Court of Appeal Supreme Court New South Wales Medium Neutral Citation: Janos v Chama Motors Pty Ltd [2011] NSWCA 238 Hearing dates: 4 July 2011 Decision date: 23 August 2011 Before: Giles JA at [1], Young JA at [2], Handley AJA at [10] Decision: (1) Appeal allowed with costs. (2) Judgment in the District Court set aside. (3) Order of the District Court that the defendants pay the plaintiff's costs on an indemnity basis from 25 November 2009 set aside. (4) In lieu thereof substitute judgment for the plaintiff for $69,351.50 with costs with effect from 10 May 2010. (5) The respondent to have a certificate under the Suitors Fund Act if qualified. [Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.] Catchwords: CONTRACT - election -- termination for breach -- unequivocal act -- service of legal process CONTRACT - breach -- damages for loss of bargain -- assessment as at date of breach -- later facts relevant CONTRACT - damages -- mitigation -- landlord accepts tenant's repudiation and terminates -- later sells freehold -- sale mitigated loss Legislation Cited: Conveyancing Act 1919; s 23D(2) Landlord and Tenant Act 1899; ss 8 & 10 Real Property Act 1900; s 55 Suitors Fund Act Supreme Court Act 1970; s 73 Cases Cited: Arnold v Mann [1957] HCA 64; 99 CLR 462 Banque Belge v Hambrouk [1921] 1 KB 321 CA Clough v London & North Western Railway Co (1871) LR Ex 26 Dendy v Evans [1910] 1 KB 263 G & A Lanteri Nominees Pty Limited v Fishers Stores Consolidated Pty Limited [2007] VSCA 4 Johnson v Agnew [1980] AC 367 Lakshmijit v Sherani [1974] AC 605 McDonald v Dennys Lascelles Ltd [1933] HCA 25, 48 CLR 457 Nicholas v Thompson [1924] VLR 554 Progressive Mailing House Pty Ltd v Tabali Pty Limited [1985] HCA 14, 157 CLR 17 Property Holdings Pty Limited v Duffy Bros Fruit Market (Campbelltown) Pty Limited [2008] HCA 10, 234 CLR 237 Tebb v Filsee Pty Limited [2010] VSCA 311 The Golden Victory [2007] UK HL 12, [2007] 2 AC 353. The Golden Victory [2007] UKHL 12, [2007] 2 AC 353 Willis v The Commonwealth [1946] HCA 22, 73 CLR 105 Category: Principal judgment Parties: Peter Janos - First Appellant PJ Automotive Pty Ltd - Second Appellant Chama Motors Pty Ltd - Respondent Representation: COUNSEL A Loxton - Appellants D Provera - Respondent John D Hancock Solicitor - Appellants Bazzi Lawyers - Respondent File Number(s): 2010/136923 Decision under appeal Date of Decision: 2010-05-11 00:00:00 Before: Judge Walmsley SC File Number(s): DC 2220 of 2009 Judgment 1GILES JA : I agree with Handley AJA. 2YOUNG JA: I have read in draft the reasons of Handley AJA and agree with them, but wish to add some additional comments. 3The law of landlord and tenant has grown up over a long period of time and, despite the fact that, in recent times, part of it has merged with the law of contract, it is still necessary to apply the basal precepts of tenancy law to cases such as the present one. 4In view of the way the case was argued, both here and below, it is not of any value to delve thoroughly into the principles that ought to have been argued and ruled upon. However, I could not let this decision be handed down without drawing attention to the principal points so that, at the very least, learned commentators on this decision (if any) will not be deluded into thinking that the court was unmindful of them. 5A lease is brought to an end by re-entry. There is no doubt at all that the landlord re-entered in the present case. The lease thus came to an end and could not be revived, Arnold v Mann [1957] HCA 64; 99 CLR 462. Any tenancy of the appellant after the landlord had accepted the back rent and let the appellant back into possession had to be because there was a fresh lease as a matter of law. 6In equity, if relief against forfeiture is granted and the lease has been determined by re-entry, the proper order is that the landlord, at the tenant's expense, execute and deliver a new lease for the balance of the term of the determined lease: see Dendy v Evans [1910] 1 KB 263, 266. This is to be contrasted with the proper order where the tenant obtains relief against forfeiture after forfeiture but before the landlord has acted upon the forfeiture and determined the lease. In such a case, the court grants an injunction to prevent the landlord acting on the forfeiture. Of course the term "forfeiture" in this connection means merely "liable to be forfeited". 7This general proposition is affected by legislation to some extent. First, there are provisions such as ss 8 and 10 of the Landlord and Tenant Act 1899 and s 73 of the Supreme Court Act 1970. It is clear that none of these apply here. Secondly, it has not yet been authoritatively decided whether or not a registered Torrens System lease continues to exist, despite re-entry, until the Registrar-General extinguishes it under s 55 of the Real Property Act 1900, a section which notes that such a lease, after re-entry, determines upon the Registrar-General's entry on the register. 8It would seem in the present case that the parties assumed that the appellant's possession after 2 December 2008 was on the same terms as the previous lease. This lease was oral. However, it was for less than three years and, on the evidence, was at the best rent reasonably obtainable without taking a fine, so that it would operate as a lease at law in accordance with the parties' agreement pursuant to s 23D(2) of the Conveyancing Act 1919. 9Thus, whether one looks at the case as the parties did, or as it should have been considered under the law of landlord and tenant, one gets to the same legal position. 10HANDLEY AJA : This is an appeal by the former tenant and its guarantor from a judgment for $152,641.50 in favour of the landlord entered by Walmsley DCJ on 11 May 2010. 11On 1 August 2007 the landlord leased premises at 422-423 Parramatta Road, Strathfield, to the tenant for a fixed term expiring on 30 June 2010. The monthly rent was $12,100 including GST. The first appellant guaranteed the tenant's obligations under the lease. 12The tenant got into financial difficulties and the rent fell into arrears. In November 2008 the landlord re-entered but the tenant paid the rent due up to 1 December and regained possession. However on 2 December it handed back the keys and vacated the property. 13The landlord attempted to re-let the premises without success. In January 2009 it decided that it would also offer the property for sale. A tenant was never found but contracts for sale were exchanged on 30 June 2009 and the sale was completed on 31 July. 14On 26 May 2009 the landlord commenced proceedings by ordinary statement of claim against the tenant and its guarantor. Paragraphs 7, 8 and 9 of the Statement of Claim alleged: "7 On or about December 2008, in breach of the lease, the Second Defendant ceased to occupy the premises. 8 In breach of the lease the Second Defendant failed to pay rental on the premises from 1 December 2008 to date and continuing. 9 By reason of the Second Defendant's breach the Plaintiff has elected to terminate the lease." 15The landlord claimed damages particularised as the contractual rental to the end of the lease less the market rent at $5,000 per month together with lease enforcement costs of $6,726. Under cl 17.2(D) of the lease the landlord had a contractual duty to mitigate its loss, and it was common ground at the trial that the agreed market rent of $5,000 per month should be deducted. 16The Judge awarded $145,017.50 for unpaid rent and pre-judgment interest and $7,624 for enforcement costs and pre-judgment interest to arrive at the judgment for $152,641.50. 17The Judge said [12]-[13]: "(12) ... There was no argument before me as to whether or not the sum claimed after the second defendant vacated was for rent or mesne profits. (13) But I took [counsel for the landlord] to say that the lease was not terminated and accordingly what was claimed was rent rather than mesne profits. In any event it does not matter because I am satisfied that any mesne profits would have represented the same sum as rent." 18It is not clear that counsel for the landlord did submit that the lease was not terminated. However the Statement of Claim was not amended. Later the Judge said [50]: "[Counsel for the landlord] put to me that the plaintiff was entitled, in the circumstances here where it ultimately sold the premises in 2009, to recover the whole of the rent payable by reason of the obligations of the second defendant." 19He concluded [53]: "I accept [the] submission that the plaintiff is entitled to recover the rent for the 19 months which were left after the tenant moved out of the building." 20He added [53], [55]: "(53) ... I am satisfied that having promised to pay the rent for the whole period, the second defendant is liable, although the term of the lease continued beyond the date of settlement in August 2009. ... (55) So ... the second defendant, having repudiated its obligations under the lease, it is liable for those payments." 21The defendant's Notice of Appeal contained two assertions of error. The first was that the landlord was not entitled to recover rent for the period after it sold the property. The second was that the landlord was not entitled to recover rent for the whole of the unexpired term without discounting the future rent and without allowing for contingencies such as the sale of the freehold. 22Counsel for the appellants, who had not appeared below, acknowledged, as he was bound to, that the tenant had repudiated the lease when it vacated the property and returned the keys at the beginning of December 2008. This was a continuing repudiation. It is clear that the landlord accepted that repudiation at the very latest when its statement of claim containing para 9 was served on the former tenant or its guarantor on or shortly after 26 May 2009. 23It is well established that service of an appropriate pleading can be an unequivocal election to terminate or rescind a contract: Clough v London & North Western Railway Co (1871) LR Ex 26, 36; Banque Belge v Hambrouk [1921] 1 KB 321 CA, 332; Nicholas v Thompson [1924] VLR 554; Lakshmijit v Sherani [1974] AC 605, 616. 24The landlord re-entered in December 2008. It first attempted to relet the property. Later it also attempted to sell it. 25It is possible that the landlord accepted the tenant's repudiation long before it commenced legal proceedings. However, this question was not litigated at the trial and counsel for the appellants acknowledged that it could not be raised for the first time in this Court. 26The lease therefore remained in existence and rent continued to accrue until it was terminated. Termination did not affect the landlord's right to the accrued rent but it ceased to be entitled to the future rent. The rights of the innocent party on termination of a contract for repudiation or fundamental breach apply to leases: Progressive Mailing House Pty Ltd v Tabali Pty Limited [1985] HCA 14, 157 CLR 17; Gumland Property Holdings Pty Limited v Duffy Bros Fruit Market (Campbelltown) Pty Limited [2008] HCA 10, 234 CLR 237, 256-7, 258. The landlord's remedy for its prospective loss was unliquidated damages for loss of its bargain during the balance of the term: McDonald v Dennys Lascelles Ltd [1933] HCA 25, 48 CLR 457, 477. 27It can therefore recover the accrued rent for six months less, pursuant to cl 17.2D, the market rent, an amount of $42,600. Pre-judgment interest on this amount should only run from 1 February 2009 to allow for its progressive accrual. 28The landlord's prospective loss was the rent for the balance of the term, reduced by the market rent, discounted to a present value as at the date of termination. 29Since the discounted amount would then accrue pre-judgment interest the discount would be reversed and it can therefore be ignored. 30The landlord's prospective loss was subject to possible contingencies, including any further mitigation of that loss which should have been achieved or was achieved. 31The landlord had been attempting since January 2009 to find either a purchaser or a tenant and its efforts were continuing when it terminated the lease. A sale of the freehold was then a real possibility. 32On 30 June, a few weeks later, the landlord exchanged contracts for the sale of its property for $2,190,000, later reduced to $2,145,000 ( Blue 184, 190 ). The sale was completed on 31 July. The property had been mortgaged to the Arab Bank to secure $412,000 with monthly payments of $3,500 ( BLUE 19 ). The evidence does not disclose the interest rate payable to the bank, the costs of sale, or the application of the net proceeds. 33Counsel for the appellant submitted ( ORANGE 9 ) that the landlord mitigated its loss when it sold the property. He relied on a comparison between the income that could be earned on the net proceeds of sale during the remaining 11 months of the lease. The net proceeds, after deducting the costs of sale which I estimate at $45,000, invested at 8% per annum would have earned interest of $154,000. The contractual rent for the same period was $133,100 or $78,100 if the market rent is deducted. 34Counsel for the landlord submitted that the sale of the freehold should be ignored because damages had to be assessed at the date of termination before contracts were exchanged. 35The principle that damages are to be assessed as at the date of breach is not inflexible: Johnson v Agnew [1980] AC 367, 400-401 , The Golden Victory [2007] UKHL 12, [2007] 2 AC 353, 380-2, 389, 396-398. Damages may be assessed as at an appropriate later date up to trial. 36In awarding damages for prospective loss the court takes into account later events that increase or diminish that loss. The leading Australian case is Willis v The Commonwealth [1946] HCA 22, 73 CLR 105 where the widow's damages for the death of her husband were reduced because she remarried before the trial. Latham CJ said at p109: "Damages are awarded for injury actually suffered and for prospective injury. Prospective injury can only be estimated with more or less probability. But where the extent and character of what would at one time be described as prospective injury depends upon the happening or non-happening of a particular event and that event has in fact happened, it is unnecessary to speculate as to whether or not this event might happen and, if so, when. In such a case prospective damage (or diminution of damage) has become actual." 37Dixon J said (at p116) that the court was not limited to the probabilities at the date of death because "where facts are available they are to be preferred to prophecies". 38The cases cited by Dixon J included a number of non-tort cases, and the principle is of general application: HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd [2004] HCA 54, 217 CLR 640, 658-9 [39]. 39These principles were applied in The Golden Victory [2007] UK HL 12, [2007] 2 AC 353. The vessel had been chartered in 1998 until December 2005, but in December 2001 the charterers repudiated. The owner terminated and claimed damages. The second Gulf War broke out in March 2003 before the damages were assessed. The charterer would then have been entitled to cancel the contract under a war clause. 40The majority held that the owner was not entitled to damages for loss of the charter after it could lawfully have been terminated by the charterer. 41When the charter was terminated the second Gulf War was no more than a possibility. The owner submitted that subsequent events could only affect the damages if, at the termination date, those events would inevitably occur. The majority held that the principle was not so limited. 42Willis v The Commonwealth (above) has been applied by the Victorian Court of Appeal in two landlord and tenant cases: G & A Lanteri Nominees Pty Limited v Fishers Stores Consolidated Pty Limited [2007] VSCA 4 and Tebb v Filsee Pty Limited [2010] VSCA 311. In the former the landlord terminated for breach and sued for loss of its bargain but sold the freehold before the trial. The court considered the effect of the sale: per Callaway JA at [8] - [13]. 43In the second case Nettle and Redlich JJA assessed the landlord's damages for loss of its bargain at the date of termination but considered later events: [9], [12], [13]. 44In an appropriate case a landlord's damages for loss of its bargain may be the difference between the capital value of the reversion with and without the benefit of the lease: G & A Lanteri Nominees Pty Limited v Fishers Stores Consolidated Pty Limited (above) [9] - [14]. 45In the present case there was no evidence of the effect of the tenant's breach on the value of the freehold. In particular there was no evidence that a purchaser would have paid more for the property if the tenant had been performing its covenants. The effect of a lease to an unhappy tenant with 11 months to run is problematic to say the least. 46The trial judge based his assessment on the loss of future rent and there was no other basis, on the evidence, on which damages could have been assessed. 47The landlord's prospective loss at the date of termination is therefore limited to the period of two months prior to completion of the sale resulting in a figure of $14,200. Pre-judgment interest on this amount should run from 1 July 2009. 48The landlord is therefore entitled to the accrued rent of $42,600 plus interest, its enforcement costs of $7,624 inclusive of pre-judgment interest for its past loss, and $14,200 plus interest for its prospective loss. 49The pre-judgment interest on the awards of $42,600 and $14,200 is calculated as follows: (1) $42,600 at (a) 8.25% from 1/2/09 to 30/6/09 (150 days) $1,444.21 (b) 7% from 1/7/09 to 31/12/09 (184 days) $1,503.25 (c) 7.25% from 1/1/10 to 10/5/10 (131 days) $1,108.47 $4,055.93 (2) $14,200 at (a) 7% from 1/7/09 to 31/12/09 (184 days) $ 501.08 (b) 7.25% from 1/1/10 to 11/5/10 (131 days) $ 369.49 $ 870.57 50The judgment entered in the District Court for $152,641.50 should be set aside and judgment for $69,350.50 should be substituted. 51The solicitors for the parties should check the calculations incorporated in the judgment and any error can be corrected under the slip rule, hopefully by consent order. 52The proposed judgment is substantially less than the $100,000 inclusive of costs in the landlord's Calderbank offer, and the order for indemnity costs made by the judge must be set aside. 53The following orders should be made: (1) Appeal allowed with costs. (2) Judgment in the District Court set aside. (3) Order of the District Court that the defendants pay the plaintiff's costs on an indemnity basis from 25 November 2009 set aside. (4) In lieu thereof substitute judgment for the plaintiff for $69,351.50 with costs with effect from 10 May 2010. (5) The respondent to have a certificate under the Suitors Fund Act if qualified. ********** 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. Decision last updated: 24 August 2011