Land Law, 4th ed, Lawbook Co, Sydney, 2001 at [15157.5]: "Surrender by operation of law occurs where one party (A) to the lease does some act (short of express surrender), assented to by the other, which is inconsistent with the continued existence of the lease. This sets up mutual estoppels, precluding the parties from denying that the lease has been surrendered." 25 In Gorman v Pye (1951) 68 WN (NSW) 180 a tenant gave her landlord the key and vacated the premises saying she wished to give up her tenancy. A few days later she gave the landlord a document stating that she had vacated as she no longer wished to have the tenancy and that any persons on the premises were squatters. About the same time the landlord's solicitors wrote to the squatters requiring them to vacate the premises. It was held that there had been a surrender of the tenancy by operation of law. 26 If Mr Bhardwaj had the authority of Indian Taj to express on behalf of the company the statements he made to Mr Gilany on 23 August 2004 as confirmed by his subsequent letter and his handing over of the keys to the lock together with Mr Gilany's subsequent acceptance of the circumstances, there would have been a surrender of the lease by operation of law, in my view. 27 The question remains, however, whether the actions of Mr Bhardwaj and Mr Sharma's subsequent conduct constituted actions of Indian Taj. That depends upon whether the subsequent actions of Mr Sharma might be regarded as an informal assent as a director of Indian Taj to the actions taken by Mr Bhardwaj. I am not satisfied that they did. Neither director was speaking to the other. When Mr Gilany informed Mr Sharma that Mr Bhardwaj had withdrawn as a guarantor under the lease, Mr Sharma said he did likewise. That, to me, smacks of an individual act on the part of Mr Sharma asserting that he no longer accepted liability under the lease. It does not suggest that he put his mind to ratification on behalf of Indian Taj of the earlier actions of Mr Bhardwaj that did not bind the company. Being at loggerheads, it is unlikely that Mr Sharma endorsed the actions of his co-director. In my view neither the notice of surrender not the actions of the directors of Indian Taj effected a surrender of the lease. Notice of termination 28 Clause 12.1 of the lease provided that it ended in three events: on the date stated in the lease, if the landlord lawfully entered and took possession of any part of the property, or if the landlord lawfully demanded possession of the property. Clause 12.2 was in the following terms: "The landlord can enter and take possession of the property or demand possession of the property if - 12.2.1 the tenant has repudiated this lease; or 12.2.2 rent or any other money due under the lease is 14 days overdue for payment; or 12.2.3 the tenant has failed to comply with a landlord's notice under section 129 of the Conveyancing Act 1919; or 12.2.4 the tenant has not complied with any term of this lease where a landlord's notice is not required under section 129 of the Conveyancing Act 1919 and the landlord has given at least 14 days written notice of the landlord's intention to end this lease." 29 Clause 12.5 defined essential terms of the lease. Clause 12.6 provided that if there was a breach of an essential term the landlord could recover damages for losses over the entire period of the lease but had to do every reasonable thing to mitigate those losses and try to lease the property to another tenant on reasonable terms. 30 It was argued that clause 12.2 was limited to termination under cl 12.1.2 and did not affect the entitlement of the landlord to demand possession under cl 12.1.3. It was said that this right arose upon breach of an essential term. 31 The problem with that analysis is that the lease does not say so. It specifically links essential terms to the entitlement to damages for loss. Furthermore, cl 12.2 applies both to cl 12.1.2 and cl 12.1.3. 32 Clause 6.1 was identified as an essential term of the lease. Clause 6.1.1 required Indian Taj to use the property as a restaurant and for no other purpose. There was no suggestion that the premises were used other than as a restaurant. Clause 6.1.2 provided that Indian Taj was to open for business at times usual for a business of the kind conducted by the tenant. It was argued that Indian Taj had failed to open for business on 23 August 2004. The liquidator took over on the next day and made it perfectly clear that he was continuing to operate the business to sell it as a going concern. 33 In my view, it is highly unlikely that the parties intended that any breach of cl 6.1.2 entitled the landlord to terminate the contract. Particularly is this so where breach of contract and repudiatory conduct were specifically dealt with under cl 12.2. I reject the argument that Mr and Mrs Gilany were entitled to terminate the lease for failure to comply with cl 6.1. 34 Next it was argued that the conduct of Mr Bhardwaj and that of Mr Sharma amounted to repudiatory conduct on the part of Indian Taj and enlivened the operation clause 12.2.1. In opposition to that submission, it was put that any breach of the lease fell within cl 12.2.4 and required 14 days' written notice and that had not occurred. 35 Mr Bhardwaj's conduct was not that of Indian Taj. It could only become so by ratification by Mr Sharma acting in his capacity as a director of Indian Taj and for the company. For the reasons expressed above, I am of the view that his conduct did not amount to ratification by Indian Taj of Mr Bhardwaj's conduct. 36 It was submitted that the condition precedent in cl 49.1(a) of the contract for sale of the premises to Mr Sharma confirmed his acceptance that the lease had been terminated. That is not, however, the issue. Mr Sharma may have concluded that was the result of Mr Bhardwaj's actions and sought the inclusion of the provision in his contract. But the question is whether he acted in his capacity as Mr Bhardwaj's co-director to ratify on behalf of the company the actions of Mr Bhardwaj. 37 It was pointed out that Mr Bhardwaj and Mr Sharma were guarantors under the lease and each had indicated an intention no longer to be bound by their guarantee. That evidence, however, tends to enforce the view that I have taken that Mr Sharma's actions were those of an individual and not made on behalf of Indian Taj. In my view, Mr and Mrs Gilany were not entitled to terminate the lease under clause 12.2.1 and 14 days' notice of any breach of the lease was required under cl 12.2.4. 38 The notice of termination proceeded on the basis that Indian Taj was insolvent. There was no evidence to support that contention. It relied upon the winding up application of Indian Taj. That was not an act of default that entitled Mr and Mrs Gilany to terminate the lease. Item 2 was the cessation of trading operations which, for the reasons expressed above, did not entitle Mr and Mrs Gilany to terminate the lease. Item 3 was the acceptance of a purported surrender of the lease. For the reasons expressed above, I am of the view that the lease was not surrendered. 39 I will make a declaration in terms of paragraph 1 of the amended summons. Mr and Mrs Gilany must pay Indian Taj's costs. I direct the parties to bring in short minutes of orders reflecting these reasons. ********** Last Modified: 12/15/2004 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.