Capital Projects (Qld) Pty Ltd v Trust Co of Aust Ltd [2008] QSC 105 [2009] 2 Qd R 313

SUPREME COURT OF QUEENSLAND CITATION: Capital Projects (Qld) Pty Ltd v Trust Co of Aust Ltd [2008] QSC 105 PARTIES: CAPITAL PROJECTS (QLD) PTY LTD ACN 078 036 772 (applicant) v TRUST COMPANY OF AUSTRALIA LIMITED ACN 004 027 749 (respondent) FILE NO/S: BS4530/08 DIVISION: Trial Division PROCEEDING: Application ORIGINATING COURT: Supreme Court at Brisbane DELIVERED ON: 29 May 2008 DELIVERED AT: Brisbane HEARING DATE: 26 May 2008 JUDGE: Martin J ORDER: (a) The applicant be relieved against the effect of its breaches of the lease in relation to the exercise of an option for a further lease period contained in a written lease between the applicant and the respondent dated 26 August 2003; and (b) Declare that the applicant’s notice of exercise of option of 28 April 2008 was an effective exercise of the option under a written lease between the applicant and the respondent dated 26 August 2003. CATCHWORDS: LANDLORD AND TENANT – RENEWALS AND OPTIONS – RELIEF AGAINST LOSS OF OPTION FOR RENEWAL – where lessee failed to pay rent on time – whether lessee should be relieved against the forfeiture of the option to renew the lease. Property Law Act 1974, s 128 Ell v CISERA (2000) 10 BPR 18,045 Evanel Pty Ltd v Stellar Mining NL [1982] 1 NSWLR 380 R & J Lyons Family Settlement Pty Ltd v 155 Macquarie -- 1 of 8 -- 2 Street Pty Ltd [2008] NSWSC 310 Re Denny’s Restaurant Pty Ltd [1977] Qd R 92 COUNSEL: R M Derrington SC for the applicant J M Horton for the respondent SOLICITORS: Mullins Lawyers for the applicant Minter Ellison for the respondent [1] This is an application pursuant to s 128 of the Property Law Act 1974 (“the Act”) for relief against forfeiture of an option to renew a lease. Background [2] The parties entered into a lease on or about 26 August 2003 whereby the applicant was the lessee of part of the third floor of an office building at 527 Gregory Terrace, Bowen Hills. The lease was for a term of five years with a commencement date of 1 September 2003 and an expiry date of 31 August 2008. The lease contained an option to renew the lease for a further term of five years. [3] The lease required the applicant to pay rent of $80,250 for the first year with that amount increasing at the fixed rate of 4 per cent for each succeeding year. Rent was payable in advance on the first day of each month. The lease contained an option for renewal in clause 15 which provides: “15.1.1 shall at all times during the term hereof have duly and punctually paid the rent and other moneys payable hereunder to the Landlord at the times appointed for the payment thereof; and 15.1.2 shall have otherwise strictly observed and performed the terms covenants and restrictions on the part of the Tenant hereunder; and 15.1.3 shall have given notice in writing of its intention in that behalf to the Landlord not more than six (6) months nor less than three (3) months prior to the expiration of the term hereof the Tenant shall have the right to be granted a further lease of the leased premises for the term of five (5) years commencing on the day after the expiration of the term hereof upon the same terms and conditions as are herein contained except for the base rental which shall be determined in the manner provided in the next following clause.” [4] The applicant purported to exercise its right to renew the lease by notice given in accordance with the relevant clause of the lease. [5] In response to that notice, the respondent asserted that the lessee was not entitled to exercise the option. That notice was given in the letter of 29 April 2008. The relevant parts provided: -- 2 of 8 -- 3 “1. the Tenant has not at all times during the term duly and punctually paid the rent and other monies to the Landlord as required by clauses 2.2 and 15.1.1 of the Lease; and 2. subject to any order of the Court under section 128(6) of the Property Law Act 1974 (Qld), the Landlord proposes to treat the failure to pay rent and other monies duly and punctually during the term as set out in paragraph 1 above as having precluded the Tenant from exercising the option to renew the Lease for a further term in accordance with the provisions of clause 15 of the Lease.” [6] The reference to clause 15.1.1 appears to be an error as that clause merely establishes a condition for the exercise of the option and there is no breach of the lease by not complying with the clause. That means that the only breach of the lease specified is the failure to pay rent under clause 2.2. [7] The affidavit evidence discloses that the applicant failed to pay the rent on time in each month of the lease apart from the month in which this application was brought. The various defaults ranged from the rent being a couple of weeks late to more than two months late. The legislation [8] The relevant parts of s 128 of the Act are: “(4) Where an act or omission that constituted a breach by a lessee of the lessee’s obligations under a lease containing an option would, but for this section, have had the effect of precluding the lessee from exercising the option, the act or omission shall be deemed not to have had that effect where the lessee purports to exercise the option unless, during the period of 14 days next succeeding the purported exercise of the option, the lessor serves on the lessee prescribed notice of the act or omission and— (a) an order for relief against the effect of the breach in relation to the purported exercise of the option is not sought from the court before the expiration of the period of 1 month next succeeding service of the notice; or (b) where such relief is so sought— (i) the proceedings in which the relief is sought are disposed of, in so far as they relate to that relief, otherwise than by granting relief; or (ii) where relief is granted upon terms to be complied with by the lessee before compliance by the lessor with the order granting relief, the lessee fails to comply with those terms within the time stipulated by the court for the purpose. (5) Relief referred to in subsection (4) may be sought— -- 3 of 8 -- 4 (a) in proceedings instituted in the court for the purpose; or (b) in proceedings in the court in which— (i) the existence of an alleged breach by the lessee of the lessee’s obligations under the lease; or (ii) the effect of the breach from which relief is sought; (6) The court may, in proceedings in which relief referred to in subsection (4) is sought— (a) make such orders (including orders affecting an assignee of the reversion) as it thinks fit for the purpose of granting the relief sought; or (b) refuse to grant the relief sought. (7) The court may, in proceedings referred to in subsection (6), take into consideration— (a) the nature of the breach complained of; and (b) the extent to which, at the date of the institution of the proceedings, the lessor was prejudiced by the breach; and (c) the conduct of the lessor and the lessee, including conduct after the giving of the prescribed notice; and (d) the rights of persons other than the lessor and the lessee; and (e) the operation of subsection (9); and (f) any other circumstances considered by the court to be relevant. (8) The court— (a) may make an order under subsection (6) on such terms as to costs, damages, compensation or penalty, or on such other terms, as the court thinks fit; and (b) may make any consequential or ancillary order it considers necessary to give effect to an order made under that subsection. (9) Subject to any order of the court and to subsections (10) and (11)— (a) where— (i) an option is contained in a lease; and (ii) the lessee exercises, or purports to exercise, the option; and (iii) the lease would, but for this paragraph, expire within the period of 14 days after the exercise, or purported exercise, of the option; the lease shall be deemed to continue in force until the expiration of that period; and (b) where— (i) a prescribed notice is duly served on a lessee; and (ii) the lease in respect of which the notice is served would, but for this paragraph, expire -- 4 of 8 -- 5 within the period of 1 month referred to in subsection (4)(a); the lease shall be deemed to continue in force until the expiration of that period; and (c) where, in relation to a lease continued in force under paragraph (b), relief referred to in subsection (4) is sought by a lessee, the lease shall, subject to subsections (10) and (11) be deemed to continue in force until— (i) the proceedings in which the relief is sought are disposed of, in so far as they relate to that relief, otherwise than by granting the relief; or (ii) effect is given to orders made by the court in granting that relief in so far as they affect the lessor or relate to an assurance to the lessee.” Consideration [9] Section 128(6) provides a wide discretion to the court in that it allows the court to make such orders as it thinks fit for the purpose of granting the relief sought. [10] On such an application the lessor has the burden of proving the breaches of the lease while the lessee must demonstrate to the court that the discretion should be exercised in its favour.1 [11] The scope of the power (in respect of the relevantly identical New South Wales legislation) was described by Hamilton J in Ell v CISERA: 2 “The discretion conferred upon the Court to excuse or not excuse the breaches and allow renewal of the term is an absolutely general one to be exercised in the light of all the circumstances: Re a Lease Kennedy to Kennedy [1935] NZLR 564 at 567; Henderson v Ross [1981] 1 NZLR 417 at 424; Evanel Pty Ltd v Stellar Mining NL [1982] 1 NSWLR 380 at 388. In the last mentioned case Wootten J, whilst holding the discretion to be completely at large, found some analogy in the Court's discretion to grant relief against the forfeiture of leases. His Honour's decision was upheld by the Court of Appeal: Stellar Mining NL v Evanel Pty Ltd (1983) NSW ConvR 55-118. In Best and Less (Leasing) Pty Ltd v Darin Nominees Pty Ltd (1994) 6 BPR 13,783 McLelland CJ in Eq at 13,788 described the power as ‘a general discretionary power, which is to be exercised in the manner best calculated to achieve justice between parties in the circumstances of the particular case’ and again alluded to the analogy of relief against forfeiture.” [12] More recent consideration was given to this issue by Bryson AJ in R & J Lyons Family Settlement Pty Ltd v 155 Macquarie Street Pty Ltd.3 In that case, Bryson AJ 1 See Re Denny’s Restaurant Pty Ltd [1977] Qd R 92; Evanel Pty Ltd v Stellar Mining NL [1982] 1 NSWLR 380 at 387-388. 2 (2000) 10 BPR 18,045. 3 [2008] NSWSC 310. -- 5 of 8 -- 6 revisited earlier consideration of the relevant provision and said that the primary focus of the court should be on considerations mentioned in the equivalent to s 128 of the Queensland Act rather than to additions and modifications which have grown through judicial exposition. His Honour pointed out, quite accurately, that: “What is under consideration is much more than whether the lessor can get remedies for past breaches: the discretion affects whether the relationship should be continued by the power of the court when the contractual relationship does not require it to continue and the lessor does not want it to continue.” [13] Section 128(7) of the Act directs the court’s attention to a number of factors which may be taken into consideration for the purposes of s 128(6). Most of the evidence in this case was directed towards the first two items in the list of factors in s 128(7). The nature of the breach complained of was the failure by the lessee to pay rent in a timely fashion as required by the lease. As noted above, there has only been one instance in the history of the lease in which the rent was paid on time. The second issue to which evidence was directed was the extent to which the lessor was prejudiced by the breach. The total amount of rent has been paid notwithstanding that it was regularly paid late. The lessee tendered an amount of $4,000 being the amount estimated by it as the interest that would have accrued due to the late payments made. That amount was not accepted by the lessor but no claim was made as to any other amount that might be paid. [14] Bryson AJ addressed this matter in R & J Lyons Family Settlement where (in a comment with which I respectfully agree) he said: 4 “… Consistent late payment of rent has relatively little economic impact if the rent is eventually paid, there being an entitlement to interest; but it generates work to be done on behalf of the lessors in pursuing payment …” [15] The lessor was not able to point to any prejudice other than the possible loss of interest on the sums which had been paid late. Section 128(7) also directs the court to consideration of any other circumstances which might be relevant. An issue which might be relevant in a case such as this is whether or not the court should force parties into a relationship which has been a failure. In R & J Lyons Family Settlement the lessee had failed to comply with the lease in more than one way. There were a number of issues between the lessor and the lessee which demonstrated that: 5 “Relations between the parties were combative to a considerable degree and each had its own position to maintain and did so with some force … Both sides were in an acutely difficult commercial and practical situation, and both had got into that situation, at least in part, because of an entire misunderstanding of entitlements relating to the easement … the lessors were faced with combative lessees who altogether refused to pay rent for reasons which, whether or not they were legally justified, were humanely understandable as they 4 At [157]. 5 At [69]. -- 6 of 8 -- 7 could not get the commercial benefit of occupation of all the premises.” [16] Those circumstances led Bryson AJ to say:6 “I wish to guard against attributing a [un]duly great significance to the often-repeated late payments of rent, but I do regard them as an indication of the poor quality of the relationship between the parties under the lease and of the unsatisfactory nature of Mr Lyons’ approach to the performance of obligations.” [17] Taking into account the different factors which applied in that case, Bryson AJ concluded: 7 “If the commercial relationship continues, it is likely that there will be more disputation. In my judgment I should not continue the relationship by a discretionary order under s 133F. On any realistic appraisal in human terms, the whole business has been a complete failure.” [18] I agree, with respect, that the court should consider the nature of the relationship between the parties and its prospects should relief against forfeiture be granted. In this case, however, it is clear to me that the relationship between the parties is such that it, if anything, points towards a continuation of the legal relationship. The lessor, while denying the right of the lessee to renew pursuant to the option in the lease, has offered the lessee a new lease with some alterations to the terms. To me, that is sufficient to demonstrate that there is no matter which should affect my discretion in that regard. [19] The failure to pay rent, while a breach of the lease, has not been regarded as something which is fatal to an application such as this. The erratic payment of rent will not be sufficient to cause forfeiture of an option if the lessor is no longer prejudiced by that failure. 8 [20] The circumstances which exist between these parties is such that, notwithstanding the failure to pay rent in a timely fashion, the lessee should be relieved against the forfeiture of the option to renew the lease. Orders [21] I order that: (a) The applicant be relieved against the effect of its breaches of the lease in relation to the exercise of an option for a further lease period contained in a written lease between the applicant and the respondent dated 26 August 2003; and 6 At [157]. 7 At [164]. 8 Ell v CISERA.. -- 7 of 8 -- 8 (b) Declare that the applicant’s notice of exercise of option of 28 April 2008 was an effective exercise of the option under a written lease between the applicant and the respondent dated 26 August 2003. [22] I will receive submissions on costs. -- 8 of 8 --