Scarcella v Linknarf Management Services Pty Ltd (In Liq) [2004] NSWSC 1168

New South Wales Supreme Court

CITATION : Scarcella v Linknarf Management Services Pty Ltd (In Liq) [2004] NSWSC 1168 HEARING DATE(S) : 13, 14, 21 & 28 September 2004 JUDGMENT DATE : 3 December 2004 JURISDICTION: Equity JUDGMENT OF : Hamilton J DECISION : Repudiation of lease accepted by refusal by landlords of access to property by tenant.

CATCHWORDS : CONTRACTS [133] - General contractual principles - Discharge and breach - Repudiation and non performance - Repudiation - Application to leases - What constitutes acceptance of repudiation. Christiansen v Klepac [2001] NSWSC 385 GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd (2003) 128 FCR 1 J Kitchen & Sons Pty Ltd v Stewart's Cash and Carry Stores (1942) 66 CLR 116 Kammins Ballrooms Co Ltd v Zenith Investments (Torquay) Ltd [1971] AC 850 Leda Commercial Properties Pty Ltd v DHK Retailers Pty Ltd (1992) 111 FLR 81 CASES CITED : Saade v Vergados NSWCA 15 October 1996 unreported Sargent v ASL Developments Ltd (1974) 131 CLR 634 Scarcella v Linknarf Management Services Pty Ltd (in Liq) [2004] NSWSC 360 Shevill v Builders Licensing Board (1982) 149 CLR 620 The Commonwealth of Australia v Verwayen (1990) 170 CLR 394 Wood Factory Pty Ltd v Kiritos Pty Ltd (1985) 2 NSWLR 105 J W Carter & D J Harland, Contract Law in Australia (4th ed, 2002) [1945], [1970] Francesco Scarcella (1P & 1XD) Helen Scarcella (2P & 2XD) PARTIES : Rocky Scarcella (3P & 3XD) Linknarf Management Services Pty Ltd (In Liq) (1D & 1XC) Ronald George Davies (2D) Linknarf Limited (In Liq) (2XC) FILE NUMBER(S) : SC 2235/02 COUNSEL : V R W Gray (Ps & XDs) D B Studdy (Ds & XCs) SOLICITORS : Corporate & Civil Legal (Ps & XDs) Gilbert & Tobin (Ds & XCs)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

HAMILTON J

FRIDAY, 3 DECEMBER 2004

2235/02 FRANCESCO SCARCELLA & ORS v LINKNARF MANAGEMENT SERVICES PTY LIMITED (In Liq) & ORS

JUDGMENT

1 HIS HONOUR: In this matter I delivered judgment on 30 April 2004: Scarcella v Linknarf Management Services Pty Ltd (in Liq) [2004] NSWSC 360 ("my first judgment"). The first defendant leased shop premises in Bowral from the plaintiffs for the purpose of conducting a supermarket. It decided to leave that business as part of the general abandonment by the Franklins Group of supermarket operations in Australia. It asked the plaintiffs to consent to the assignment of the lease to two different prospective purchasers of the business. The plaintiffs in both cases failed to give that consent. Ultimately, at about the beginning of March 2002, the first defendant closed the business and ceased to pay rent under the lease. In my first judgment, I held that, although consent to the proposed assignments had been unreasonably withheld, this did not constitute a repudiation of the lease by the first defendant capable of acceptance by the plaintiffs so as to terminate the lease. I also decided that cross claims for negligence by the first defendant and its holding company, the second defendant, were not made out. 2 I did not in my first judgment deal with the question of whether the first defendant's closing the business and ceasing to pay rent amounted to a repudiation by the first defendant of the lease. However, the orders that I made on 5 May 2004 consequent upon my first judgment included a declaration made by consent that the first defendant repudiated the lease on 1 March 2002 and continued to do so at all times after 1 March 2002. Since this is the agreed basis on which the parties have proceeded, I need say no more about this. 3 The only claim that remains outstanding is the plaintiffs' claim against the first defendant for rent under the lease from 1 March 2002 up to 23 April 2004, the date which has been agreed on by the parties as the date at which the lease was finally terminated, if not terminated before. On that day the plaintiffs gave the first defendant formal written notice of acceptance of repudiation. There has been no suggestion that the plaintiffs had lost their right to terminate the lease in this way. The only question that remains for determination is whether, on an occasion earlier than 23 April 2004, the plaintiffs accepted the repudiation available from 1 March 2002 and thereby terminating the lease and bringing to an end any obligation to pay rent. 4 The occasions on which it was claimed that the repudiation had been accepted, as set out (and I believe accurately) in particulars given pursuant to order 5 made by me on 5 May 2004, were as follows:

(a) the first defendant alleged that the plaintiffs accepted the first defendant's repudiation of the lease on or about: (i) 6 March 2002; or in the alternative (ii) 12 June 2002; or in the alternative (iii) 7 August 2002; or in the alternative (iv) 13 September 2002; or in the alternative (v) 6 February 2003; or in the alternative (vi) 7 March 2003.

(b) The first defendant relied on the following facts and circumstances as constituting the plaintiffs' acceptance of repudiation on each of those dates. It submitted that the conduct was inconsistent with the lease remaining on foot. (i) On 6 March 2002 the plaintiffs' former solicitors Henshaws sent a letter to the defendants' solicitors Gilbert + Tobin, which included the following statement: "Finally, we are instructed that the subject premises remains filled with your client's fixtures and fittings. Please advise if your client intends to remove that property and whether your client accepts its obligation to make good the premises." (ii) On 12 June 2002, in response to a request by the defendants to have access to the premises in order to remove "Franklins" signage, Henshaws sent a letter to Gilbert + Tobin which included the following statement: "Please advise what access is necessary to the property to effect the removal and also please advise how your client intends to make good the property following the removal." (iii) On 7 August 2002 the plaintiffs sent a letter to their managing agent, Commercial & Industrial Property Services (CIPS), instructing CIPS to arrange for a locksmith to change the locks on the premises. The locks on the premises were changed on or around 8 August 2002, as evidenced by the invoice of that date from Alpine Locksmiths to CIPS. The new keys to the premises have never been provided to the defendants. (iv) On or about 12 September 2002 the plaintiffs engaged Studio [R] to provide them with a Scope of Works for Demolition and Making Good the premises. In paragraph 1.02 of the Scope of Works Studio [R] provide the following description of the project: " The project involves the demolition and removal of items as described in the Scope of Works [being the defendants' fixtures and fittings located within the premises]. Also included in this package of work is the repair and making good of all surfaces in order to return the premises to condition it was in prior to the last tenant, essentially the building structure". (v) On 6 February 2003 the plaintiffs engaged Whitehorse Constructions Pty Ltd to provide them with a "budget estimate" for the "demolition and make good of the ex Franklins store". The budget estimate contemplates the plaintiffs and/or Whitehorse Constructions Pty Limited selling the defendants' fittings to third parties. (vi) On 6 March 2003 the plaintiffs instructed their managing agent to write to the defendants and inform them that they have no access to the premises (in response to a request by the defendants to access the premises for the purpose of removing their fixtures and fittings made by letter dated 5 March 2003). On 7 March 2003 CIPS wrote to the defendants informing the defendants that they "have no right to access the site". 5 These "particulars" not only accurately delineate the issues, but to a large degree succinctly set out the evidence relevant to the determination of each of them, although some supplementation of the references to evidence will be necessary as I consider each of the issues in turn. 6 Concerning the law as to acceptance of a repudiation, the following statements are made in J W Carter & D J Harland, Contract Law in Australia (4th ed, 2002) at [1945] and [1970]: "[1945] 'Acceptance' of a repudiation . The word 'acceptance' is used in the context of repudiation to describe the promisee's decision ('election') to terminate the performance of the contract.

Therefore, acceptance of a repudiation is necessary if the promisee wishes to terminate the performance of the contract. ……

……

[1970] At common law the requirements of election involve unequivocal words or conduct evincing an election to terminate the performance of the contract. Generally, the promisee should communicate the election to the promisor, for example, by saying that the contract is being terminated on the ground of the promisor's breach, or by issuing and serving a writ alleging termination. However, communication need not be by the promisee personally, and in some cases an act may be regarded as unequivocal even though there is no communication, as where a vendor of land resells to a third party after a repudiation by the purchaser of his or her obligations under the contract. However, equivocal words or conduct, even if communicated, will not amount to an election to terminate. For example, if the vendor in the example just given serves a writ on the purchaser which states alternative claims for (1) specific performance and (2) damages based on termination, there is no election because the vendor has not communicated any choice to the purchaser." 7 In Kammins Ballrooms Co Ltd v Zenith Investments (Torquay) Ltd [1971] AC 850 at 882 – 883 Lord Diplock said: "This arises in a situation where a person is entitled to alternative rights inconsistent with one another. If he has knowledge of the facts which give rise in law to these alternative rights and acts in a manner which is consistent only with his having chosen to rely on one of them, the law holds him to his choice even though he was unaware that this would be the legal consequence of what he did. He is sometimes said to have 'waived' the alternative right, as for instance a right to forfeit a lease or to rescind a contract of sale for wrongful repudiation or breach of condition; but this is better categorized as 'election' rather than as 'waiver'."

This was cited with approval by McHugh J in The Commonwealth of Australia v Verwayen (1990) 170 CLR 394 at 496. 8 In Wood Factory Pty Ltd v Kiritos Pty Ltd (1985) 2 NSWLR 105 McHugh JA (as his Honour then was) said at 146: "In his judgment Samuels JA draws attention to the necessity for the plaintiff not only to have elected to accept the repudiation but also to have communicated it to the defendant. His Honour refers to the statement in Sargent v ASL Developments Ltd (1974) 131 CLR 634 at 655 - 656 where Mason J said that essential 'to the making of an election is communication to the party affected by words or conduct of the choice thereby made". But I do not think that Mason J meant that the defaulting party must always receive a direct notification from the person rescinding. In Holland v Wiltshire (1954) 90 CLR 409 Dixon CJ said (at 416) that the vendor's 'election to treat the contract as discharged by the purchasers' breach was sufficiently manifested by his proceeding to advertise the property for sale, and by his selling it'. No doubt this was what Mason J had in mind when he referred to the communication of the election 'by words or conduct'. In Tropical Traders v Goonan (1964) 111 CLR 41 at 55, which was one of the two statements to which Mason J referred, Kitto J said: '... Not that election is a matter of intention. It is an effect which the law annexes to conduct which would be justifiable only if an election had been made one way or the other ....' Moreover in the present case the facts which constituted the surrender by operation of law and the acceptance of the repudiation were known to the defendant. Mr Callum and the defendant's solicitors were well aware that Insul Fluff had entered into occupation of the premises as tenant."

And Priestley JA said at 133: "This is the situation where Progressive Mailing has shown the legal result is different from what it was once thought to be. In Buchanan for example, it was taken for granted that a surrender by operation of law became complete upon the landlord taking possession on his own account and the landlord could not get damages for loss of the lease. Under the Progressive Mailing doctrine, upon the landlord taking possession on his own account the lease still comes to an end (and the situation can still be called an example of surrender by operation of law as well as a contractual termination following accepted repudiation or breach of fundamental term) but the landlord is entitled to any damages suffered by loss of the lease." 9 The passages from Wood Factory illustrate that, since the High Court has made it plain in Shevill v Builders Licensing Board (1982) 149 CLR 620 and the other authorities referred to in my first judgment at [11], that leases fall to be dealt with as constituting contracts, as well as continuing to constitute grants of estates in land and to be dealt with accordingly in the traditional way. Thus, there are two routes by which a lease may be brought to an end where one party abandons or repudiates its obligations under the lease. The traditional method of regarding the estate in land as terminated by the inference of an agreement remains available. Equally, the matter may be dealt with under the ordinary contractual rules as to the repudiation of the contract and acceptance of the repudiation. Although conceptually available in the present case, I do not need to consider the first of these alternatives, as the parties have proceeded by the second route alone. 10 As to the quality of the conduct needed to constitute an acceptance, in Sargent v ASL Developments Ltd (1974) 131 CLR 634 Stephen J said at 646: "The words or conduct ordinarily required to constitute an election must be unequivocal in the sense that it is consistent only with the exercise of one of the two sets of rights and inconsistent with the exercise of the other; thus for a lessor to continue to receive rent under a lease will be consistent only with his rights as lessor and inconsistent with the exercise of a right to determine the lease (Viscount Dilhorne in the Kammins Ballrooms Case [1971] AC, at p 873; Herring CJ in the Coastal Estates Case [1965] VR, at p 436; Kitto J in Tropical Traders Ltd v Goonan (1964) 111 CLR 41, at p 56). However, less unequivocal conduct, only providing some evidence of an election, may suffice if coupled with actual knowledge of the right of election ( Elder's Trustee Case (1941) 65 CLR at p 618). There need be no expressed intention to elect, nor will an express disclaimer of such an intention be of any avail in preserving one right if in fact there be an exercise of another inconsistent right ( Croft v Lumley (1858) 6 HL Cas 672 [10 ER 1459]; Matthews v Smallwood [1910] 1 Ch, at p 786). For an election there need be no actual, subjective intention to elect ( Scarf v Jardine (1882) 7 AC, at p 361), an election is the effect which the law attributes to conduct justifiable only if such an election had been made (per Kitto J. in Tropical Traders Ltd v Goonan (1964) 111 CLR, at p 55); cf S Kaprow & Co Ltd v Maclelland & Co Ltd , per Wrottesley LJ [1948] 1 KB 618, at pp 629 - 630."

See also the decisions of Higgins J in Leda Commercial Properties Pty Ltd v DHK Retailers Pty Ltd (1992) 111 FLR 81; the Court of Appeal in Saade v Vergados NSWCA 15 October 1996 unreported; Young J (as his Honour then was) in Christiansen v Klepac [2001] NSWSC 385; and Finn J in GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd (2003) 128 FCR 1 at [359]. 11 The onus of proof that the contract has been brought to an end lies on the party alleging the termination: J Kitchen & Sons Pty Ltd v Stewart's Cash and Carry Stores (1942) 66 CLR 116 per Latham CJ and Mc Tiernan J at 126. 12 I turn specifically to occasions (i) to (vi) set out in [4](a) and (b) above, on which acceptance of the repudiation is respectively alleged to have occurred. 13 As to occasion (i) (6 March 2002), what is relied on is an inquiry on behalf of the plaintiffs as to whether the first defendant intended to remove its property and accepted its obligation to make good the premises. The first defendant submitted that the making of those inquiries, some 2½ years before the end of the term, amounted to a communication that the plaintiffs were treating the lease as at an end. I cannot accept that this letter communicated in an unequivocal way to the first defendant that the plaintiffs regarded the lease as at an end. The first defendant would remain liable for the rent whether or not the fixtures and fittings were in the property. An inquiry as to whether the first defendant accepted an obligation to make good the premises might well be an inquiry about its attitude to that obligation at the end of the lease, whenever that end might come about, rather than an indication that the plaintiffs regarded the lease as at an end and the first defendant as under an immediate obligation to make the premises good. 14 As to occasion (ii) (12 June 2002), the evidence reveals that the signage which was to be removed was not within the demised premises, but was elsewhere in or on the shopping centre. A reply in the terms set out inquiring what access the first defendant desired to some other part of the plaintiffs' shopping centre can hardly be regarded as an unequivocal communication of acceptance of the repudiation. 15 As to occasion (iii) (7 August 2002), it might appear from the facts as stated in [4](b)(iii) above that the change of lock had the effect of a lock out indicating the definitive exclusion of the first defendant from the premises, which might well operate as an acceptance of the repudiation. However, those facts must be viewed in the light of a deal of other evidence concerning those events (essentially undisputed except where stated otherwise). Access to the premises was through any one of four locked doors. The first defendant had been last in possession of the keys and the plaintiffs did not have any. The plaintiffs asked the first defendant for a key to gain access to the premises. The first defendant said that it could not find any. The plaintiffs then changed the lock on one door, but not on the other three. Rocky Scarcella deposed that the request for access arose from a desire to quantify damage to the premises for purposes of litigation. It was suggested that I should disbelieve his evidence, but I do not see why I should. In any event, this was what Mrs Lynam, from the managing agent, was told at the time. I found her a very straightforward witness, whose evidence I accept. The suggestion that Rocky Scarcella told her this, but knew at the time it was untrue, I find so Macchiavellian as to be far fetched. I find that the purpose of the request for a key and of the change of lock was to gain access for the purpose stated by Rocky Scarcella. It is true that a copy of the new key was not given to the first defendant, which had said it could not find any keys. But it was not forbidden to enter through the doors with unchanged locks, of which it was the last known possessor of the keys. While the changing of the lock deprived the first defendant of access to the premises through that door, the other three doors remained secured by locks, the keys to which were held not by the plaintiffs, but by or on behalf of the first defendant. The act of changing one lock did not exclude the first defendant from the premises. It may have found the keys, or had new ones made by a locksmith. In all the circumstances, the changing of one lock could not be regarded as an unequivocal act constituting acceptance of the repudiation. 16 As to occasion (iv) (13 September 2002), the requisitioning of a program for the demolition and removal of the first defendant's items remaining in the premises and making good of the premises was, again, not an unequivocal act showing acceptance of the repudiation. It simply showed the plaintiffs moving towards doing the work necessary to ready the premises for reletting when the lease did come to an end. It could not, on the face of the document, be a firm indication that the work would be done at a particular date (as indeed it was not). It does not convey a statement that the plaintiffs regarded themselves as unequivocally and immediately entitled to possession. 17 Similarly, as to occasion (v) (6 February 2003), the obtaining of a budget estimate for the doing of the work could not have the effect of an unequivocal act operating as an acceptance of the repudiation. 18 As to occasion (vi) (7 March 2003), the context of the correspondence relevant to this occasion needs to be set out a little more fully. On 5 March 2003, R G Davies, chartered accountant, wrote to CIPS informing them that he had on 15 April been appointed liquidator of Franklins Ltd in a members' voluntary liquidation. He stated that he had been advised that fixtures and fittings were still located in the store and that he wished to have these removed. He stated that he was "asking for your permission to gain access to the site". Mrs Lynam sent a copy of the letter to Rocky Scarcella, who sent it back to her bearing a handwritten note stating that "they" had to speak with him or his solicitor; "they are in default & have no access to the site". It was following receipt of that note that Mrs Lynam replied to Mr Davies that, "as Linknarf Limited (formerly known as Franklins Limited) are [sic] in default of their Lease, they have no right to access the site". Although both sides referred in terms to the second defendant, which was the holding company, there is no doubt they were intending to refer to the lease held by the first defendant. There is no evidence that the first defendant had had any access to the premises during the six months between occasion (iii) in [4] above and the time of this correspondence. Rocky Scarcella swore that he had no knowledge of the first defendant entering the premises during that time. It is not clear whether the liquidator asked for permission to access the premises because he believed he had no right to do so, or whether he simply had not been handed any keys by the companies which had gone into liquidation and believed he had no means of gaining access. 19 Mr Ventry Gray, of counsel for the plaintiffs, submitted that the letter of 7 March 2003 could not operate as an acceptance of the repudiation. Essentially, his submissions were twofold. First, in his words, to "effect a re entry" or otherwise to act as an acceptance of the repudiation, the document would have to be more formal than this letter. He suggested that something like the formal notice of 23 April 2004, which both parties agree operated to terminate the lease, if it had not been previously terminated, was necessary. His second submission was that, in effect, the document was rendered equivocal by its use of the words "in default of their Lease". By the use of these words the plaintiffs were affirming the continued existence of the lease. Even if the refusal of access appeared to be inconsistent with the continuation of the lease, the document overall was equivocal, so could not operate as an acceptance of the repudiation. Mr Studdy, of counsel for the defendants, submitted that the reference to the default was merely a reference to the basis on which the lease would be brought to an end. He said that the refusal of access was absolutely unequivocal. Default or no, the first defendant continued to have a right of access to the premises so long as the lease was on foot, whatever defaults there may have been. If there was no longer any access, there was no longer any lease. 20 Whilst there may have been some looseness of wording in the letter, in my view, it constituted an unequivocal communication that the plaintiffs regarded the lease as at an end. As to Mr Gray's first point, in my view it has a tendency to place a gloss, as dangerous as most glosses are, on the simple proposition of law as to what is necessary for the acceptance of a repudiation: see [6] above. The acceptance may be by words or conduct. It must be unequivocal. But there is no other requirement as to form or content. Mr Gray's first point is rejected. As to the second point, in my view, Mr Studdy is right. The communication makes it quite plain, access having been requested on behalf of the first defendant, that no access will be allowed and that the first defendant is denied entry to, much less possession of, the premises. Refusal of access is absolutely inconsistent with the continued existence of the lease. An oblique reference to default by the tenant as the reason for exclusion does not detract from the absoluteness of the refusal. As this, in my view, is the correct interpretation to be put in the context of this case upon the letter of 7 March 2003, then I am of opinion that an acceptance of the repudiation was communicated as at that date. 21 The plaintiffs are therefore entitled to judgment for the rent of the premises accrued due up to, but not after, that time. Short minutes may be brought in to give effect to this decision. Questions of interest and costs may be dealt with at that time.

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