Hop Woo Cheung Enterprises Ltd v. Intergroup Industries Ltd

HCA004760/1981

Landlord and Tenant-Acceptance of repudiation principles applicable to leases-Failure to pay rent not a wrongful repudiation.

BETWEEN

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Coram: Barnes, J.

Date: 12 August 1982

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JUDGMENT

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1. The plaintiff landlord and the defendant tenant formed their relationship by an agreement in writing dated 16 December 1978. The material terms of that agreement were as follows:-

2. The defendant entered into possession of the premises on 1 January 1979. On 24 February 1981 the plaintiff issued and served a writ on the defendant. The defendant at that time had not paid rent since 1 January 1981. The plaintiff claimed, inter alia, possession, arrears of rent, and mesne profits until vacant possession was delivered up. On 6 March 1981 the defendant delivered up vacant possession, paid mesne profits for the period from 24 February 1981 to 6 March 1981 and asked the plaintiff to set-off the deposit (equal to two months' rent) paid on entering into the agreement against the claim for arrears of rent! On 10 March 1981 the plaintiff's solicitors wrote to the defendant's solicitors as follows:-

"     We acknowledge receipt of your letter of the 6th of March 1981 together with the keys therein enclosed.

We do not agree that your clients' liability is limited to payment of mesne profits and rent up to the date of delivery of vacant possession by virtue of the fact that your clients' breach of the Tenancy Agreement is a continuing breach until the termination of the Tenancy Agreement.

Our client reserves its right to claim against your clients for the damages that our client may suffer as a result of your clients' breach of the Tenancy Agreement, and we would like to further point out that there is no provision in the Tenancy Agreement for the set-off in respect of the arrears of rent.

Our client is now carrying out an inspection of the premises and we shall revert to you in due course."

3. On 15 July 1981 the present action was launched by the issue of a writ by which the plaintiff claimed, inter alia, damages for breach of contract. In a nutshell, the plaintiff's claim under this head is this: the defendant's breach of the covenant to pay rent was a wrongful repudiation of the tenancy agreement; the plaintiff accepted that repudiation; the agreement was thereby terminated; had the defendant not repudiated the plaintiff would have received the stipulated rent for the period from 6 March 1981 to 31 December 1981; subsequent to the termination the plaintiff sought to mitigate its damage by re-letting but was unable to relet until 1 November 1981; the plaintiff's loss as a result of the defendant's breach was therefore the amount of rent which the plaintiff should have received between 7 March 1981 and 31 October 1981 but which it did not receive because of the defendant's breach.

4. The first issue raised by this claim is whether the principles relating to "acceptance of repudiation" applicable to "ordinary contracts" are also applicable to agreements inextricably involved with a demise. It did appear at one time that they were not because the Court of Appeal in England in Total Oil Great Britain Ltd. v. Thompson Garages (Biggin Hill) Ltd.⁽¹⁾, held that "repudiation and acceptance does not bring a lease to an end". In that case, the plaintiff oil company let a garage to the defendant. The lease contained a covenant that during its term all motor fuel sold at the garage should be supplied by the plaintiff. It also provided that payment was to be upon delivery. Because some of the defendant's cheques "bounced" the plaintiff wrote to the defendant stipulating that orders for motor fuel at the garage would only be accepted on receipt at its depot of banker's drafts to, the correct values prior to dispatch and delivery. The defendant did not comply with this requirement but, instead, obtained its supplies from another oil company. On the plaintiff's claim for an injunction to restrain the defendant from buying supplies elsewhere the defendant contended that it had accepted the plaintiff's repudiation of the agreement for the supply of motor fuel and that it was therefore terminated. An Interim injunction was granted and the defendant appealed. On the appeal the defendant argued that the lease was separate from the "tie" agreement. In his judgment (with which the other two members of the Court agreed) Lord Denning, M.R., said at pp. 323-4:-

"The first point is whether the lease is separate from the agreement for a tie. In my opinion it is not. The lease with the tie is one composite legal transaction. It cannot be severed. On the way it is worded, it does look as if the lease was one part: and the agreement for the supply of petrol (plus the tie) was the other part. But it is not right to look at the wording alone. The transaction must be regarded as a whole. It is obvious that the dealer would never have got the lease unless he agreed to the tie. It is all one.

The second point is: what is the effect of the repudiation by the oil company which was accepted by the dealer? Does it put-an end to the lease? I think not. It conveys an interest in land. It does not come to an end like an ordinary contract on repudiation and acceptance. There is no authority on the point, but there is one case which points that way. It is Leighton's Investment Trust Ltd. v. Cricklewood Property and Investment Trust Ltd. [1943] K.B. 493 sub nom. Cricklewood Property and Investment Trust Ltd. v. Leighton's Investment Trust Ltd. [1945] A. C. 221. Lord Russell of Killowen and Lord Goddard, at pp. 234 and 244, were both of opinion that frustration does not bring a lease to an end. Nor, I think, does repudiation and acceptance." (Emphasis supplied).

5. A lease does, however, come to an end where a tenant repudiates by failing to pay the rent and quitting the premises, and the landlord accepts that repudiation by re-letting to another tenant without notifying the defaulting tenant that the re-letting is on the defaul-ter's account. (Hill and Redman's Law of Landlord and Tenant, l7th edn., pp. 433-4). Although the lease is said, in those circumstances, to be terminated by an implied surrender or a surrender by operation of law, the conduct which produces that legal result is indistinguishable from acceptance of wrongful repudiation. Thus, in saying what he did Lord Denning must have had in mind that the legal result of such conduct in relation to leases is not to be found by applying the principles applicable to acceptance of repudiation in "ordinary contracts". That was also the view once held in Canada. In 1962 the Ontario Court of Appeal in Goldhar v. Universal Sections and Mouldings Ltd. ⁽²⁾ held that:-

"Where a tenant wrongly repudiates a lease for a term of years and vacates possession, it is the law of property that governs the landlord's remedial rights and not the law of contract."

6. That decision was, however, overruled in 1971 by the Supreme Court of Canada in Highway Properties Ltd. v. Kelly, Douglas & Co. Ltd. ⁽³⁾. In delivering the judgment of the five--member Court Laskin J., in addition to saying specifically that "Goldhar"⁽²⁾ was overruled, said at p. 721:-

"Although it is correct to say that repudiation by the tenant gives the landlord at that time a choice between holding the tenant to the lease or terminating it, yet at the same time a right of action for damages then arises; and the election to insist on the lease or to refuse further performance (and thus bring it to an end) goes simply to the measure and range of damages. I see no logic in a conclusion that, by electing to terminate, the landlord has limited the damages that he may then claim to the same scale that would result if he had elected to keep the lease alive.

What is apparently the majority American view is to the same effect as the view taken in Australia and that I would take: see 4 Corbin on Contracts (1951), #986, at p. 955. The American Law of Property (1952), vol. 1, pp. 203-4, states that 'If the lessee abandons the premises and refuses to pay rent the cases quite generally hold, in accordance with the doctrine of anticipatory breach, that the lessor may sue for complete damages without waiting until the end of the term'; and I may add that, under the case law, this is so at least where the suit is for damages and not for rent as such.

There are some general considerations that support the view I would take. It is no longer sensible to pretend that a commercial lease, such as the one before this Court, is simply a conveyance and not also a contract. It is equally untenable to persist in denying resort to the full armoury of remedies ordinarily available to redress repudiation of covenants, merely because the covenants may be associated with an estate in land."

7. That judgment, and in particular the last two sentences from the above passage, were the subject of comment in the House of Lords in National Carriers Ltd. v. Panalpina Ltd. ⁽⁴⁾. Lord Wilberforce in his speech quoted the two sentences as an extract from "an instructive  judgment" (p.172). Lord Simon of Glaisdale said that the judgment itself was "important and relevant for its general reasoning" in "holding that the contractual doctrine of repudiation, with its remedies independent of the landlord/tenant relationship is applicable to a lease" (p.177). Lord Roskill said that it was a "helpful" judgment (p.187).

8. In that case the House of Lords was concerned with the question whether the doctrine of frustration was capable of applying to an executed lease of land so as to bring the lease to an end if a frustrating event occurred during the currency of the term. The determina-tion of this question involved a consideration of the Cricklewood Case referred to by Lord Denning in the Total Oil Case (supra). In Cricklewood the House had been divided on the "frustration" question. Viscount Simon, L.C., and Lord Wright were of the opinion that the doctrine did apply whilst Lord Russell and Lord Goddard were of the opinion that it did not. In the National Carriers Case⁽⁴⁾ the House of Lords came to the conclusion that the doctrine does apply. There is, therefore, a House of Lords decision expressing a contrary opinion to that expressed by Lord Russell and Lord Goddard in Cricklewood. There was no authority on the point about which Lord Denning expressed his view and the House of Lords now disagrees with the opinions "which pointed the way" and partly influenced him in forming it. In accordance with this trend of current authority I would, therefore, hold that the acceptance of repudiation principles applicable to "ordinary contracts" apply to the agreementx here.

9. The next question then is: was the tenant guilty of wrongful repudiation?

10. In this case no evidence has been given. The material before the court consists of the pleadings and an agreed bundle of documents. The only wrongful conduct alleged against the tenant before the tenancy was forfeited is the failure to pay two instalments of rent. Did that failure following 24 punctual payments evince an intention not to continue to perform its part of the contract? The failure was not accompanied by an abandonment of possession nor by a breach of any other of the tenant's covenants. I do not mean to suggest that a failure to comply with the terms of a covenant to pay rent could never be indicative of an intention "not to perform the contract". The modern approach to leases emphasises the contractual rather than the "estate" element of the arrangement. Rent is not now seen as "something issuing out of the land" but as a contractual obligation assumed by the tenant. If, viewed as a contract, the arrangement showed that the only benefit the landlord would receive was the rent the tenant agreed to pay, then failure to pay even though unaccompanied by an abandonment of possession might be indicative of a repudiator intention on the part of the tenant. But, in this case, even if one takes the view that the receipt of rent was the only benefit the landlord received under the agreement and that the payment of it was the basic obligation undertaken by the tenant, the failure to pay punctually the two instalments of rent did not amount to a repudiation. The tenant was in breach but the principles of the law of contract which indicate the landlord's rights are set out in the following extract from the judgment of Diplock, L.J., (as he then was) in Financings Ltd. v. BaBldock⁽⁵⁾:-

"Where one party has done something which the law .......regards as a wrongful repudiation of the contract and the other party has thereupon determined the contract, whether under an express pourer contained in the contract or in the exercise of his right to do so under the common law, he is entitled to damages for non-performance of the contract during the period that it has still to run; but that if that party has not done something which the law regards as a wrongful repudiation of the contract, the other party, although he may be entitled under an express power to determine the contract, is not entitled to damages for non-performance of the contract during the period for which it would have continued to run but for such determination." (Emphasis added).

11. Here the tenant did something which the law does not regard as a wrongful repudiation and the landlord exercised an express power to determine the contract. The landlord is, therefore, not entitled to damages for non-performance of the contract during the period for which it would have continued to run but for such determination.

(1)    [1972] 1 Q.B. 318

(2)    36 D.L.R. (2d)

(3)    17 D.L.R. (3d)

(4)    [1981] 1 All E.R. 161

(5)    [1963] 2 Q.B. 104, 123

Representation:

Mr. D. FUNG instructed by Messrs. Johnson, Stokes & Master for the plaintiff.

Mr. A. NEOH instructed by Messrs. Gallant Y.T. Ho & Co. for the defendant.