What happens if a lessee duly exercises its option over a commercial tenancy but the landlord does not respond with any proposal as to market rent and fails to provide to the lessee a new lease as the arrangement requires it to do?
A dispute over a convenience store tenancy in Brisbane’s CBD at the heart of the Cross River Rail redevelopment precinct in Albert Street illustrates the dilemma and provides a good example of relief against forfeiture at the margins.
NightOwl Properties entered into a lease at 132 Albert Street Brisbane in October 2010 which contained two 5 year options the first of which was to start in October 2020.
In September 2019 Cross River Rail construction work began within metres of the shopfront, and that part of Albert Street was closed to traffic.
In January 2020 – within the option exercise window – NightOwl’s Alan Minshull gave to its landlord Replay, a written notice of exercise of the first option period by email to its director Jon Sophios.
He requested a downwards rental review having regard to “the current retail climate and general market conditions” but made it clear he was open to discussion and requested an early response.
In March 2020 – with the onset of the Covid pandemic – Australia closed its international border, and Queensland closed its southern border to interstate residents.
In April 2020 a National Cabinet Mandatory Code of Conduct imposed a set of good faith principles for application to commercial tenancies where tenants’ retail businesses were adversely affected by the “once-in-a-century public health crisis”.
Shortly thereafter, NightOwl sent store turnover figures and notified Replay that it proposed to reduce rent payments in line with the reduction in its turnover
The landlord notified it must comply with its lease obligations until any rent relief had been agreed upon. NightOwl provided further financial data as requested.
Queensland’s COVID-19 Emergency Response Regulation came into force at the end of May. That regulation required the landlord to “cooperate and act reasonably and in good faith in negotiating a reduction in rent”, ie to provide rent relief whether by way of deferral or waiver but requiring at least half whatever concession was agreed to be waived rather than merely deferred.
Between April and August 2020, NightOwl paid self-assessed reduced rent which Replay accepted.
It resumed paying the full rent and outgoings in September.
On the last day of the original term – still without any acknowledgement of the renewal – NightOwl sent a rental valuation pitching annual market rent at $81,000 plus outgoings.
Disruption by ongoing Cross River Rail construction featured in the valuer’s market rent assessment.
Follow-up from NightOwl’s franchising director Craig Turrell and in-house solicitor Libby Fitzgerald failed to secure any response from the landlord or its solicitors.
The tenant then sought to have the market rent determined by the mechanism contained in the lease by inviting Replay to make a selection from the three specialist retail valuers it had nominated to perform the exercise.
On 9 December, the landlord’s solicitors finally responded only to notify that the renewal was refused by reason of NightOwl’s failure to pay full rent during the Covid emergency response period.
“The Lease is not affected by the COVID Regulation,” the solicitors responded and demanded – by way of a Notice to Remedy Breach of Covenant – $58,000 in rent that NightOwl had withheld.
Notwithstanding the tenant promptly paid that sum in full, the landlord still refused to grant a renewal contending that NightOwl’s breaches after giving the option exercise notice in January denied it the additional term.
The dispute came before Justice Thomas Bradley in the Supreme Court at Brisbane.
NightOwl chose not to argue any entitlement for reduced rent under the Covid emergency response regulation and conceded that for the purposes of the contest, it had been in breach by failing to pay in full.
The argument turned on whether by its conduct, the landlord had waived the tenant’s breaches and if not, whether the tenant was entitled to relief against forfeiture of the lease to which it was otherwise entitled pursuant to the option.
A familiar option renewal proviso required that there be no unremedied breach that had not been waived by the landlord at the time the option is exercised “and thereafter prior to the expiry date”.
And another necessitated the lessee to have “at all times during the term strictly observed and performed the provisions of the lease”.
Justice Bradley observed that a landlord who receives and accepts rent from a tenant in breach is usually taken to have waived its right to re-enter for the breach because acceptance of rent is inconsistent with a right to terminate for the earlier failure to pay.
Replay’s acceptance of December 2020 rent was – he ruled – a recognition that the tenancy persisted and constituted a waiver of its right to re-enter.
It did not however put the tenant in a position as if there had been no breach and the landlord remained entitled to rely on such breaches as a basis to refuse to grant a new lease.
Neither was its silence is to be taken as a waiver of its right to rely on NightOwl’s breaches to avoid the obligation to grant a new lease or otherwise rely on the option provisos to that end.
Justice Bradley went on to note however that the landlord-tenant relationship is not simply contractual because it involves a grant of a leasehold estate.
“Equity abhors a forfeiture,” he observed. “It is a long-standing practice to do justice between parties by granting relief against forfeiture of leasehold estates where an instrument seems to require strict observance of formalities that, in truth, were included as security to ensure the payment of rent”.
In equity – he explained – a proviso in a lease for re-entry on a failure to pay rent is regarded as merely a security for the rent.
Thus where a landlord can be restored to the position it was in before the breach, the tenant is entitled to equitable relief against forfeiture if the tenant has remedied.
“I reject Replay’s submission that the court is unable to grant equitable relief against the forfeiture of an option in a registered lease where the circumstances would otherwise make relief appropriate.
Because of many factors – NightOwl was a long-standing tenant; the landlord long delayed its responses; it knew the tenant had conducted itself as having validly exercised the option; the payment of reduced rent was not a “wilful” or grave breach – he adjudged the relief should be granted even though the landlord’s conduct could not be classed as unconscionable.
“In all the circumstances, it is necessary to intervene to avoid injustice [and] the [option] covenant of the Lease ought to be specifically performed,” he ordered.
Note that NightOwl was ineligible for relief under Property Law Act s 128(4) because that section does not have an application to breaches which occur after a lessee gives notice of the exercise of an option, prior to the end of the original term.