A breakdown in contractual relations can often lead to confusion over cancellation rights. The Supreme Court's decision earlier this month in Ingram v Patcroft Properties Ltd [2011] NZSC 49 highlights the importance of parties understanding their rights and obligations when responding to a breach, particularly in respect of the timing of their response and the requirement to clearly communicate what election they have made to the repudiating party.

The dispute

The case concerned the Central City Backpackers and Embargo Bar in Auckland. Ingram and others (the tenants) leased the premises from Patcroft, but had fallen behind in the rent. Under the lease agreement, Patcroft could re-enter the premises and terminate the lease 14 days after the rent had become due and remained unpaid. Unfortunately, Patcroft miscalculated and re-entered and purported to terminate the lease 13 days after the rent was due. It changed the locks and took possession of the premises.

A year later, Patcroft demanded $1.3 million from the tenants in unpaid rent and other amounts which it said was due for the remainder of the term of the lease. The tenants responded a few days later by filing proceedings seeking damages for the loss of their business caused by Patcroft's wrongful re-entry. Patcroft counterclaimed for rental arrears.

Both the High Court and the Court of Appeal agreed that Patcroft's re-entry was premature and that Patcroft had consequently repudiated the lease on the day of its re-entry. However, the tenants did not immediately accept the breach and give notice of cancellation. As such, the key issue to be determined was whether the tenants had validly cancelled the lease by virtue of their non-payment of rent or bringing of proceedings, or whether it was Patcroft that had cancelled the lease through its continued occupation of the property after the non-payment of rent when the 14 days had expired.

The High Court found in favour of the tenants and awarded them damages for the loss of their business. The Court of Appeal, by majority, reversed that decision.

The Supreme Court's decision

The Supreme Court unanimously allowed the tenants' appeal and restored the decision of the High Court. Delivering the Court's judgment, Justice Blanchard ruled that the on-going repudiation by Patcroft (by re-entering one day early) prevented it from claiming a right to cancel for non-payment of rent – even though the tenants had not cancelled the lease agreement before failing to pay the rent. Justice Blanchard said that because of Patcroft's repudiatory act, the tenants could not operate their business. The non-payment of the rent was justified by Patcroft's unlawful re-entry, because Patcroft "was in effect representing that any such payment would be futile". As a result, Patcroft was precluded from cancelling for non-payment of the rent. The tenants had however validly cancelled the lease by issuing legal proceedings and were entitled to damages consequent on Patcroft's breach of contract.