New South Wales Supreme Court CITATION : Gumland v Duffy [2006] NSWSC 10 HEARING DATE(S) : 21, 22 July 2005; 19, 20, 21 September 2005 JUDGMENT DATE : 21 February 2006 JURISDICTION : Equity Divison JUDGMENT OF : Associate Justice Macready at 1 CATCHWORDS : Contract - construction of terms of contract and its variation to determine amount of rent payable. - Penalties. Held that clauses merely provided for payments of past monies due and thus not a penalty. - Discharge. Did various breaches give a right to terminate? Whether such breaches were waived. - Damages. Whether a claim for damages for loss of bargain in respect of a lease arose. - Landlord and Tenant. Construction of use and occupation covenants. - Termination of Tenancy. Whether there was a surrender of sub-lease and creation of new tenancy as a result of sub-tenant deciding to pay half the holding over rent. - Guarantee and indemnity. Discharge of surety. Failure to include a term required by the principal contract to be included in a guaranteed sub-lease discharged surety. Held that it did. - Indemnities. Whether indemnity responded to situation where the need for indemnity arose from a breach of contract by the person entitled to the benefit of the guarantee. Held that it did not. - Construction of term of operation of guarantee. PARTIES : Gumland Property Holding Pty Limited v Duffy Bros Fruit Markets (Campbelltown) Pty Limited and 2 Ors FILE NUMBER(S) : SC 50066/2005 J. West QC and NJ Kidd for plaintiff COUNSEL : D. Cassidy QC and R. Keller for 1st defendant G. Turner for 2nd and 3rd defendants PricewaterhouseCoopers Legal for plaintiff SOLICITORS : Davis Legal for 1st defendant Curwood & Partners for 2nd and 3rd defendants - 1 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST Associate Justice Macready Tuesday 21 February 2006 50066/05 Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Limited, Ferdinando Pisciuneri and Natale Piscuineri JUDGMENT 1 His Honour: This is a claim by a lessor to recover damages following upon the termination of the first defendant's lease of shop 10 in the Marketfair Campbelltown Shopping Centre. The second and third defendants are guarantors of the first defendant's obligations under the lease and certain variations of the lease. The claim is for a sum of $2,013,055. 2 The circumstances have some complexity so it is useful to first set out the basic chronology of the lease history in the matter. At some stage it may be necessary to address the difficulties that the shopping centre suffered which led to the downturn in the lessee's business and its eventual ceasing to trade from the premises before the expiry of its lease. It will also be necessary to address in more detail the factual circumstances surrounding the payment of rent in connection with the sub-lease. Chronology 3 The lease in question was dated 30 March 1993 and was made between Transit Management Pty Limited ("Transit") and the first defendant ("Duffy Bros") of Shop 10 (now known as shop 9, 9A, 10 and 10A) of Marketfair Campbelltown Shopping Centre. The initial term of the lease was 15 years (expiring 29 March 2008). The base rent was $245,343 per annum. In addition Duffy Bros was required to pay 19.65% of the outgoings payable by the lessor in respect of the Shopping Centre. On 25 March 1994 the second and third defendants ("guarantors") gave guarantees in favour of the lessor in respect of the obligations of Duffy Bros under the lease. 4 By 1999 trading conditions had become difficult for Duffy Bros and it was in arrears with its rent. On 2 March 1999 a deed between Transit and Duffy Bros was entered into varying the terms of the lease. The deed recorded that part of Shop 10 would be sought to be sub-leased to a third party (which part later became known as shop 10A). The benefit of the rental from any such sub-lease was to accrue to Gumland 5 Also on 2 March 1999 there was a deed between the guarantors and Transit in which the guarantors acknowledged the deed between Transit and Duffy Bros and affirmed their guarantees of the lease. 6 On 1 August 1999 Duffy Bros granted a sub-lease of shop 10A to Austie Nominees Pty Ltd trading as Liberty Liquor. The initial term of the lease was 3 years (expiring 31 July 2002). The base rent was $98,875 per annum. On 30 October 2001 Austie Nominees Pty Ltd transferred its interest as sub-lessee in the sub-lease to Woolworths Ltd. 7 In December 2001 the plaintiff ("Gumland") purchased the freehold title to the shopping centre from Transit. 8 On 24 April 2002 the solicitor for Duffy Bros wrote to Gumland expressing concern as to the decline of the shopping centre. He indicated that his client was forced to mitigate its losses by ceasing to trade with effect from 30 days from the date of the letter. The letter made it plain that Duffy Bros did not intend to breach the terms of the lease and would continue to pay rental as prescribed in the lease. It sought Gumland's cooperation in any attempt to assign the lease. 9 On 9 May 2002 Woolworths informed Duffy Bros that they did not wish to exercise the option to renew the sub-lease. On 31 May 2002 the new solicitors for Gumland wrote to Duffy Bros and suggested that if there was any ceasing to trade that would be a breach of the terms of the lease. The letter did not make mention of any breach of the terms of the 1999 deed. As will appear later the covenants as to carrying on business were different in each document. 10 In about June 2002 Duffy Bros ceased conducting its fruit business from Shop 10. 11 On 1 August 2002 after the expiry of its sub-lease Woolworths remained in occupation of Shop 10A. Whether it was governed by the holding over provisions in the sub-lease is a matter of some dispute. On 19 August 2002 Woolworths unilaterally decided to reduce the rate that it was paying under the sub-lease by 50%. There had been attempted negotiations for a further sub-lease to Woolworths. 12 About a year later, namely, on 3 July 2003 Gumland made a written demand upon Duffy Bros for unpaid rent arising from the reduction of rent paid by Woolworths Ltd. Duffy Bros contends that it had no liability to Gumland as the lessor for Woolworths' failure in this regard. 13 On 1 August 2003 Gumland served a notice of termination of the Lease on Duffy Bros. It relied upon the non-payment of the Woolworths rent and made no mention of Duffy Bros having ceased to trade. Gumland now seeks to rely on that alleged breach to further support its termination. 14 On 1 August 2003 Gumland granted a lease to VNH Dollars of part of shop 10. 15 On 4 August 2003 Gumland requested Duffy Bros to remove its chattels from the premises and make good the premises by 12 August 2003. 16 On 6 August 2003 Gumland notified Woolworths that by virtue of the termination of the Duffy Bros' lease, the sub-lease of Shop 10A was also terminated. 17 On 23 September 2003 Gumland granted a lease to Sivier of part of shop 10 (described as Shop 9). That lease came to an end in September 2004. 18 Gumland commenced proceedings against Duffy Bros and the guarantors seeking damages for breach of the lease on 5 March 2004. On 11 May 2004 Duffy Bros filed a cross claim against Woolworths for unpaid rent under the sub-lease. 19 On 5 May 2005 Transit assigned to Gumland all of its rights under the guarantees and the lease (as varied). 20 On 1 July 2005 Gumland granted a lease to Dieu Quy Le of part of shop 9, and a lease to Aranda and Abell of the remaining part of shop 9 (described as Shop 9A). The rental received from all these later leases are taken into account in Gumland's calculation of its common law damages The plaintiff's claims 21 The plaintiff makes three basic claims in the matter. They are: 1. Arrears of rent up to the date of termination on 1 August 2003. Under this head there are two areas of claim namely: (a) arrears of rent under the Woolworth's Sub-Lease of $57,415 and interest of $16,765 (b) amounts due under the acceleration provisions of Clause 10.2 (d) of the 1999 Deed in the sum of $220,434 with interest of $52,252. 2. Common law damages for loss of bargain for the period 1 August 2003 to the expiry of the lease on 29 March 2008 in the sum of $1,319,678 with interest of $234,613. 3. Costs associated with making good the premises and re-leasing the premises in the sum of $111,897. 22 In order to understand Gumland's claims it is useful to make reference to some of the terms in the 1999 deed. It recited, as I have earlier indicated, that arrears were outstanding under the lease by Duffy Bros and in general terms it recorded an agreement which encompassed the repayment of those arrears over a certain period of time and a further payment of a reduced level of rent. That reduced level of rent was calculated by reference to the gross receipts of Duffy Bros (the details of which are not critical to the determination of the matter). 23 Under clause 2 the parties ratified and affirmed the terms of the lease. In clause 3 there was a provision for Duffy Bros to continue to occupy a part of the leased premises that was identified in a plan attached to the deed. This was the part that the fruit shop had occupied. In clause 4 the parties agreed to seek a sub-lessee for the balance of the premises that had previously been occupied by a butcher. 24 Clause 4 also provided for the directors of Transit, as attorneys for Duffy Bros, to enter into any such sub-lease upon such terms and conditions as Transit saw fit. Importantly clause 4.2 provided: "It will be a term of any Sub-Lease that any sub-lessee shall pay all rent and outgoings under any such Sub-Lease directly to Transit". 25 Plainly the benefit of any rental to be received from a sub-lease for the unused part of the leased area was to accrue to the head lessor, presumably to offset the discount given to the lessee in the negotiations. 26 In the sub-lease, which was granted pursuant to this power, this clause was omitted. 27 Clauses 5, 6 and 7 of the 1999 deed provided for the payment of arrears. 28 Clause 8 provided for the payment of the reduced future rent and clause 9 provided for verification of gross receipts. 29 Clause 10 provided for payment of rent and outgoings and the terms of that clause are as follows: "Payment of rent and outgoings 10.1 For the purpose of interpreting clause 10.2 any payment due by Duffy Bros 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 Duffy Bros which subsists for a period of 7 days after Transit has given notice to Duffy Bros of such breach, 10.2 Duffy Bros shall pay to Transit the aggregate of the following sums for rent and outgoings payable by Duffy Bros 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 Sub-Lease entered into pursuant to clause 4 of this Deed, and (d) the sum by which the rent and outgoings payable by Duffy Bros under the Lease up to the date the Lease terminates exceeds the aggregate of sums received under clauses 10(a) (b) and (c). 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 Duffy Bros then Transit shall accept the sums payable under clause 10(a), (b) and (c) hereof in satisfaction of rent and outgoings payable by Duffy Bros under the Lease." 30 Duffy Bros paid all the arrears and the rent at the reduced rates as required under clauses 10.2 (a) and (b) and there is no dispute concerning those items. It is the payment of the rent and outgoings under the sub-lease that has led to the dispute between the parties following upon Woolworths' payment of the reduced rental. 31 It is to be noted that by the 1999 deed Transit obtained some benefits as well as Duffy Bros obtaining concessions. Clause 14 provided that time was of the essence for all payments by Duffy Bros. Matters raised by the defendants 32 Duffy Bros raised the following issues on liability: 1. Whether Woolworths' occupation of shop 10A after 31 July 2002 was was pursuant to a fresh tenancy entered into by it direct with Gumland and not pursuant to the holding over provisions in the sub-lease? 2. Alternatively, whether the failure to pay the whole of the rent under the sub-lease from 1 Aug 2002 was a breach of clause 3 of the lease as amended by clause 10.2 and the other clauses of the 1999 deed. Sub issues include - · whether the sub-lease was "pursuant" to the deed · whether the rent was payable "under" the sub-lease and · whether the obligation was limited to the monies actually paid by the sub-lessee. 3. Whether the failure of Duffy Bros to carry on any business on the premises from June 2002 was a breach of clause 3 of the deed. 4. Whether Gumland can now rely upon any breach of the covenant to carry on business to support its notice of termination which did not refer to that breach. 5. Whether one or both of the breaches had the effect of making the balance of rental and outgoings payable under the lease up to the date of breach by virtue of clause 10.1 of the deed. 6. Whether, if the answer to 5 is yes, the Gumland's claim involves enforcing a penalty. 7. Whether any of the breaches gave Gumland a right to terminate the lease? Sub-issues include: · were there breaches of essential terms? · was there repudiation? · was there a failure to act in good faith? · was there any unconscionable conduct at common law or breach of s 51AA of the Trade Practices Act? · was the assignment to Gumland effective? 8. Was there an election to affirm the lease which had the effect of Gumland losing the right to terminate by accepting rent for shops 10 and 10A in late July 2003? 9. Can there be a claim for damages for the loss of bargain? 33 In addition to the matters raised by Duffy Bros, the second and third defendants as guarantors raised the following issues on liability: 1. Whether the failure to include in the sub-lease a term requiring the sub-lessee to pay rent directly to Transit operates to vary the obligations and release the guarantors, and 2. The construction of clause 4 of the guarantee relating to the period for which the guarantees operated. 34 I turn now to the issues raised by the defendants. Whether Woolworths' occupation of shop 10A after 31 July 2002 was pursuant to a fresh tenancy entered into by it directly with Gumland and not pursuant to the holding over provisions in the sub-lease 35 Duffy Bros submitted that there was surrender by operation of law of its Lease in respect of the area of the sub-lease. The sub-lease expired on 1 August 2002 and Woolworths remained in occupation of shop 10A. As I have mentioned on 19 August 2002 Woolworths unilaterally decided to reduce the rate that it was paying under its previous sub-lease by 50%. It was submitted that Woolworths became a tenant at will of Gumland under s 127 of the Conveyancing Act 1919. 36 The principles relating to a surrender by operation of law are discussed by the Court of Appeal in Konica Business Machines Australia Pty Limited v Tizine Pty Limited (1992) 26 NSWLR 687. The principles are (at 697) that in order for a surrender by operation of law to operate it is necessary for each of the following to exist: (a) The tenant abandons the premises; (b) The landlord acts in such a manner as unequivocally indicates that it no longer regards the Lease as in existence. If the landlord's actions are consistent with the Lease remaining in existence, or are equivocal, then it would not be correct to infer that a surrender had occurred. 37 Gumland argued that neither of these conditions was satisfied in the present case. 38 Accordingly, the relevant facts require some investigation. A chronology, submitted by Gumland of what were the relevant circumstances included the following matters which are not controversial: (a) on 9 May 2002 Woolworths wrote to Duffy stating that Woolworths would not be exercising its option to renew the Sub-Lease, that Gumland had advised that they are not in a position to consider a direct Lease with Woolworths, and offering to Duffy a new subLease on specified terms (Exhibit 1 p 66); (b) on 27 May 2002 Duffy responded to Woolworths stating that they were examining their legal obligations and could not respond to Woolworths' offer (Exhibit 1 p 67A); (c) on 19 June 2002 Woolworths wrote to Gumland requesting a direct Lease with Gumland (Exhibit 1 p 73); (d) on 25 June 2002 Gumland wrote to Woolworths, stating that in order for Gumland to grant a fresh Lease to Woolworths the existing head Lease to Duffy Bros needed to be surrendered (Exhibit 1 p 76A); (e) on 27 June 2002, Woolworths wrote to Gumland stating that Woolworths was not prepared to accept Gumland's non-committed response and would arrange for a new rental of $50,000.00 p.a. to commence from the date of the next payment (Exhibit 1 p 77); (f) on 2 July 2002, Gumland's solicitors wrote to Woolworths stating that Woolworths' offer to Lease the premises was rejected, and stating that until such time as Gumland's head Lease with Duffy is concluded, Gumland is not in a position to offer Woolworths a separate Lease of the premises (Exhibit 1 p 80); (g) on 11 July 2002, Woolworths wrote to Duffy, advising Duffy that Woolworths would hold over on a month-to-month basis whilst it negotiated a direct Lease with Gumland, but that Gumland had advised that it would not consider any offers from Woolworths until the head Lease between Gumland and Duffy is concluded; (g) From August 2002, Gumland issued invoices for Shop 10A (addressed to Duffy) for the full amount of rent payable under the holding over provisions of the Sub-Lease; (h) that Duffy has filed a cross claim in these proceedings against Woolworths claiming payment of the shortfall in rent payable under the holding over provisions of the subLease. 39 Duffy Bros emphasised the fact that Gumland continued to accept rent from Woolworths at the reduced rate. These payments were appropriated to the quantum of Duffy Bros current rent. Gumland had issued invoices to Duffy Bros for shop 10A rental from April 2002. According to Gumland this was done for GST purposes as prior to April it had invoiced the tenant directly. 40 Clause 4 of the 1999 deed specifically contemplated that rent should be paid directly by the sub-lessee to the head lessor. In these circumstances the fact that Woolworths paid rent directly to Gumland from April 2002 is not inconsistent with the terms of the lease to Duffy Bros as amended by the 1999 deed. In my view the circumstances suggest that Gumland acted in a way consistent with the existence of that part of its Lease to Duffy Bros as is comprised in the Sub-Lease for shop 10A. 41 It is hard to see in the circumstances that there has been any abandonment of the premises by Duffy Bros. In these circumstances I do not think that there has been a surrender by operation of law. Alternatively, whether the failure to pay the whole of the rent under the sub-lease from 1 August 2002 was a breach of clause 3 of the lease as amended by clause 10.2 of the deed 42 It will be recalled that clause 10.2 provided: "10.2 Duffy Bros shall pay to Transit the aggregate of the following sums for rent and outgoings payable by Duffy Bros 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 sub-lease entered into pursuant to clause 4 of this Deed, and (d) …….." 43 The three points raised by Duffy Bros in connection with this issue were (a) whether the sub-lease was "pursuant" to the deed, (b) whether the rent was payable "under" the sub-lease and (c) whether the obligation was limited to the monies actually paid by the sub-lessee. 44 Duffy Bros argued that because the Woolworths' sub-lease did not contain a term that all rent under the sub-lease shall be paid directly to the lessor (being a term contemplated by clause 4.2 of the deed), the sub-lease was not a sub-lease entered into pursuant to clause 4 of the deed. That this did not happen - the relevant clause being omitted - according to Duffy's submissions means the sub-lease was not entered into "pursuant" to the deed (that is, in accordance with the terms of the deed) and therefore fell outside the terms of clause 10.2 (c) of the deed. The submission went on to point out that thus there was no amount payable by Duffy Bros under the clause. 45 It was submitted by Gumland that the words "pursuant to" were held in Habel v Tiller (1929) SASR 170 by the full court to be capable of a wide meaning, and, at 176, included acts done "in intended or substituted performance", as well as acts done "strictly in performance" of the agreement. 46 It was submitted by the plaintiff that the Woolworths' sub-lease was plainly a sub-lease entered into in intended or substituted performance of clause 4 of the 1999 deed because: (a) the Sub-Lease was executed pursuant to the power of attorney provided for in Clause 4 of the Deed; (b) the Sub-Lease related to the very same area (which became known as Shop 10A) that was contemplated by Clause 4 of the Deed would be the subject of a Sub-Lease. 47 Gumland argued that the terms in the sub-lease did not affect the rights or obligations of Duffy Bros. The absence of the term that all rent under the sub-lease shall be paid directly to the lessor (being a term contemplated by clause 4.2 of the deed) would not have altered the nature of the sub-lease as a sub-lease between Duffy and the sub-lessee. It seems to me that the evident purpose of the term was to minimise the risk to the lessor that the rent referable to Shop 10A (the benefit of which was under the arrangement to accrue to the lessor) might be paid by the sub-lessee to Duffy Bros and not paid by Duffy Bros to the head-lessor. Such a term would have had the effect of at least a direction to pay, for the benefit of the head lessor. It may or may not have given the head-lessor an entitlement to sue the sub-lessee directly for rent payable under the sub-ease. This would no doubt depend upon the terms of the document. 48 Duffy Bros answer to the construction advanced by Gumland, by reference to a number of cases, was that something done under a power that is subject to a condition, without complying with the relevant condition, is not done pursuant to the power. 49 In Garbin v Wild [1965] WAR 72, a landowner who had a licence to draw water subject to the condition that he install a meter, but drew water without doing so, did not draw it "pursuant to" the condition (72 at 76). The Full Court was not referred to Habel v Tiller and referred to the Oxford definition of "pursuant to" as "in accordance with", "consequent and conformable to". 50 In Alexander Cowan & Sons Ltd v Lockyer (1904) 1 CLR 460, money was paid to secure the re-lease of certain goods under a draft tariff, yet when the Customs Tariff 1902 was passed by the Federal Parliament, it had no application to that particular type of goods. The duty thus demanded was not legally payable and the plaintiff was entitled to recover the money deposited. Section 6 of the Act in question had placed restrictions on "duties of customs collected pursuant to any tariff". Therefore the money was repayable because it had not been collected pursuant to a tariff (Griffith CJ at 464-467). The court seems to have adopted this construction to avoid interfering with vested rights to a return of the moneys paid under protest which were not the subject of a tariff. The court relied upon the principle that where there is doubt as to the meaning of a word in an Act of Parliament and that word is capable of being interpreted as either interfering with an existing right or not, the word will not be construed by the courts as having a retrospective effect so as to remove an existing right. In the present case there is no question of such an effect. 51 Duffy Bros submitted that the word "under" had the same effect as "pursuant to" and I think that in this case this is correct. Reference was also made to Lolly Pops (Harbourside) Pty Ltd v Werncog Pty Ltd; (1998) NSW ConvR 55–861 at 56,748-56,750. The case concerned the Retail Leases Act 1994 and whether under s6(1)(d) a new lease was granted under an agreement or option entered into prior to commencement of the Act. It was held that if its terms were substantially different it would not be pursuant to the earlier lease. After a careful review of the authorities Young J decided that the variations, which included a second four-year option and a change in the percentage increases of rent, were not such as would take it outside the section. 52 In this case 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. The sub-lease to be valid depended upon the deed for authority for its execution. Clause 4.1, "sub letting of an area", of the 1999 deed read: "4.1 Duffy Bros 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." 53 Under that clause the directors of the head lessor could determine the term of the lease to be granted and any other conditions. The lease was limited to being in respect of a particular defined area and the lease, which was granted, was in fact limited to that area. The other condition in clause 4 was of course that in clause 4.2, and there was no compliance with that clause: "4.2 It will be a term of any Sub-Lease that any Sub-lessee shall pay all rent and outgoings under any such Sub-Lease directly to Transit." 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. 55 I now turn to the next question which is whether the obligation on Duffy Bros to pay was limited to the monies actually paid by the sub-lessee. 56 In Chan v Cresdon (1989) 168 CLR 242 at 249, the High Court held that the phrase "obligation under this lease", appearing in the guarantee contract under consideration in that case, meant an obligation "created by, in accordance with, pursuant to or under authority of" the lease. 57 Applying that meaning to the present case, the words "under such sub-lease" where appearing in clause 10.2(c) of the deed means rent "created by, in accordance with, pursuant to or under authority of" such sub-lease. Plainly the words extend to rent that is payable but not paid. Duffy Bros and the guarantors made submissions for limiting the words "rent under such sub-lease" so as to exclude rent payable but not paid under such sub-lease. This was based upon the true construction of the clause or, alternatively, the surrounding circumstances which needed to be considered. 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 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. 60 Reference was made to Codelfa Construction Pty Ltd v State Rail Authority (1982) 149 CLR 337 61 In this case Mason J said at page 352: "The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be received as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed. " 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. 63 In these circumstances in seems to me that there has been a breach by Duffy Bros of the deed and the lease by failing to pay the unpaid amount in respect of the Woolworths' sub-lease. Whether the failure of Duffy Bros to carry on any business on the premises from June 2002 was a breach of clause 3 of the deed? 64 There is no complaint made by Gumland about breach of the user provisions of the lease. It is only a breach of clause 3 of the 1999 deed which is in issue. That clause is in the following terms: "From the date hereof Duffy Bros 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. " 65 Given that Gumland ceased trading in the relevant part of the leased area it is clear that there has been a breach of this clause in the deed. The fact that no trading hours were prescribed is not to the point. The obligation is to carry on business "in the said area" and that is a mandatory obligation the ambit of which would obviously include trading from the premises during ordinary business hours. Whether one or both of the breaches had the effect of making the balance of rental and outgoings payable under the lease up to the date of breach by virtue of clause 10.1 of the deed? 66 Gumland submitted that both breaches had the effect of making the balance of the rent and outgoings payable under the lease up to the date of the breach payable under clause 10 of the deed. This balance is what is referred to in clause 10.2 (d) of the deed. 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. 71 Gumland also submitted that the second breach, namely, the ceasing to trade in breach of the 1990 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. 72 As I have found that one of the triggers to accelerate has occurred, namely, the failure to pay the balance rental, the amount under clause 10.2 (d) is payable Can Gumland now rely upon any breach of the covenant to carry on business to support its notice of termination which did not refer to that breach? 73 The notice of termination dated 1 August 2003 only relied upon the failure to pay the arrears of the Woolworths' rent. Although the question does not now arise it requires a reference to those cases which normally allow a lessor to rely on another breach to support a notice of termination even though it has not referred to it in the notice. 74 The matter seems to be settled by Shepherd v Felt & Textiles Australia Ltd (1931) 45 CLR 359. As expressed by Rich J at 371; "The question is whether the defendant was entitled to do what it did, not whether the reason why it exercised the rights it in fact had was a good or a bad one." 75 See also FPM Constructions v Council of the City of Blue Mountains [2005] NSWCA 340, Basten JA at 120, for a more recent restatement of the principles in Shepherd v Felt where he said: "A declaration which is, in fact, untrue will justify the withholding of a payment, but not the termination of a contract. This approach is consistent with the more generally applicable principle that it is the objective circumstances of a contract which may justify conduct which would otherwise constitute a breach, whether the party was aware of the relevant facts at the time of the conduct or not: see Shepherd v Felt and Textiles of Australia Ltd (1931) 45 CLR 359 at 377 (Dixon J)." 76 Accordingly, the failure to specify the other ground in the notice of termination would not prevent it from being relied upon if it were available to support the termination. Does Gumland's claim involve enforcing a penalty? 77 Gumland submitted that Duffy Bros' claim by virtue of clause 10.2(d) of the 1999 deed and the consequent reversion to the rent originally reserved in the lease would constitute a penalty. Reference was made to O'Dea & Ors v Allstates Leasing System (WA) Proprietary Limited and Others (1983) 152 CLR 359; United Dominions Corp Pty Ltd v Austin [1984] 2 NSWLR 612, and Pascoe-Webb v Nusuna Pty Ltd (1985) NSW Conv R 55-259. 78 The submissions were in these terms: "O'Dea involved a clause in a chattel Lease accelerating the rent in the event of the hirer committing a breach. It has been applied to Leases of land: Pascoe-Webb …; Ocelota Pty Ltd v Water Administration Ministerial Corp (2000) 9 BPR 17,527; [2000] NSWSC 370 … The clause in O'Dea was struck down on two grounds:" according to "Deane and Brennan Jj [sic] it failed because rent is the consideration for possession. If, upon the tenant committing a breach of the Lease which would attract the clause, the landlord elects to terminate the Lease, from the moment it recovers possession, whatever else the moneys [sic] may be they cannot be rent. If the Lease does provide for the recovery of money that would otherwise be due for a period after termination then, since it has a different character from that which it had before, it is an amount that becomes due as a result of the tenant's breach. On the other approach the payment was to be examined to see whether it was a genuine attempt to provide for the damage that would be caused by a breach. If the same result flows from breaches of different degrees of seriousness it is, prima facie , a penalty: Lombard North Central plc v Butterworth [1987] 1 QB 527; Citicorp Australia v Hendry (1985) 4 NSWLR 1. Clause 10.2 of the 1999 Deed and Clause 7 of the Lease would appear to have this effect. The ploy used in Clause 10, modelled on the provision common in mortgages whereby a discount is given for prompt payment rather than an increased rate for late payment, does not work: Border Printing Services Pty Ltd v Australian Guarantee Corp Ltd (Fed C of A, Pincus J, 19 December 1988, unreported). If Clause 10 entitles the Plaintiff to the amount it now claims in this case it must fail for four reasons: it does not provide for a cash flow discount: IAC (Leasing) Ltd v Humphrey (1972) 126 CLR 131 at 141-5 per Walsh J; AMEV -UDC Finance Ltd v Austin (1986) 162 CLR 170 at 181 per Mason and Wilson JJ; Esanda Finance Corp Ltd v Plessnig (1989) 166 CLR 131 : It calculates the damages on the basis of the rent reserved in the Lease and not the moneys [sic] provided in the 1999 Deed: It provides the same amount for a number of different breaches: It shifts the burden to pay the rent of Shop 10A from the party by whom it was payable under the 1999 Deed to the Defendant and reLeases the Plaintiff from its obligation under that Deed to find replacement tenants after 30 June 2002: The Plaintiff's damage was caused by its election to terminate and not by the Defendant's breach … see above." 79 Gumland submitted that clause 10.2(d) is not an agreed damages clause. It was said to be a clause relating to a pre-existing debt arising under the pre-existing lease which debt was conditionally postponed and released. The clause does not accelerate payments due in the future. It makes payment that would otherwise have been due in the past, payable if the conditions relating to the postponement and release of those debts are not satisfied. Such a clause it was submitted is not a penalty. Reference was made to O'Dea at 371-3 where the court considered the case of agreements for the payment of a lump sum for a whole period rather than rent at a yearly rate. 80 It is useful to note what was said by Gibbs CJ in O'Dea (at 366) when discussing the principles involved. He 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 [18] ; Wallingford v. Mutual Society [19] 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 [20] at p. 1322]) 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 [21] at pp. 15-16, 27-28, 30; Ex parte Burden; in re Neil [22] . 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." 81 See also Zenith Engineering Pty Ltd v Queensland Crane & Machinery Pty Ltd [2001] 2 QDR 114 [2000] QCA 221. 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). Did any of the breaches give Gumland a right to terminate the lease? 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) 149 CLR 620 at 625-7; Progressive Mailing House Pty Ltd v Tabali Pty Ltd (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. 87 The second breach, relating to ceasing to trade, was a breach of clause 3 of the 1999 deed. In terms the deed and 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) 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) 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. 90 The next question that arises is whether the conduct of Duffy Bros in refusing to pay the rent shortfall and ceasing to trade from the shop for some 12 months amounted to a repudiation of the lease by Duffy Bros - in the sense of evincing an intention to fulfil the contract only in a manner substantially inconsistent with its obligations and not in any other way: or in committing a fundamental breach of the lease, in the sense of a breach going so much to the root of the contract that it makes further commercial performance of the contract impossible (see Shevill's case at 625-6). 91 As to repudiation, in GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd (2003) 128 FCR 1, Finn J stated the applicable principles as follows (at 202-3): (i) A party will have repudiated a contract if, by words or conduct, it evinces an intention no longer to be bound by it or if that party shows it intends to fulfil the contract only in a manner substantially inconsistent with its obligations and not in any other way: Shevill v Builders Licensing Board (1982) 149 CLR 620 at 625-6; Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623. (ii) The party's conduct is to be judged objectively by reference to the effect it would be reasonably calculated to have upon a reasonable person: Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623 at 658; Satellite Estate Pty Ltd v Jaquet (1968) 71 SR (NSW) 126 at 150 92 In Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623 at 658, Deane & Dawson JJ said: "An issue of repudiation turns upon objective acts and omissions and not upon uncommunicated intention. The question is what effect the lessor's conduct would be reasonably calculated to have upon a reasonable person. It suffices that, viewed objectively, the conduct of the relevant party has been such as to convey to a reasonable person, in the situation of the other party, repudiation or disavowal either of the contract as a whole or of a fundamental obligation under it." 93 It was submitted that Duffy Bros' conduct in ceasing to trade and refusal to pay any rent other than the rent in 10.2(a) and (b) meets these descriptions. After the deed, Duffy Bros obligations included, as I have found, the obligation to pay rent under clause 10.2(c) as well as the obligation to occupy and trade from Shop 10. As at 1 August 2003 Duffy Bros was not occupying or trading from Shop 10 and had refused to pay any rent under clause 10.2(c). That position had been ongoing for over 12 months. It was submitted that Duffy Bros had thereby evinced an intention to fulfil the contract only in a manner substantially inconsistent with its obligations under the lease and not in any other way. 94 Duffy Bros referred to the fact that repudiation is a serious matter not lightly to be found or inferred: Shevill v Builders' Licensing Board (1982) 149 CLR 620 per Wilson J at 633; Apriaden Pty Ltd v Seacrest Pty Ltd [2005] VSCA 139. This is particularly so in the case of a lease: Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17 at 32-33. There must be an actual renunciation of the party's liabilities, conduct by it which makes further performance impossible or a declaration that it will only carry out its obligations if it feels like it: Shevill v Builders' Licensing Board (1982) 149 CLR 620 at 625-6, 633. Whether the conduct in question amounts to repudiation involves a close consideration of all the surrounding circumstances: Hawkhouse Pty Ltd v La Cava Holdings Pty Ltd (FC(WA), 17 December 1991, BC9100857. 95 Duffy Bros also emphasised that, because of the serious consequences of repudiation, non payment of rent does not on its own and without more, constitute repudiation: per Wilson J in Shevill at 633 and 634. See also Progressive Mailing House Pty Ltd at 32-33. 96 Duffy Bros argued, that in the circumstances which existed here, namely, that Duffy Bros was paying the rent for shop 10 and all that was not being paid was the proportion which by the 1999 deed Gumland was supposed to be collecting for shop 10A that within the Shevill principle, there was no repudiation. In this case the clause 10.2(c) amount not paid was approximately 1/6 of the total rent of shops 10 and 10A. 46 Duffy Bros failure to trade for twelve months was submitted to be temporary and dictated by circumstances beyond the control of Duffy Bros but within that of Gumland. Since there would be, until trade improved, no prospect of the cut in point for the turnover rent being reached it did not cost Gumland anything. However, the landlord would suffer the consequences of having a major shop closed in the shopping complex. There is no doubt on the evidence before me that Duffy Bros ceased to carry on business because of the difficult trading conditions and as a means of mitigating the losses that they were suffering. However, the fact that they did this based upon a misunderstanding of the terms of the lease and the deed is not relevant to the consideration of whether there was a repudiation. 97 Reference was made to the fact that Duffy Bros had never been provided with a copy of the 1999 deed after it had been executed. Gumland's letters of May and June did not refer to the deed but only to the user covenant in the lease and placed a wrong interpretation on it. As in DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 at 431-433, the failure to trade being a breach of the deed was not drawn to the Duffy Bros' attention prior to the re-entry. These matters merely illustrate that we are not dealing with a case where a party maintaining an erroneous view of the contract persists with that heresy after an authoritative exposition of the correct interpretation. In such a case it is far easier to infer repudiation. 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. 100 As the only entitlement to terminate arises from failure to pay rent no question of a notice under s 129 of the Conveyancing Act 1919 is involved. Was there an election to affirm the lease which had the effect of Gumland losing the right to terminate by accepting rent for shops 10, and 10A in late July 2003? 101 Duffy Bros contends that Gumland waived the breaches of the lease by Duffy Bros in two ways. First by accepting rent from Duffy Bros on 30 and 31 July 2003 such that Gumland was not entitled to terminate the lease on 1 August 2003 and, second, by accepting rent with knowledge of the breach of clause 3 of the Deed for months after the breach first occurred. 102 The principles which apply here were usefully summarised by Campbell J in Spathis v Hanave Investment Co Pty Ltd [2002] NSWSC 304 at 118 – 120: "It is well enough established that, if a landlord is entitled to terminate a Lease for breach of covenant, and he or she knows of that breach but subsequently accepts rent, that is a waiver of the landlord's rights to terminate the Lease on the basis of that breach. The principles are succinctly summarised by Windeyer J in Owendale Pty Ltd v Anthony (1967) 117 CLR 539, at 556. A waiver in this sense is more properly understood as an election. The essence of the doctrine, in cases between landlord and tenant, is that where a Lease contains a provision for forfeiture and a right of re-entry upon breach of a covenant by the lessee, then, upon a breach occurring, the lessor can either take advantage of his right of forfeiture and re-entry or waive this and treat the Lease as still subsisting. If, with knowledge of a breach, giving him a right of re-entry, he does an act inconsistent with his avoiding the Lease, he is deemed to have elected not to avoid it. Anything which a landlord does or says which is an unequivocal recognition of the continued existence of the Lease when he is aware of facts which would have given him a right of re-entry will amount to a waiver of that right. One act which, by the common law, is always regarded as unequivocal, and therefore necessarily a waiver of a right of re-entry on account of a breach of covenant by the lessee, is the lessor's acceptance, with knowledge of the fact of the breach, of rent accrued due after the breach. Apart from any special term in the Lease… or any statutory modification of the common law, acceptance of rent due in respect of a current period is an obvious recognition of a tenancy then subsisting. (See also Central Estates (Belgravia) Ltd v Woolgar (No.2) [1972] 1 WLR 1048). Accepting rent can be a waiver of the right to terminate even if the landlord purports to accept the rent, "without prejudice" – Segal Securities Ltd v Thoseby [1963] 1 QB 887. The reason why this is so, is explained in the last mentioned case by Sachs J at 899. 'As both demand and acceptance respectively are in law merely different forms of a notification by a landlord of election not to avoid or forfeit the Lease, to my mind no distinction can nowadays be drawn between them in relation to a question whether the label "Without Prejudice" affects their quality as an election. There is no reason of principle why a right of forfeiture arising from a failure to pay rent, cannot be waived in exactly the same way as a right of forfeiture arising from a breach of any other covenant in the Lease. In London and County (A&D) Ltd v Wilfred Sportsman Ltd [1971] 1 Ch 764, at 786 Russell LJ (with whom Lord Donovan and Megaw LJ agreed) said: 'The other argument put forward was that there can never be waiver of forfeiture for non-payment of rent by recognition of the continued existence of the Lease because, as has often been said, a right of re-entry for non-payment of rent is a mere security for the payment. I am not aware of any authority for this proposition, and I see no justification in principle for making this distinction between a default in an obligation to pay rent and any other obligation. Of course, rent may be demanded after the forfeiture days are passed, and, indeed, part payment accepted on account without waiving the forfeiture; this does not recognise the continued existence of the Lease beyond the date when that rent was payable. I refer in this connection also to the passage in Shepherd v Berger [1892] 1 QB 597, 599, which appears to me inconsistent with the proposition advanced.' That a right to forfeit for non payment of rent can be waived in precisely the same way as a right to forfeit for breach of any other covenant was accepted in Endeavour Lodge Motel Ltd v Langford [1998] 2 NZLR 121." 103 On the first breach a question arises as to whether the rent which was received accrued due after the event giving rise to the forfeiture. 104 Gumland submitted that under clause 3.2 of the lease rent was due by monthly instalments in advance on the 30th day of each month and the right of forfeiture arose if the rent was not paid within 7 days of that day (see also clause 12.1). That is, the right of forfeiture arose 7 days after the date on which the rent was due. Accordingly, the rent for July 2003 (or more accurately, the month commencing 30 June 2003) was payable on 30 June 2003 and a right of forfeiture arose if that rent was not paid by 7 July 2003. Gumland's notice of termination was served on 1 August 2003. Applying the principle set out above, acceptance of rent during the period 7 July 2003 to 1 August 2003 could only amount to a waiver of the right of forfeiture if the rent accepted accrued due after 7 July 2003. It is not a waiver of a right of forfeiture to accept rent that fell due prior to the right of forfeiture arising. The only rent that accrued due after 7 July 2003 was the monthly rent accruing on 30 July 2003 in respect of the month of August 2003 (or more accurately the month commencing 30 July 2003). It was submitted that there was no acceptance by the lessor of that rent prior to 1 August 2003. 105 The evidence discloses that rent was electronically transferred into Gumland's bank account in an amount of $4,166 received on 30 July 2003 and the amount of $14,023 received on 31 July 2003. These days were respectively a Wednesday and a Thursday. There were substantial arrears of rent which accrued due prior to 31 July 2003 against which the landlord was entitled to appropriate the payments received on 30 and 31 July 2003. 106 There is no direct evidence as to whether those payments were appropriated to arrears and the documentary evidence is equivocal on the point. 107 If the lessor did not appropriate the payments the mere payment by electronic transfer or direct deposit of rent into Gumland's bank account by Duffy Bros or Woolworths, it was submitted, did not amount to acceptance of rent by Gumland. In Wong v St Martins Properties (Aust) Pty Ltd (1990) 5 BPR 11334 (at 11337) it was held that the mere receipt of rent cheques - without them being banked - did not amount to acceptance of rent. I would accept that knowledge of the direct deposits by some responsible person is necessary before there can be an acceptance of rent. 108 The evidence of Ms Aleta Hui-Yuk-Yiu Leung (Ex E) outlined the process by which funds were electronically transferred or directly credited into Gumland's bank account and became known to Gumland. Ms Leung clearly stated in her evidence that she was responsible for banking cheques received by lessees of properties owned by Gumland. She appears to be the person who would hold the relevant position for the purpose of determining when Gumland became aware of the payment and took some step in relation to the payment. 109 Ms Leung stated that her first possible knowledge of the payments was the day after the funds were transferred or deposited because such transfers did not appear on the bank statement until the next day. She would receive copies of Gumland's bank statements on a weekly basis in the mail and sometimes printed off the Internet by Gumland's accountant. Within a day or two of receiving the bank statements Ms Leung would check the amounts recorded as credited into the account. The earliest possible time that electronic transfers or direct deposits into Gumland's account would become known to Gumland is the day after the transfer was effected. 110 Ms Leung informed the Court that she would place a received stamp on the bottom of the invoices to which the incoming cheques referred, and that she would then record the date in handwriting underneath the stamp – the date recorded being: "the date upon which the bank statements of Gumland recorded monies as being received into Gumland's bank account." 111 She stated she followed this process in relation to all invoices issued by Gumland for Shops 10 and 10A during the period December 2001 (Gumland's purchase of the property) until the termination of the Duffy Lease in August 2003. She said: "Apart from some cheques from Duffy for shop 10 rent that I received in the first few months after Gumland purchased the Property, Gumland did not receive or bank any cheques during that period relating to shop 10 and shop 10A … I understood that prior to April 2002 Woolworths were refusing to pay rent for shop 10 A until it received a direction to pay from Duffy, and that Duffy gave that direction to Woolworths in about April 2002. From April 2002, Gumland issued invoices for both shop 10 and shop 10A to Duffy." 112 In respect of the tax invoice from Gumland to Duffy Bros for the rent for the period 1 July 2003 to 31 July 2003 Ms Leung said: "I did not receive or bank any cheque from any person relating to the monies referred to in the Invoice. The payment referred to in the Invoice was paid into the Gumland bank account by another person, I assume Duffy." 113 Although Ms Leung did not receive a cheque she did check amounts received into Gumland's bank account via a system of manual stamping and dating. However, when asked if she recalled stamping and dating the Gumland bank statements regarding Duffy Bros recorded deposits of 30 and 31 July 2003 into Gumland's bank accounts, Ms Leung said: "I no longer recall the day upon which I recorded the handwritten date on the Invoice. The earliest possible time that I did that was the day after the handwritten date. 114 Therefore, in determining whether Gumland elected to affirm the lease and thus lost the right to terminate by accepting rent for Shops 10 and 10A on 30 and 31 July by acceptance of rent during the period 7 July 2003 to 1 August 2003 there could only be a waiver of the right of forfeiture if the rent accepted accrued due after 7 July 2003. Clearly the rent of $14,023 for shop 10 accrued due after 7 July 2003, namely, on 31 July 2003. In respect of the $4,166.67 for shop 10A received on 30 July 2003 at least that amount accrued due after 7 July 2003, namely, on 31 July 2003. 115 Having regard to the evidence, the earliest the payments could have been noticed by Ms Leung was 31 July and 1 August 2003. Given the different manner and times that she did receive the bank statements, namely, that some came in the mail one or two days later, I would not infer that she received the statements and became aware of the payments on 31 July and 1 August 2003. 116 Cross examination of Ms Leung did not demonstrate that that she became aware of the payments made on 30 or 31 July at any stage prior to service of the notice of termination on 1 August 2003. 117 In these circumstances I am not satisfied that she became aware of the payments before service of the notice of termination. 118 The question of whether acceptance of rent amounts to a waiver of a right of forfeiture is a question of fact depending on the circumstances of the particular case. The relevant question is whether the conduct of the landlord amounts to unequivocal conduct consistent only with an election to affirm the contract, and inconsistent with an election to terminate: United Australia Ltd v Barclays Bank [1941] AC 1 at 30. 119 In the present case the following facts were referred to as being important to the overall consideration of the matter: · the substantial arrears that had accrued and Gumland's written demand of 3 July 2003 relating to those arrears [Ex A p 265], · the fact that all relevant rent was paid by Duffy Bros and Woolworths directly paying the amounts into Gumland's bank account (being acts in which Gumland played no part), and · that there is no suggestion that the steps taken by Ms Leung to check Gumland's bank account were ever communicated to Duffy Bros. 120 These facts together with the facts in relation to the receipt of the amounts paid on 30 and 31 July demonstrate that there has not been unequivocal conduct by Gumland before service of the notice on 1 August 2003 and after 7 July 2003 that is consistent only with an election to affirm the contract and inconsistent with an election to terminate. The conduct of Gumland during this period was consistent with a lessor taking steps to recover the rental arrears that had accrued before 7 July 2003. 121 There was also reference to the fact that on 18 August 2003 Gumland issued a further invoice to Duffy Bros in respect of shop 10A for the period 1 September 2003 to 30 September 2003 and that it accepted the rent paid on 29 August 2003. By that time the lease had been determined and there could thus be no further waiver of forfeiture. All there could be was some waiver of the termination. The facts at the time which included the re-letting of the premises make it clear that there was no waiver of the termination. 122 It was submitted that the obligation of Duffy Bros in clause 3 of the deed to "continue to occupy" shop 10 and "carry on the business permitted by the Lease" in shop 10 was a continuing obligation. Reference was made to Larking v Great Western (Nepean) Gravel Ltd (1940) 64 CLR 221. There Dixon J (as he then was) said at 236 : "Upon these facts, the first question for consideration is whether the covenants contained in clauses 12 and 15 operated to impose a continuing duty upon the respondent company so that a failure to fence involved new breaches for every day of default, thus including the period after 31st October 1939. If a covenantor undertakes that he will do a definite act and omits to do it within the time allowed for the purpose, he has broken his covenant finally and his continued failure to do the act is nothing but a failure to remedy his past breach and not the commission of any further breach of his covenant. His duty is not considered as persisting and, so to speak, being for ever renewed until he actually does that which he promised. On the other hand, if his covenant is to maintain a state or condition of affairs, as, for instance, maintaining a building in repair, keeping the insurance of a life on foot, or affording a particular kind of lateral or vertical support to a tenement, then a further breach arises in every successive moment of time during which the state or condition is not as promised, during which, to pursue the examples, the building is out of repair, the life uninsured, or the particular support unprovided. The distinction may be difficult of application in a given case, but it must be regarded as one depending upon the meaning of the covenant. It is well illustrated by the construction given to the ordinary covenant that premises will be insured and kept insured against fire. Such a covenant is interpreted as imposing a continuing obligation to see that the premises are insured, so that the covenant cannot be broken once for all, but, on the contrary, failure to insure involves a continuing breach until the omission is made good. But in Doe d. Flower v. Peck [29] , speaking of such a covenant in a Lease that had been assigned with the covenant unperformed, Parke B. said:--"If this could be construed to be a covenant by the lessee to effect one policy of assurance immediately, and afterwards that he and his assigns should keep that particular policy on foot by continuing to pay the annual premiums on that policy, the assignee would not have been guilty of any breach of covenant, if the lessee had never insured, for the policy never could have existed, which the assignee was to continue; and the distress for rent would have been a waiver of the breach by the original lessee. In such a case the lessor of the plaintiff could not have recovered. But if the covenant mean that the lessee and his assigns shall always keep the premises insured by some policy or another, then it is broken if they are uninsured at any one time; there is a continuing breach for any portion of time that they remain uninsured; and we are of opinion that this is the true construction of the covenant: it is that which would have been put upon it if an action of covenant had been brought; and it makes no difference that the consequence of the breach of it is a forfeiture" 123 In my view the breach of clause 3 of the 1999 deed is one which continued at each moment of the term of the lease. Accordingly, if a breach of that obligation gave rise to a right to forfeit the lease, then no acceptance of rent could waive the new rights to terminate that continued to arise thereafter. 124 In these circumstances there is no waiver of the forfeiture. Can there be a claim for damages for the loss of bargain? 125 Gumland contends that at the date of termination it was vested with the right to loss of bargain damages. It referred to Nangus Pty Ltd v Charles Donovan Pty Ltd [1989] VR 184 at 189 which referred to the well known statements in Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17 at 31. There Mason J said that repudiation or fundamental breach entitles the innocent party to rescind the contract and sue for damages for loss of the bargain. 126 In Shevill v Builders Licensing Board (1982) 149 CLR 620 Gibbs CJ at 626 referred to situations where there has been a breach of a fundamental or essential term of the contract in these terms: "For present purposes, it is immaterial whether repudiation and fundamental breach are treated as separate categories, for in either case the innocent party can rescind the contract and recover damages to compensate him for the failure to perform the contractual obligations. Counsel for the respondent, in their alternative argument, sought to bring the case within this principle. A third situation in which a right to rescission arises is where there has been a breach of a fundamental or essential term of the contract. In Suisse Atlantique Societe d'Armement Maritime S.A. v. N.V. Rotterdamsche Kolen Centrale [30] , Lord Upjohn said: 'A fundamental term of a contract is a stipulation which the parties have agreed either expressly or by necessary implication or which the general law regards as a condition which goes to the root of the contract so that any breach of that term may at once and without further reference to the facts and circumstances be regarded by the innocent party as a fundamental breach ... ' The test accepted in Associated Newspapers Ltd. v. Bancks [31] , at p. 337, is whether the term "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." The primary argument of the respondent is that cl. 3, the covenant for the payment of the rent, read in conjunction with cl. 9(a), was a fundamental or essential term and that any breach of it which resulted in rent being unpaid for fourteen days gave to the respondent the right to terminate the contract and sue for damages for the breach. 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 . [32] , 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 [33] , at p. 539. In the present case cl. 9(a) undoubtedly gave to the respondent a right to re-enter if rent should be unpaid for fourteen days. That right was subject to the provisions of s. 129 of the Conveyancing Act, 1919 (N.S.W.), as amended, but that Act is not material in the present case. However, the respondent's argument is that because cl. 9(a) gave a right to re-enter for any breach of cl. 3 that resulted in rent being unpaid for fourteen days, the covenant in cl. 3 as to payment, together with the provisions of cl. 9(a), became an essential term, or at least gave the respondent the same rights as are available under the general law to a party who elects to terminate a contract for repudiation or fundamental breach." 127 In the present case I have found that there is a breach of an express essential term of the contract. In these circumstances there is a right to loss of bargain damages. 128 There was reference in Duffy Bros' submissions to the fact of the assignment dated 5 May 2005 under which Transit purported to assign its rights under the lease and the 1999 deed to Gumland. This was apparently done as a matter of precaution. It was suggested that it could not have the effect of assigning past amounts due prior to the assignment. It purported to assign all the assignors rights and obligations under the lease as varied by the variation of the lease and the 1999 deed. 129 Of importance is the fact that Gumland became the owner of the property before the relevant events in question but after the execution of the lease and the deed. The deed in clause 1.1 defined Transit to include its successors in title and assigns. As privity of estate exists between Gumland and Duffy Bros, Gumland can recover in respect of breaches of covenants which touch and concern the land such as a covenant to pay rent or to repair the building and fixtures. 130 In any event the benefit of leasehold covenants may be expressly assigned in accordance with normal contract law principles for assigning benefits under a contract. See the cases referred to in "Land Law" by Peter Butt, 5th edition, para 15148. 131 There were some submissions by Duffy Bros as to an estoppel arising as a result of Gumland taking no action for a year after Duffy Bros ceased trading. It was said that in these circumstances Gumland could not rely on the breach of clause 3 of the deed. Although on my findings this does not arise there is no basis for any estoppel as there were no actions by Gumland which caused Duffy Bros to change its position. 132 Similarly there were some vague submissions about the duty to cooperate and s51AA of the Trade Practices Act in the context of declining numbers of potential shoppers in the complex. There was no provision in the lease on such matters and even assuming some implied obligation to cooperate in this respect the evidence did not demonstrate any breach of such an obligation. Quantification of damages 133 Gumland claims that the loss of bargain damages should be quantified in the sum of $1,319,678. 134 There are said to be three steps to be taken to calculate this amount. First, calculate the rent and outgoings that would have been payable to Gumland under the lease after 1 August 2003 (the future rent that would have been payable). Second, calculate the rent and outgoings that have been or are likely to be received by Gumland after 1 August 2003 (the future rent in fact received). Third, discount the shortfall to the date of termination on 1 August 2003. 135 As to future rent that would have been payable after 1 August 2003 this consists of the rent and outgoings that would have been payable under the lease. The amounts are said to be those amounts listed in columns 3 and 4 of the plaintiff's "Damages Spreadsheet" and relate to the period from 1 August 2003. 136 There are a number of issues raised by the defendants regarding the calculation of damages. It was suggested that clause 4.4 of the lease has the effect of excluding outgoings from the loss of bargain amount. Clause 4.4 is as follows: "4.4 If the term of the Lease expires or if the Lease is otherwise determined before the 30th day of June in any year then the Reimbursement Rent shall be deemed to accrue from day to day and the Reimbursement Rent thereof shall be calculated and payable by the Lessee accordingly upon demand to the date of expiration or determination of this Lease. 137 It is apparent that clause 4.4 relates to outgoings payable up to the termination of the lease. Obviously once the lease is terminated the lessee no longer has any obligation to pay outgoings under the lease. However, the lessor is vested with a right to recover damages for the loss of bargain, being compensation to put the lessor in the position it would have been in had the lease not been breached. That right to damages is a right that is vested in the lessor by the common law. Gumland is not recovering outgoings pursuant to the lease in respect of the period after termination of the lease. Rather, it is recovering damages at common law for the loss of the lease. Such damages are calculated by reference to the hypothetical position that the lessor would have been in had the lease remained on foot. In these circumstances the outgoings must be taken into account. 138 In respect of outgoings Duffy Bros claim that the outgoings for the period 2002 to 2003 were overstated by $32,706 and for the period 2003 to 2004 were overstated by $53,952.16. Duffy Bros proportion of these alleged overstatements is 19.65%. 139 One matter of contention was whether management fees by two companies, Skyrise Consultants Pty Ltd and Timberland Property Holdings Pty Ltd are proper outgoings. 140 Mr Pang, the owner of Gumland, also owns these companies. They charge a fee of 7% of the total rental income for the centre to Gumland for the services of those of their employees who do work on the management of the shopping centre. 141 Outgoings are defined in clause 1.24 of the lease in these terms: 1.24 The term "Outgoings" means (to the extent to which the same are not specifically payable from time to time by any lessee or licensee of any part of the subject premises under the terms of his occupancy) the total costs of all outgoings, costs and expenses of the Lessor (other than rent paid by the Lessor under any head lease) now or hereafter properly and reasonably assessed, charged or chargeable, paid or payable or otherwise incurred upon or in respect of the Subject Premises or upon the Lessor in relation thereto or in the conduct, management or maintenance of the Subject Premises and to the use and occupation of the same and shall include:" 142 It then sets out a number of common items including: "(g) All reasonable internal costs (inclusive of wages) and other on-costs of employment of management, control and administration of the Subject Premises;" 143 It concludes with these words: "PROVIDED that outgoings shall not include the cost of ventilating, air conditioning, heating or cooling other than the common areas of the Subject Premises and shall not include the cost of professional rent collectors, rent collectors or property managers receiving payment by way of commission." 144 Mr Pang claims that the method of calculation for outgoings was an "industrial standard". Certainly the outgoings are not calculated by reference to the amount of work actually done on the premises. In the absence of any other evidence it seems to me that there is nothing to prove that the amounts are reasonably charged and, accordingly, they should not be allowed. 145 In Duffy Bros' submissions there were a number of specific invoices where it was suggested they were not proper lessor's outgoings. In a large number of cases the only ground is the statement "not common expense". The basis upon which Duffy Bros alleges that invoices were "not common expenses" is not recorded. There was no cross-examination relating to many of these invoices. The invoices that Duffy Bros has stated as being "not common expense" include invoices relating to air conditioning, grease trap, locksmiths, wiring, security and repairs and cleaning. As to air conditioning, Mr Pang gave evidence that the shopping centre is air conditioned by a central air conditioning system and, apart from the IGA Supermarket, none of the shops at the shopping centre have a stand alone or separate air conditioning system. The central air conditioning system provides air to the common areas of the shopping centre as well as the shops. Accordingly, in my view, the costs of repairing and maintaining the central air conditioning system are proper costs to be subject of the lessor's outgoings as a result of clause (f) in clause 1.24 of the lease and are not precluded by the proviso in that clause to which I have already referred. 146 As to the grease trap Mr Pang gave evidence that the grease trap is for the use of all tenants of the shopping centre. In respect of the balance of the invoices complained about I have carefully considered them and the invoices which are not proper to charge as outgoings are as follows. The invoices in Exhibit "C" at AYL 79, 138, 258, 268, 430 (as to $231.00) 455, 456 and 481. 147 There was another issue related to the use of CPI in the calculation of damages. The defendants submitted that clauses 5.1, 5.3 and 5.7 of the lease make it clear that if the lessor does not claim a CPI review "after the expiry of one year from the termination of the lease" it cannot make a CPI review. In this regard time is "of the essence" (clause 5.7). 148 In these circumstances it was said that Gumland could not make a claim in respect of a CPI review element in its claim for damages. This may be so but the exercise assumes the continued existence of the lease. 149 To the extent that the evidence discloses the past increases in CPI after 1 August 2003 these can be taken into account. Future increases are not known and cannot be assumed as has been done in the calculations. 150 As to future rent in fact received after 1 August 2003 this consists of the rent and outgoings that have been and are likely to be received by Gumland after 1 August 2003. The amounts are those amounts listed in columns 5 to 17 of the Gumland's "Damages Spreadsheet" as it relates to the period from 1 August 2003. 151 The issues raised by the defendants in relation to those amounts are allegations of Gumland's failure to mitigate. The defendants have the onus of proving failure to mitigate: see TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130 at 158. 152 The terms of clauses 7.7 and 7.8 of the lease do not reverse that onus. All the clauses seek to do is to state the common law rules as to the duty to mitigate one's loss. 153 Complaints were made in a number of areas. It was said that the incentives given to new tenants and the commission claimed by leasing agents were not proved to be reasonable. However, the defendants called no evidence to suggest that these were unreasonable which they would have had to do to establish a failure to mitigate. Similarly in respect of the licensing of leasing agents there is no evidence of the fact that the agents were not licensed. 154 There was also a complaint about failure to recover arrears of rent from one tenant who vacated owing arrears of rent. The property was relet a year later and invoices sent to recover the arrears. Nothing else was done but given the total lack of evidence about the ability to recover such arrears from Mr Sievier (who broke his lease and vacated), I am not satisfied that there has been a failure to mitigate. In respect of the failure to accept an offer from Woolworths that was a conditional offer and there is nothing to suggest that it may have become unconditional. There were a number of unknown factors in the offer and on the state of the evidence I do not regard the failure to accept the offer demonstrates a failure to mitigate. 155 As to the discounting of the future amounts there are two issues. The first is the appropriate discount rate. The plaintiff contends that the risk free rate of 5.19% is appropriate given that the purpose of damages is to put the plaintiff in the position it would have been had the contract been performed. That assessment hypothesises that all future rent is paid, so that there is no occasion to add a premium to the discount rate to reflect the risk of events not happening. Mr Hunter gave evidence for Duffy Bros and adopted a discount rate of 10.19%. This included the risk free interest rate of 5.19% and a premium for the inherent risks in leasing this type of property. As the exercise involved assumes performance, the only relevant discount rate is 5.19%. 156 The second matter is the date to which the amounts should be discounted. The plaintiff contends it is the date of termination, at which time the plaintiff was vested with the right to loss of bargain damages, that should be considered: see Nangus Pty Ltd v Charles Donovan Pty Ltd [1989] VR 184 at 189. In my view this is appropriate. Costs of reinstating the premises 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. Interest 160 The interest on the clause 10.2 (d) amounts will apply from 1 August 2002 when the rent for Shop 10 A was not paid in full. The interest is payable at 12% being the default rate under the Lease. Interest on loss of bargain amount 161 The loss of bargain amount was vested in the plaintiff on 1 August 2003. Interest is payable on that amount from 1 August 2003 to the date of judgment, at the default rate under the Lease (12%) or, alternatively, the Court rates: see Seven Sydney Pty Ltd v Fuji Xerox Australia Pty Ltd [2004] NSWSC 1081 per McDougall J. 162 Given that the lease would still be running if it had not been terminated it is appropriate to apply the contractual rate. Guarantee issues 163 In addition to the matters raised by Duffy Bros set out above, the guarantors, raised the following issues on liability: 1. Whether the failure to include in the sub-lease a term requiring the sub-lessee to pay rent directly to transit operates to vary the obligations and release the guarantors, and 2. The construction of clause 4 of the guarantees relating to the period for which the guarantees operated. 164 On 25 March 1994 the guarantors gave guarantees in favour of the lessor in respect of the obligations of Duffy Bros under the lease. 165 The recitals in the guarantee agreement included: "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)." 166 The definitions included: - (d) 'Guaranteed Monies' shall mean all monies, interest and damages the subject of the guarantee and indemnity contained in Clauses 2 and 3 hereof (f) 'Lessor' shall mean the First Lessor while soever 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 … 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. (g) '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 the operation of this agreement as defined in clause 4 hereof. (h) '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. 167 The substantive provisions included:- 2. The Guarantor guarantees to the Lessor the payment to the Lessor of all monies now or hereafter to become 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 the 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 or may not 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 he [sic] 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 an agreement to Lease relating to the said premises." 168 The term of operation of the agreement is defined at clause 4 as follows: "is the period from the date hereof until the entry into a lease of the said premises by the first lessor and 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 other 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" 169 At clause 11 the agreement stated: "The Guarantor shall not be exonerated in whole or in part nor shall the Lessor's rights, remedies or recourse against the 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 re-leases. … (i) The transfer or assignment of the benefit of these presents to any persons to whom the whole or any part of the benefit of the Guaranteed Monies is transferred or assigned (whether at the same or at different times). (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." 170 On 2 March 1999 there was a deed between the guarantors and Transit in which the guarantors acknowledged the 1999 deed between Transit and Duffy Bros and affirmed their guarantees of the lease. Discharge of the guarantors by the omission of the clause 4.2 covenant 171 Under the 1994 guarantee and the 1999 amending guarantee the guarantors guaranteed the obligations of the first defendant under the lease as amended or varied by the 1999 deed. By the 1999 deed the lease obligations were varied whereby there was to be a sub-lease under which the sub-lessee was to pay the rent directly to Transit (or its successor) (clause 4). 172 Contrary to the 1999 amending guarantee and the 1999 deed the sub-lease did not contain such a term. In the guarantors' submission it was important to note that clause 4 of the 1999 deed required a term in the sub-lease that the sub-lessee was to pay the rent direct to the head lessor. It was not expressed in the 1999 deed to be a "mere direction to pay" as suggested by the plaintiff's opening written submissions. If it was intended by the parties to the 1999 deed to be a "direction to pay" then the 1999 deed would have said so. It required, according to the submissions, that there be an express term for payment of the sub-lessee's rent direct to the head lessor. 173 The guarantors' submissions noted that the sub-lease conferred obligations on the sub-lessee in favour of the head lessor. It is also noted that the head lessor executed the sub-lease. These obligations suggest that it would have been entirely appropriate for there to be a covenant in the sub-lease in favour of the head lessor which would have enabled it to sue the sub-lessee in the event of failure to pay. 174 In the circumstances of the case this was said to be a very substantial benefit to Duffy Bros and to the guarantors and the failure to provide it was not an "unsubstantial breach of obligation". It was said to be extremely prejudicial to the guarantors' rights. 175 Accordingly as a matter of principle the guarantors submitted that: (i) the guarantors are discharged. (ii) Alternatively their guarantees do not respond because their guarantee, as varied, was on a particular basis and the lessor departed from that particular basis. (iii) The circumstances of their guarantor's liability do not exist as the sub-lease was never obtained: See Deane J in Ankar 162 CLR at 570.6. (iv) As the guaranteed transaction (the lease as amended by the 1999 Deed) was never concluded on the terms of the 1999 guarantee, the guarantor has no liability in respect of the events which have occurred: See Chan v Cresdon (1989) 168 CLR 242 at 256. 176 The guarantors' submissions noted that any ambiguity in a guarantee is resolved in favour of a guarantor, that guarantees are construed strictly and any doubt as to their construction is always resolved in favour of the guarantor. Reference was made to Chan v Cresdon (1989) 168 CLR 242 at 256 and also Ankar Pty Limited v National Westminster Finance (Australia) Limited (1987) 162 CLR 549 at 561. 177 The general principle is that any departure from the terms of a guarantee or from the principal transaction by the creditor without the guarantor's consent (which departure is not obviously and without any inquiry shown to be quite unsubstantial) discharges the guarantor from liability under the guarantee. Generally speaking the Court will not inquire whether it is not substantial: See Holme v Brunskill (1877) 3 QBD 495 at 505-506. See also Halsburys Laws of England, Fourth Edition, Volume 20 p.206 (para 325) and p.211 (para 332). See also Ankar v National Westminster (1986-87) 162 CLR at 558-9. It does not matter that the departure does not in fact injure the guarantor. 178 In Ankar the High Court applied the principles from the English cases describing them in these terms:- "According to the English cases, the principle applies so as to discharge the surety when conduct on the part of the creditor has the effect of altering the surety's rights, unless the alteration is unsubstantial and not prejudicial to the surety. The rule does not permit the courts to inquire into the effect of the alteration. The consequence is that, to hold the surety to its bargain, the creditor must show that the nature of the alteration can be beneficial to the surety only or that by its nature it cannot in any circumstances increase the surety's risk, e.g., a reduction in the debtor's debt or in the interest payable by the surety. The mere possibility of detriment is enough to bring about the discharge of the surety." 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. 185 It is necessary to see whether any term of the guarantee would give relief from such a variation. Reference was made to clause 3 in the guarantee which contained an indemnity to which I will return later. Reference was also made to clauses 10 and 11 (j) of the guarantee. Clause 10 was in the following terms: -- "10 The guarantor agrees: -- (a) to waive each and every of each of the guarantors rights whether legal, equitable, statutory or otherwise which may at any time be inconsistent with any of the provisions hereof or in any way prejudice, limit or restrict the lessors rights and remedies or recourse. (b) the guarantor will not claim the benefit or will seek or will require the transfer of any guarantee or other security which the lessor may now or hereafter hold in respect of all or any part of the guaranteed monies until such time as the lessors shall have received one hundred (100) cents in the dollar of the guaranteed monies. " 186 It is only the first part of this clause which might have any possible effect. The clause only purports to waive inconsistent guarantors' rights and in respect of existing provision of the guarantee does not constitute an agreement that the guarantee shall not be affected by a variation of the principle contract. This is what is needed if the variation is to have no effect on the liability under the guarantee. 187 Clause 11 (c) and (j) provide: -- "The Guarantor shall not be exonerated in whole or in part nor shall the Lessor's rights, remedies or recourse against the 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" 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, I would construe the word "agreement" in sub-clause (j) as not encompassing a variation of the original contract the subject of the guarantee. 189 In these circumstances the guarantors have been discharged from the guarantee by reason of the failure to include the appropriate term in the sub-lease in accordance with clause 4.2 of the 1999 deed. This result may seem surprising in the light of the fact that in this case, as things have transpired, there has been no actual detriment to the guarantors. It may be that the settled law in this area needs reconsideration by those responsible for law reform. Term of operation of the guarantee 190 The submissions of the guarantors were that clause 4 of the guarantee limits the period of operation of the second and third defendants' obligations, if any, to Gumland. 191 According to the submissions by clause 4 the operation of the guarantee came to an end when: (i) the relationship of landlord and tenant ceased (on 1 August 2003 according to the plaintiff); (ii) the lessee ceased to be in possession (also on 1 August 2003); (iii) the sub-lessee ceased to be in possession with the consent of the sub-lessor (also on 1 August 2003) in accordance with clause 28 of the sub-lease when the sub-lease terminated because the relationship of landlord and tenant came to an end. 192 Accordingly as the latest of these occurred prior to the commencement of proceedings it was submitted that the second and third defendants were not liable. 193 Gumland disputes that the lessee ceased to be in possession on 1 August 2003 as its goods remained in the premises for some time thereafter. In any event its response is that Gumland's entitlement to be paid the arrears of rent, clause 10.2(d) amount and loss of bargain damages were all vested in Gumland as at 1 August 2003. It referred to Nangus Pty Ltd v Charles Donovan Pty Ltd (supra) which dealt with the situation of repudiation but the same principles apply to a breach of an essential term of the agreement. 194 The submissions, however, misread the terms of clause 4 of the agreement. Clause 4 does not mean that the operation of the guarantee comes to an end at the latest of the relevant times. Instead it provides a period for the term of operation of the agreement for the purposes of the imposition of a liability under clause 2 of the guarantee. That liability is the guarantee to the lessor of the payment of "all monies now or hereafter to become payable to the lessor by reason of …. any provisions of any relevant lease whether for rental, interest, damages…" 195 The purpose of the definition in clause 4 is to limit the guarantors' liability by excluding events which occur after the lease term comes to an end. A question arises when a lease is terminated by forfeiture or repudiation as to whether or not the guarantor remains liable for prospective damages. It is clear that the lessor can recover damages against the lessee and also against the guarantor for repudiation of the lease by the lessee. See Moschi v Lep Air Services Ltd (1973) AC 331 and Nangus Pty Ltd v Charles Donovan Pty Ltd (1989) VR 184, Wharf Street Pty Ltd & anor v Amstar Learning Pty Ltd & Ors (2004) QC 256. The question also of course depends upon the scope and wording of the guarantee. 196 In the present case the liability of the guarantor under clause 2 of the guarantee encompasses monies payable to the lessor by reason of any provisions of any relevant lease as I have already indicated. Important provisions of the lease in this respect are as follows: "7.3 The lessee agrees to compensate the lessor all 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 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 repudiation or breach. 7.5 The lessor shall be entitled to recover damages against the lessee in respect of reputation or breach of covenant for the damage suffered by the lessor during the entire term of this lease." 197 These provisions make it plain that the lessee's liability includes prospective damages for which Gumland sues in this case. By reason of the wording of clause 2 of the guarantee the guarantors are also liable for such damages. Indemnity issues 198 As an alternative to its claim on the guarantee Gumland sought to rely on two indemnities. One was in the original guarantee and the other in the 1999 confirmation of the guarantee. The clause sought to be relied upon in the original guarantee is clause 3 which is in these terms: -- "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 or may not 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 he [sic] 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 an agreement to Lease relating to the said premises." 199 The terms of the 1999 confirmation were slightly different and were in the following terms: -- "3. To the extent that the guarantee and deed referred to in the recitals of this deed shall or clause 2 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." 200 Although this claim was not raised in the pleadings it was clearly raised in Gumland's opening and, accordingly, if necessary appropriate leave to include it could be given. 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 Switchgrear Ltd 1 All ER 18 at 22 andthe 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. 204 I direct the parties to bring in short minutes to give effect to these reasons. ********** 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.