Shell Co. of Australia Ltd. v. Zanelli and Anor

[1973] 1 NSWLR 216

(Judgment by: Jacobs P., Hardie and Reynolds JJ.A.)

Shell Company of Australia Limited
v. Zanelly and Another

Court of Appeal

Jacobs P., Hardie and Reynolds JJ.A.

Subject References:
Real Property
Lease, under-lease and sub-under-lease of premises
Company being wound up owing rent under sub-under-lease
Merger of lease in fee simple
Competing claims of fee simple owner and under lessee for rent

Legislative References:
Real Property Act, 1900 - ss. 32 (3), 54 (3), 55.

Case References:
Capital and Counties Bank v. Rhodes - [1903] 1 Ch. 631.
Cooper v. Federal Commissioner of Taxation - (1958) 100 C.L.R. 131, applied.
English Scottish and Australian Bank Ltd. v. Phillips - (1937) 57 C.L.R. 302.
Fletcher, Re - [1917] 1 Ch. 339.
Lewis v. Keene - (1936) 36 S.R. (N.S.W.) 493;; 53 W.N. 177, distinguished.

Hearing date: 13 March 1973
Judgment date: 14 May 1973

Judgment by:
Jacobs P., Hardie and Reynolds JJ.A.

JACOBS P. This appeal concerns the small sum of $982.88 to which Street J. (as he then was) held that Mrs. Mary Elizabeth Zanelli was entitled, but to which the Shell Company of Australia Ltd. ("Shell") claims that it is entitled. This dispute, which would ordinarily be a small claim in a District Court and one in respect of which leave to appeal to the Supreme Court would now be necessary, comes to the Supreme Court because it arose in the course of the winding up of Buena Vista Motors Pty. Ltd. That company had been tenant of a service station at Mosman and the money in question was rent therefor and as such was a priority debt. But the problem was-to whom was it owed?

The problem arose out of the following circumstances. Mrs. Zanelli was the registered proprietor of the premises in fee simple, and they were subject to a registered mortgage. In 1962 a series of transactions took place between the appellant Shell and the respondent Mrs. Zanelli with the object of tying the station to Shell. On 14th June, 1962, Mrs. Zanelli leased the premises to Shell for a term of twenty years from 2nd July, 1962, at a rental of £260 a year. On the same day Shell under-leased the premises back to Mrs. Zanelli for the same period less three days or so at the same rental. Then a few days later Mrs. Zanelli granted a sub-under-lease to Buena Vista Motors Pty. Ltd. for five years from 2nd July, 1962, at a rental of £2,080 with options to renew. The company was holding over under this lease at the relevant time.

Clause 4 (d) of the under-lease from Shell to Mrs. Zanelli provided, inter alia: "... if for any reason whatsoever the Lessor's tenure of the demised premises is determined or surrendered this Lease and the term hereby created shall automatically determine simultaneously therewith without notice or further act of the Lessor or the Lessee and without any liability on the part of the Lessor."

In 1969 the mortgagee exercised the power of sale and the purchaser was Shell which thus on completion of the sale on 7th July, 1969, or at any rate on registration became head lessor and head lessee. Did this determine Shell's tenure of the demised premises pursuant to cl. 4 (d)? If it did, the under-lease and the term thereby created automatically determined simul- taneously therewith. Street J. held that Shell's tenure of the demised premises was determined. He concluded that the situation, although it resulted in a determination of the tenure, did not fall within the scope of a clause such as cl. 4 (d). He also held that the fee simple of Shell should be regarded in equity as subject to Mrs. Zanelli's rights under her under-lease from Shell. If the tenure was not determined in equity then it was not determined within the meaning of the clause. If it was so determined nevertheless it could be

that on its true construction cl. 4 (d) did not apply to the situation where there was a merger of the head lease in the fee simple. However, whether the reasons be thus separate or not, the underlying ground for the conclusion is that a contrary view would permit Shell by its unilateral act not merely to bring the under-lease to an end but to do so "with the sole and direct object and consequence of enhancing its own interest in the land". This was held to be an ulterior purpose, and such a use of the power to determine the sub- lease was held to be an unconscientious use of power which would lead equity to intervene to protect the under-lessee Mrs. Zanelli from the rigours of the effect at law of Shell's actions. The learned trial judge concluded: "I am of the view that there is a principle of equity which will apply so as to require the Shell Co. of Australia to hold its fee simple, enhanced as that fee simple is by the merged leasehold estate that accrued to that fee simple in July 1969, subject to Mrs. Zanelli's rights under her sub-lease."

The equitable doctrines which protect against the unconscientious use of a power depend upon the existence of a duty arising from a fiduciary relation- ship or from a particular principle of equity. Thus a fiduciary may not exercise a power for his own benefit, but there is no fiduciary relationship here. Also particular rules of equity such as those protecting the equity of redemption may prevent a person, for example a mortgagee, from exercising a power in a particular manner, as by a sale to himself.

There is no principle of law or equity which prevents a lessee from purchasing the fee simple, but the consequence may not be to destroy a sub- lessee's interest. See now s. 122 of the Conveyancing Act, 1919. This probably would be the position in the present case, if it were not for the express provision in cl. 4 (d). This clause clearly envisages a surrender and a determination otherwise than by surrender. The latter would, as Street J. held, include determination by merger. What would need to be implied, in order to avoid this effect of the clause, would be an equitable obligation on Shell not to surrender or to bring about a determination of the head lease for profit to itself. But there is no such equitable obligation. Shell could surrender for a consideration. It owed no fiduciary or other equitable obligation. Like- wise it could bring about a determination of the tenure for profit to itself. In any event it is not correct in my view to regard Shell as exercising a power. It purchased at the mortgagee's sale, but that was the exercise of a right common to it and all the world. It cannot be described as the exercise of a power.

It has however been submitted that Shell owed to Mrs. Zanelli a duty not to derogate from its grant of the under-lease, that all that cl. 4 (d) envisaged was a surrender to Mrs. Zanelli and that when she transferred the title directly or indirectly thereafter Shell could not surrender or determine the head lease so as to bring to an end Mrs. Zanelli's sub-lease. But it seems to me that this argument is not tenable. The clause does not say so, and to read it down in this way would give Mrs. Zanelli the unilateral right to dispose of the fee simple to a stranger with the result that when she did so the power of Shell to surrender or to determine which was envisaged by cl. 4 (d) with the results there expressed would be effectually taken away from Shell. This could not in my opinion have been intended. If it be assumed that a surrender or other determination of the head lease may be a derogation from the grant of a sub-lease, the reference to surrender in this lease makes it clear that

Shell was to be entitled to act in derogation of the grant. It is true that at the time the under-lease was granted the result of a surrender would have been to give unencumbered possession to Mrs. Zanelli; but she would have got that as proprietor in fee simple, and not as under-lessee, and there is nothing in the clause to indicate that this identity should be regarded as other than incidental.

I, therefore, can see no indication that there was to be superimposed on cl. 4 (d) a proviso that the under-lessor should not derogate from its grant in the manner suggested. This, it seems to me, makes inapplicable the principles enunciated in Capital and Counties Bank Ltd. v. Rhodes[F1] and Re Fletcher[F2], even if it be assumed that those principles extend to contractual duties as well as to fiduciary duties or duties analogous thereto in equity.

I come now to the submission that, the land being under the provisions of the Real Property Act, 1900, there was no merger so long as the twenty year lease to Shell remained on the title, even though Shell had become the registered proprietor in fee simple. It is necessary to state some further facts. By a document dated 31st July, 1969, lodged with the Registrar-General on 5th August, 1969, and given effect to by the Registrar-General on 18th August, 1969, the following request was made: "The Shell Company of Australia Limited, being the registered proprietor of the land comprised in Certificate of Title Volume 8333 Folio 57 HEREBY REQUESTS you to enter on the said Certificate of Title a notification of the merger of Lease J. 148009 to this Company in the fee simple."

The first question is whether, apart from this application and the action of the Registrar-General thereunder, there had been a merger upon registration of Shell as proprietor in fee simple. In my opinion there was not. I am not satisfied that the decision of Maugham A.J. in Lewis v. Keene[F3] was correct or that the principle which he enunciated is applicable where both the freehold estate and the leasehold estate are of land under the provisions of the Real Property Act. In respect of mortgages it has been held that the mortgage survives even when it is transferred to the registered proprietor in fee: English Scottish and Australian Bank Ltd. v. Phillips[F4]; but a mortgage under the Act is purely a creature of the Statute and the statutory method of extinguishment is by discharge[F5]. However, it has been held that a transfer of a lease to the registered proprietor in fee simple does not, while it remains registered as a separate estate or interest, result in a merger: Cooper v. Federal Commissioner of Taxation[F6]; but on the other hand the Act (s. 46) provides for transfers and in s. 51 envisages transfer to any person, not excluding the registered proprietor in fee simple.

A surrender of a lease cannot be regarded as in a different position. Leases are not the creature of the statute and their characteristics obtain from the general law; but, although a term may be forfeited by re-entry and the forfeiture is good under the general law, under s. 55 the Registrar-General is required to note the re-entry "and the estate of the lessee in such land shall thereupon determine...". Where there is a surrender other than by operation of law then by s. 54 (3) a procedure is laid down and upon entry in the register book, "the estate or interest of the lessee in such land shall revest in the lessor...".

It seems to me that so long as the lease remains on the title, apparently as a distinct interest, it must be regarded as a separate estate or interest under the Real Property Act. There is no more reason why unity of title should destroy it on a transfer to the lessee of the fee simple than should unity of title in the case of a mortgage: English Scottish and Australian Bank Ltd. v. Phillips[F7] or unity of title by transfer of a lease to the registered proprietor in fee: Cooper v. Federal Commissioner of Taxation[F8]. Particularly is this so when it is borne in mind that, though unity of title would result in merger at common law, it would by no means necessarily do so in equity. Intention, actual or presumed, was the test in equity. So long as the interest remained on the title it could not be assumed from the unity of title that there had been a merger. What if the lessee had transferred the lease previously by an unregistered transfer? An introduction of the doctrine of merger by registra- tion of the lessee as proprietor in fee simple with the consequent unity of title would wholly destroy the lease and there could be no effective subsequent registration of the transfer of lease. There is no need to introduce such complications into the system of registered title. It is better to give full weight to the register.

I am, therefore, of the opinion that there was no merger merely by registra- tion of Shell as proprietor in fee. However, there was a merger by the action of the Registrar-General in noting on the title the merger of the lease in the fee simple. Thereby, pursuant to s. 32 (3), the entry of the lease was can- celled and the Registrar-General was properly satisfied that it had ceased to exist. The request by Shell lodged on 6th August, 1969, and given effect on 18th August, 1969, was a proper request since the other arguments advanced on behalf of Mrs. Zanelli have not been sustained.

In these circumstances the appeal succeeds in respect of the period after 18th August, 1969. However, no submission was made by either party that the sum of money should be apportioned. The proper direction is that the liquidator should pay the sum of $982.88 (in respect of rent owing by the company) to the Shell Co. of Australia Ltd. The costs of the latter of the hearing before Street J. should be paid out of the assets of the company. However, I see no reason why the order for costs made in favour of Mrs. Zanelli in the Court below should not stand.

It would in my opinion be unfair to order any further costs out of the assets of the company. An order will, therefore, be made that Mrs. Zanelli as respondent pay the appellant's costs of this appeal but have a certificate under the Suitors' Fund Act, 1951.

HARDIE J. I have read a copy in draft form of the judgment of Jacobs P. and concur with the orders proposed and the reasons therefor.

REYNOLDS J.A. In this matter I have had the opportunity of reading the judgment of the President in draft form and I agree therewith and with the order proposed.

Appeal allowed with costs. Liquidator directed to pay sum of $982.88 in respect of rent owed by company ordered to be wound up to appellant. Costs of appellant and of first respondent before Street J. to be paid out of assets of company. First respondent to pay appel- lant's costs of appeal and to have certificate under Suitors' Fund Act, 1951. Second respondent's costs of appeal to be paid out of assets of company.

Solicitors for the appellant: Sly & Russell.

Solicitors for the first respondent: Creagh & Creagh.

Solicitors for the second respondent (the liquidator): Dawson Waldron.



R. J. Bainton Q.C. and R. T. H. Barbour, for the appellant.

K. R. Handley and J. M. N. Rolfe, for the first respondent.

There was no appearance by the second respondent (the liquidator) other- wise than to admit service and to submit to the order of the court.

Cur. adv. vult.

May 14.

[1903] 1 Ch. 631.

[1917] 1 Ch. 339.

(1936) 36 S.R. (N.S.W.) 493; 53 W.N. 177.

(1937) 57 C.L.R. 302.

(1937) 57 C.L.R. 302, at pp. 323, 324.

(1958) 100 C.L.R. 131, at pp. 142, 143.

(1937) 57 C.L.R. 302.

(1958) 100 C.L.R. 131.