Published on 12 August 2019 at 5:35pm
I INTRODUCTION
As Professor Peter Butt notes, ‘Shevill has been productive of much drafting ingenuity [because] Lawyers acting for landlords have produced many different attempts to circumvent its reach’.[1] This paper will begin with a brief explanation of Shevill, followed by an analysis of subsequent cases that used anti-Shevill clauses to avoid this decision.
II SHEVILL
In Shevill, the tenant was continually late for payment of rent and, despite initially accepting the late or partial payments of rent, the landlord eventually re-entered and sued for loss of bargain damages, namely any damages suffered as a result of the premature termination of tenancy.[2] The High Court found that the tenant’s breach was not sufficiently serious to constitute repudiation and that the landlord terminated the lease himself when he resumed possession under the terms of the lease.[3] Therefore, the landlord was only entitled to any unpaid rent up until the date of termination. He was not entitled to any loss of bargain damages for prospective rent that would have been recoverable if the lease continued until its expiry date.
The Court held that it would be ‘unjust’ to allow lessors to recover damages for ‘the loss resulting from the failure of the lessee to carry out all the covenants of the lease’ after the landlord has re-entered because ‘the lessee might have been both willing and able to perform had it not been for the re-entry’.[4] In order to avoid Shevill, there should be a clear contractual right for damages for ongoing rent and other monies due.[5] If not, it may be preferable to allow the tenant to remain in possession and to seek to enforce compliance with the terms of the lease by suing for moneys payable as and when they fall due.[6]
II GUMLAND
The ‘anti-Shevill’ drafting technique arose from the obiter remarks in Shevill that ‘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’.[7] This would require ‘very clear words’ or ‘a clear expression of intention’.[8] Therefore, the anti-Shevill technique involves drafting contracts to make certain terms ‘essential’ so that damages could be recovered for breach of those terms. In a unanimous decision, the High Court in Gumland endorsed the effectiveness of anti-Shevill drafting.[9] It can be inferred from that case that the key to drafting contracts to avoid Shevill is to use ‘very clear words’ so that ‘there is no basis upon which a court could properly do otherwise than to give effect to the obligation to which the parties bound themselves’.[10]
Gumland also involved late payment of rent and eventual termination by the landlord but, importantly, cl 7.1 provided that ‘Each of the covenants by the Lessee which are specified in this clause are essential terms of this Lease’ and one of these ‘essential terms’ was the timely payment of rent.[11] Clause 1.13 of the contract also stated that ‘It shall be a fundamental obligation of the Lessee to ensure that the Lessor shall receive the rental provided for in the Lease during the full term thereof’.[12] In accordance with the obiter remarks in Shevill, the contract in Gumland certainly used ‘very clear words’ relating to the payment of rent to the extent that the Court observed the lease had ‘a preoccupation with the issue, which is scarcely surprising in a commercial lease creating an economic relationship’.[13] The Court held that ordinary principles of contract law are applicable to contractual leases and, as a matter of construction in the present case, ‘many clauses point overwhelmingly to the conclusion that on the true construction of the Lease the covenant to pay rent was an essential term’.[14] Therefore, loss of bargain damages could be awarded so the landlord, or any future purchaser, was entitled to the difference between the rent and outgoings payable under the terminated lease and the rent the landlord had received or was likely to receive from any new tenants, discounted to present-day value.[15]
Chief Justice Gibbs in Shevill suggested that damages could be recovered for even a ‘trifling’ breach of an essential term provided the parties included a clause in the contract to that effect.[16] In Gumland, the High Court acknowledged this issue but noted that ‘Whether or not the mere description of a covenant in a lease as essential, however trivial it may be thought to be, can make it essential is a question which need not be decided’.[17] This observation suggests that it is open to debate whether merely labelling a term as ‘essential’ is sufficient.[18]
III PROGRESSIVE MAILING
Progressive Mailing indicates another means by which Shevill may be avoided.[19] In that case, the contract included a clause allowing the lessor to re-enter if rent was 14 days overdue ‘without prejudice to any claim which he might have against the lessee in respect of any breach of the covenants’.[20] Following a dispute between the parties, the lessee failed to make rent payments and the landlord subsequently sued to regain possession as well as obtain outstanding rent and damages, including damages for loss of bargain.[21] The issue arose as to whether reliance on the contractual provision allowing re-entry prevented the landlord from claiming repudiation and therefore prevented him from seeking loss of bargain damages.[22] The High Court held that the landlord was entitled to damages for loss of bargain, even though he was relying on the right to terminate by agreement.[23] Justice Mason observed that such damages are not ‘recoverable only in the event of discharge for breach’, rather the ‘essential foundation may be established by a common law rescission of the contract by the innocent party or by a termination of the contract in the exercise of a contractual power to do so’.[24]
IV IMPACT FUNDS AND DEE-TECH
Justice Croft in the Victorian Supreme Court case of Impact Funds observed that the courts may award loss of bargain damages if the breached term was properly to be regarded as an essential term and the parties are free to determine which terms are essential so long as this is ‘cast in unambiguous terms’.[25] His Honour suggested that ‘it may be that the use of words “breach of an essential term and constitutes repudiation”…which forms part of the Lease and is cast in more explicit language than the relevant clause in Shevill’s case – is sufficient to achieve this position’ but this point was ultimately ‘unnecessary to decide’ on the facts of the present case.[26]
The New South Wales Court of Appeal in Dee-Tech also emphasized that even where the parties agree that certain terms are essential and give rise to termination, the election to terminate for repudiation or fundamental breach must be communicated by an unequivocal act or statement that the innocent party is treating the contract as at an end.[27] In that case, the lease provided that the landlord could terminate by giving notice if the tenant was in breach of an essential term.[28] The landlord gave the tenant a ‘Notice to vacate’ but the Court of Appeal held the letter was insufficient to terminate the lease, as it merely stated that the agent had been ‘instructed to terminate this current lease’ without providing a date for termination or stating that the reason for termination was the tenant’s breach of an essential term.[29]
V CONCLUSION
The decision in Shevill may effectively be avoided by the inclusion of anti-Shevill clauses in leases. Gumland, Progressive Mailing and Impact Funds highlight that labelling a particular clause in a lease as a ‘fundamental’ or ‘essential’ term, breach of which entitles the innocent party to terminate, is all that is required for default to give rise to a right to loss of bargain damages, provided ‘very clear words’ are used in the contract.[30] However, there is an open question as to whether labelling a ‘trivial’ or ‘trifling’ term as essential or fundamental would be sufficient.[31]
REFERENCE LIST
A Articles/Books/Reports
Butt, Peter, ‘Be Careful How You Terminate’ (2011) 85 Australian Law Journal 333
Butt, Peter, ‘Son of Shevill’ (2008) 82 Australian Law Journal 363
Gamble, Roger, ‘Loss of Bargain Damages: What Happened When Push Came to Shevill?’ (2009) 37 Australian Business Law Reports 124
McGill, Denise, ‘Anti-Shevill clauses and statutory protection of tenants from forfeiture: What’s left after Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd?’ (2009) 17 Australian Property Law Journal 326
Raphael, David, ‘Lessor’s Right to Loss of Bargain Damages’ (2017) 91 Australian Law Journal 261
Redfern, Michael, ‘What is the Value of An Anti-Shevill Clause?’ (1995) 3 Australian Property Law Journal 158
Sides, Kim, ‘Is that Term Truly “Essential”?’ (2008) Law Society Journal 53
B Legislation
Conveyancing Act 1919 (NSW) s 117
[1] Peter Butt, ‘Son of Shevill’ (2008) 82 Australian Law Journal 363, 363. [2] Shevill v Builders Licensing Board (1982) 149 CLR 620. [3] Ibid, 637 (per Wilson J). [4] Ibid, 627-8 (per Gibbs CJ). [5] Michael Redfern, ‘What is the Value of An Anti-Shevill Clause?’ (1995) 3 Australian Property Law Journal 158, 158. [6] Ibid. [7] (1982) 149 CLR 620, 627-8 (per Gibbs CJ). [8] Ibid 628 (per Gibbs CJ); 637 (per Wilson J). [9] Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Cambelltown) Pty Ltd (2008) 234 CLR 237. [10] Ibid 257-8; see also Conveyancing Act 1919 (NSW) s 117. [11] Ibid 242-3. [12] Ibid. [13] Ibid 255. [14] Ibid. [15] Ibid 264. [16] Shevill v Builders Licensing Board (1982) 149 CLR 620, 627 (per Gibbs CJ). [17] Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Cambelltown) Pty Ltd (2008) 234 CLR 237, 255 (per Gleeson CJ, Kirby, Heydon, Crennan and Kiefel JJ). [18] David Raphael, ‘Lessor’s Right to Loss of Bargain Damages’ (2017) 91 Australian Law Journal 261, 261. [19] Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17. [20] Ibid 17. [21] Ibid. [22] Ibid 31. [23] Ibid. [24] Ibid. [25] Impact Funds Management Pty Ltd v Roy Morgan Research Ltd [2016] VSC 221 [182]. [26] Ibid. [27] Dee-Tech Pty Ltd v Neddam Holdings Pty Ltd [2010] NSWCA 374 [56]; World Best Holdings Ltd v Sarker [2010] NSWCA 24 [69] (Handley AJA; with whom Tobias and Campbell JJA agreed); Peter Butt, ‘Be Careful How You Terminate’ (2011) 85 Australian Law Journal 333, 334. [28] Dee-Tech Pty Ltd v Neddam Holdings Pty Ltd [2010] NSWCA 374 [21]. [29] Ibid [61]-[62]. [30] See Raphael, above n 18. [31] Ibid.
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