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Who gets to cancel the contract?

By Renika Siciliano - May 2013

The recent case of Ingram v Patcroft Properties Limited [2011] NZSC 49 dealt specifically with one party’s right to cancel a lease agreement as a result of the other party’s breach. 

This particular case dealt with a lease of commercial premises in Auckland. Ingram leased the premises from Patcroft. Under the lease, Ingram was to pay rent in advance on the first day of each month. Ingram failed to pay the rent owing on 1 June 2005. Under the lease agreement, this entitled Patcroft to re-enter the premises and terminate the lease 14 days after the rent had become due and remained unpaid. 

Unfortunately, Patcroft miscalculated the timeframe and re-entered the premises only 13 days after the rent was due. The re-entry was therefore unlawful and at this stage, Ingram was therefore entitled to accept Patcroft’s repudiation of the lease by giving notice of cancellation. He did not do this. In fact very little was done, the lease was not cancelled, rent was not paid and Patcroft remained at the property. The matter then sat still for over a year until Patcroft demanded $1.3 million dollars in unpaid rent from Ingram. Ingram responded by filing proceedings seeking damages for the loss of business caused by Patcroft’s unlawful re-entry. 

The issue for the Court to decide was whether Patcroft could have cancelled the contract validly because of Ingram’s breach in not paying the rent (when it became 14 days overdue). Where, in this instance, Patcroft was already in breach of the lease. The Supreme Court ultimately found that one party cannot cancel a contract because of the other party’s breach, if the cancelling party is itself already in breach. Here Patcroft’s breach made Ingram’s performance of the contract futile, and therefore Patcroft could not validly cancel the lease and was not entitled to damages. 

Importantly, the Supreme Court also found that, not only is the cancelling party (in this instance, Patcroft) not entitled to damages for the other party’s breach, but that the cancelling party itself may also be liable for damages where a cancellation is invalid. 

The lessons to be taken from the Supreme Court’s decision in this instance are important for those involved in commercial lease agreements and other contracts: 

• Firstly, any party to a contract should very carefully consider their right to cancel a contract. In this instance, had Patcroft correctly calculated the date for re-entry (and rent remained unpaid on the correct day) such litigation would have been prevented. 
• Secondly, parties should not leave a repudiation unaccepted. If one party is in breach of a lease agreement so as to repudiate the contract, the other party should cancel the lease agreement as soon as possible. Obviously where a party accepts a repudiation and cancels the agreement, then the issue of whether the cancelling party has breached the lease agreement in a manner that was directly caused by the other parties repudiation, is avoided. We note that, whilst not appropriate in this case, an innocent party may respond to a repudiation by affirming the lease rather than cancelling. 

Renika is an Associate in our Dispute Resolution Team and can be contacted on 07 958 7429.