Health Partners Inc v Constantinos Gonos and Chrysoula Gonos No. SCGRG 96/1197 Judgment No. 5834 Number of Pages 12 Landlord and Tenant (1996) 67 Sasr 338

[1996] SASC 5834

COURT IN THE SUPREME COURT OF SOUTH AUSTRALIA MATHESON J

CWDS
Landlord and tenant - lease of snack bar - reduced rent accepted by landord - premises sold and reduced rent accepted by new landlord - tenant seeking to exercise rights of renewal - earlier breaches of covenants but tenant paying punctually actual rent requested at time of purported exercise - interpretation of renewal clause - whether estoppel arose - argument of tenant upheld and appeal dismissed. Shepherd v Felt and Textiles of Australia Ltd (1931) 45 CLR 359; Finch v Underwood (1876) 2 Ch D 310; Reed and another v Sheehan (1982) 39 ALR 257; Bass Holdings Ltd v Morton Music Ltd (1987) 1 All ER 389 and
(1987) 2 All ER 1001; Commercial Leases 2nd Edn p189; Commercial Tenancy Law in Australia Bradbrook and Croft p187, applied. Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226; Lee and others v Ferno Holdings Pty Ltd (1993) 33 NSWLR 404; The Commonwealth of Australia v Verwayen
(1990) 170 CLR 394; Central London Property Trust Ltd v High Trees House Ltd (1947) KB 130; Hals. Laws of England 4th Edn Vol 27(1) para 216; Je Maintiendrai Pty Ltd v Quaglia and Quaglia (1980) 26 SASR 101, distinguished.

HRNG ADELAIDE, 4, 17 September 1996 #DATE 17:10:1996

Counsel for appellant:     Mr A J Besanko QC with him
   Mr P E Burgess

Solicitors for appellant:    Daenke O'Donovan

Counsel for respondents:     Mr N G Rochow with him Mr A S Clare

Solicitors for respondents: Mellor Olsson

ORDER
Appeal dismisssed.

JUDGE1 MATHESON J

1. The respondents are the proprietors of a snack bar business and trade under the name of Pirie Street Snack Bar at premises known as Shop 2, 78 Pirie Street, Adelaide (the "premises"). They have actually occupied the premises for about ten years, but by Memorandum of Lease registered number 7444666 and dated 15 December 1992, they leased the premises from Angelfish Pty Ltd ("Angelfish") for a term of four years commencing on 8 April 1992 (the "lease"). It was a term of the lease that the respondents pay rental for the premises in the sum of $23,000 per annum payable in advance in equal calendar monthly payments of $1,916.66. As and from 8 April 1993, the respondents were obliged to pay an increased rental in the manner provided by Schedule l(b) of the lease, but Angelfish never sought the payment of rental in excess of $23,000 per annum.

2. By letter dated 1 March 1995 to the respondents, the Property Manager of Angelfish wrote to the respondents as follows:
    "Dear Con and Chrysoula
    RE : YOUR LEASED PREMISES - RENTAL
    We refer to our conversation of today's date and confirm that, due
    to a downturn in trading, your annual rental has been reviewed to
    $16,000 until 7 April 1996.The annual rental will be reviewed at
    that date taking into account trading circumstances at that
    time. The revised monthly rental of $1,333.33 will apply from 8
    March 1995. We trust that you recognise the spirit in which this
    concession is allowed in a climate which is difficult for both
    Landlord and Tenant."

3. The respondents paid $1,333.33 to Angelfish for the months March to October 1995 inclusive.

4. On or about 8 November 1995, the appellant became the registered proprietor of the premises. In a letter to the respondents dated 17 November 1995, its secretary wrote:
    "We wish to advise that we have purchased the building at 76-80
    Pirie Street, Adelaide.Your monthly rental of $1,333.33 due on the
    1st of each month for the shop you occupy at 78 Pirie Street,
    Adelaide should now be payable to Health-Partners. Attached is an
    invoice for rent due as at 1st November, 1995.If you have any
    queries concerning this matter, please do not hesitate to contact
    me." (I interpolate here that I do not know why the due date was
    specified as the 1st of each month. It was in fact the 8th of
    each month, but I do not think anything turns on that.)

5. The appellant continued to invoice the respondents for, and to receive from the respondents, monthly rental payments of $1,333.33, the last of such payments being received on 8 March 1996.

6. Clause 2(v) of the lease states:
     "That if a renewal period is specified in Schedule XVI hereto
    then provided that the lessee shall have duly complied with all
    the covenants, terms and conditions of this lease during the term
    hereof and shall not have committed any breach or breaches thereof
    and there shall be no subsisting breach at the time and the lessee
    shall give to the lessor not less than three (3) nor more than six
    (6) calender months prior to the date of expiration of the term of
    this Lease, notice in writing of the lessee's desire to renew the
    Lease then the lessee shall be entitled to an additional term or
    terms as set out in Schedule XVI hereto commencing immediately on
    the expiration of the initial term of this Lease upon and subject
    to the same covenants terms and conditions as are herein set out
    except for this right of renewal unless more than one period of
    renewal is specified in the said Schedule. The rental for the
    term comprised in the right(s) of renewal shall be determined in
    accordance with the provisions contained in sub-clauses (d) and
    (e) of clause 3 hereof and Schedule XIX mutatis mutandis. The
    renewal period specified in Schedule XVI of the Lease is four (4)
    years."

7. By letter to the appellant dated 5 January 1996, the respondents purported to exercise their option to renew the lease for a further term of four years as provided for in clause 2(v).

8. The respondent Constantinos Gonos made an appointment to see Mr James Hill, the appellant's Chief Executive Officer, on 22 January 1996 to discuss the lease, but by letter dated 16 January 1996 the appellant's secretary wrote to him in these terms:
    "With reference to your appointment with Mr James Hill, Chief
    Executive Officer of Health-Partners on Monday 22nd January, 1996
    at 10.30 a.m. Mr Hill has extended his annual leave and it has
    become necessary for me to cancel this appointment When Mr. Hill
    returns to work, I will contact you and make another
    appointment,In the meantime, would you please, within the next
    seven days, supply me with a copy of your insurance policy in
    accordance with your Lease Agreement."

9. By letter to the respondents dated 24 January 1996, Mr James Hill wrote:
    "I acknowledge receipt of your letter dated 5 January 1996 in
    which you purport to exercise the option contained in the lease of
    the above premises registered number 7444666.I am writing to
    advise that Health-Partners Inc. does not acknowledge that you
    have validly exercised the option to renew the lease. (Mr Hill
    then quoted clause 2(v) of the lease.) You will appreciate from
    this clause that there are four preconditions that must be met
    before you will be considered to have validly exercised an option
    to renew, being:
    (a) You have duly complied with all covenants terms and conditions
    of this lease during its term.
    (b) You have not committed any breach or breaches thereof.
    (c) There shall be no subsisting breach at the time; and
    (d) You shall give to the Health-Partners Inc. not less than three
    nor more than six calendar months prior to the date of expiration
    of the term of this lease notice in writing of your desire to
    renew the Lease.

This clause clearly sets out the time and manner of acceptance of
    the option to renew and it is only by performing all of the
    conditions prescribed can you accept the offer to renew the lease
    resulting in an agreement for a lease being created. A purported
    acceptance without performance of the prescribed conditions would
    not and could not be an acceptance of the offer or an exercise of
    the option.As you are aware the lease required that you pay a
    rental in the first year of $23,000 with that rent being increased
    annually pursuant to the Consumer Price Index determined in the
    manner provided in Schedule 1 (b) of the lease. Instead of paying
    the rent determined in accordance with the lease, you have been
    paying a rental at the rate of $16,000 per annum since 7 April
    1995 which clearly means that you have not duly complied with all
    the covenants terms and conditions of the lease during its term.
    The fact that the lessor has been prepared to accept the lesser
    sum of $16,000 per annum in lieu of the amount specified in the
    lease does not change the fact that you have not duly complied
    with all the covenants terms and conditions of the lease meaning
    that at least one of the preconditions of the exercise of the
    option has not been met.Accordingly your right to occupy the
    premises terminates on 7 April next and the purpose of this letter
    is to advise you that Health-Partners Inc. will require you to
    vacate the premises on that date.Health-Partners Inc. regrets that
    it is unable to offer you a further term. However, it is its
    intention to refurbish and redevelop the building erected on the
    property as a result of which there will be no premises that could
    be let to you."

10. The appellant, however, subsequently sent invoices to the respondents in February and March for the sum of $1,333.33 for the rental of the premises, and the respondents paid punctually.

11. The respondents commenced proceedings in the Magistrates Court (Civil Division) on 14 March 1996 seeking, inter alia, a declaration that they had validly exercised their right to renew the lease for a further term of four years commencing on 8 April 1996. The appellant filed a defence and counter claim. On the application of the respondents, Mr G J Hiskey SM made the following order on 29 March 1996:
    "1. That on and from the 8th April 1996 and until further order
    the applicants remain in occupation of the premises known as Shop
    2, 78 Pirie Street Adelaide in the State of South Australia
    pursuant to monthly tenancy the terms and conditions of which are
    the same as they currently occupy the said premises except as to
    the payment of rent.

2. That pending the trial of this action and delivery of judgment
    that the applicants pay:
    (a) the sum of $1,391.95 to the respondent by way of calendar
    monthly payment in advance with the first payment due and payable
    on 8th April 1996;
    (b) the sum of $741.00 to be paid into Court on or before 8th
    April 1996 and further sums of $741.00 at monthly intervals
    thereafter pending judgment.

3. That until further order the respondent be restrained and an
    injunction is hereby granted restraining it whether by itself, its
    agents, servants or otherwise from taking possession or ejecting
    the applicants from the said premises."

12. It is convenient here to refer to some of the appellant's pleas in its defence and counter claim. It is important at the outset to notice and to stress the pleas in paragraph 7, namely:
    "7. É (appellant):
    (a) admits that it was a term of the lease that the (respondents)
    pay rental for the premises in the sum of $23,000.00 per annum
    payable in advance in equal calendar monthly payments of $1916.66
    from the 8th April 1992 to the 7th April 1993;
    (b) says that from 8th April 1993 the (respondents) were obliged
    to pay rental increase by reference to the Consumer Price Index in
    the manner provided by Schedule I(b);
    (c) says that from 8th April 1993 to 1st March 1995 Angelfish Pty
    Ltd waived its rights to payment of rental at a sum in excess of
    $23,000.00;
    (d) says that by letter dated the 1st of March 1995 to the
    (respondents) Angelfish Pty Ltd advised that it was prepared to
    accept as rental for the premises the sum of $16,000.00 per annum
    payable in advance in equal calendar monthly payments of $1,333.33
    commencing on the 8th of March 1995;
    (e) further says that the reduction of rent (referred) to in
    paragraph 7(d) above amounted to a waiver of rent and not a
    variation of the term of the lease;
    (f) further says that after the (appellant) purchased the land É
    that it continued to accept the reduced amount of rent as set out
    in paragraph 7(d) herein and that such acceptance constituted a
    waiver by the (appellant) of its entitlement to receive rent in
    accordance with the terms of the lease."

13. The appellant then further alleges that from 8 April 1993 the respondents failed to comply with the terms of the lease prescribing the amount of rental and referred to Schedule l(b) of the lease. Pursuant thereto, the appellant alleges the respondents should have paid $1,950.14 per month from 8 April 1993, $1,987.13 per month from 8 April 1994 and $2,043.50 per month from 8 April 1995.

14. Paragraph 10 (so far as is material) read as follows:
    "10. É the (appellant) says:
    (a) that from the 8th April 1993 the (respondents) failed to
    comply with the term of the lease prescribing the amount of annual
    rental.
    (b) - (f) É
    (g) that the (respondents) were obliged pursuant to the lease to
    make monthly payments of rent on the 8th day of April 1992 and
    thereafter on the 8th day of every succeeding calendar month;
    (h) that Clause 2(j) of the lease provides as follows;
    The lessor hereby covenants with the lessee that the lessee paying
    the rent reserved by this Lease and at the times and in the manner
    herein contained and observing and performing and keeping all and
    singular the covenants conditions agreements and restrictions
    herein contained or implied and on the part of the lessee to be
    observed performed and kept according to the true intent and
    meaning of this Lease shall and may quietly and lawfully have hold
    and enjoy the premises and the lessor's plant and equipment (if
    any) during the term without unlawful interruption or disturbance
    from or by the lessor or any person claiming under or in trust for
    the lessor PROVIDED ALWAYS AND IT IS HEREBY EXPRESSLY COVENANTED
    AND AGREED between the lessor and the lessee as follows:
    That if the said rental or any part thereof shall be unpaid for
    the number of days specified in Schedule XII hereto next after any
    of the days hereinbefore appointed for payment thereof and whether
    the same be formally demanded or not or if the lessee shall not
    well and truly have performed observed and kept all and singular
    the terms covenants conditions and restrictions in this Lease
    contained and which on the part of the lessee are to be observed
    performed and kept or if the Lessee (being a Company) goes into
    liquidation, is wound up or dissolved, enters into a scheme of
    arrangement with its creditors, makes an assignment for the
    benefit of its creditors, is placed under official management, a
    Receiver or Manager of any of its assets is appointed or an
    Inspector as appointed pursuant to Part VII of the Companies
    (South Australia) Code or under a corresponding part or Section of
    a Code or Statute of another State or Territory or if the lessee
    (being a natural person) enters into any agreement or arrangement)
    which would by virtue of Section 301 of the Bankruptcy Act render
    this provision void) or if execution shall be levied against the
    lessee and not discharge within 30 days, then in any or either of
    such cases the lessee shall be deemed to have made default
     (i) that the period of time referred to as that set out in
     Schedule XII directly above was seven days;
    (j) that the (respondents) have breached a covenant of the lease
    by failing to make timely payments of rent pursuant to the terms
    of the lease and/or that the failure to make timely payments
    amounts to a default under the lease. (Particulars were given.)
    (k) that the (respondents) were obliged pursuant to clauses l(s)
    and l(t) of the lease to take out a policy of public risk
    insurance to cover the lessor and lessee for any damage occasioned
    to any person by way of bodily injury or damage to property that
    occurred on or in the vicinity of the premises;
    (l) that pursuant to clause l(s) the sum of public risk insurance
    referred to directly above was to be not less than that specified
    in Schedule of the lease, which provided a level of
    $5,000,000.00.
    (m) that pursuant to clause l(t) and Schedule VII the value of the
    insurance (referred) to above was to be $5,000.000.00.
    (n) that the (respondents) have breached a covenant of the lease
    by failing to insure the premises in accordance with clause l(s)
    and l(t) of the lease;
    PARTICULARS    (i) from the 8th April 1992 to until the 17th
    October 1993 the (respondents) policy of insurance for public risk
    was limited to the sum of $2,000,000.00."

15. In its counter claim, the appellant says that it was entitled to possession of the premises from 7 April 1996 and sought an order for possession. It also claimed damages.

16. It is convenient to state here that at the time the respondents purported to exercise any rights of renewal, the relevant insurance cover was and had been since 17 October 1993, $5 million, and that the respondents were paying the monthly rent requested by the appellant and paying it promptly.

17. The claim and counter claim were heard by Mr G C Gumpl SM. In a judgment dated 31 May 1996, his Honour concluded:
    "By letter dated 25 January the respondent advised the applicant
    that, in its opinion, he had failed to 'validly exercise the
    option to renew the lease' citing the applicant's reduced rental
    payments as the basis for the determination that the renewal was
    not valid. The respondent nevertheless continued to receive
    rental payments at the reduced rates and, more importantly, issued
    invoices for the reduced amount of $1,333.33.

In the circumstances, the respondent should be estopped from
    asserting this breach as the basis for refusing to renew the
    lease. It has, by its conduct in identifying the applicant's
    monthly rental at the reduced rate in correspondence, by its
    issuing of invoices for the reduced rate and by its silence in
    correspondence until 24 January, created an unequivocal assumption
    of the continuation of the amended term agreed to by the previous
    landlord.

Clearly the respondent does not wish to renew the lease but its
    reason for refusal, whilst it might have superficial appeal, is
    not supported by its actions. The lease was registered. The
    respondent was aware of the reduced rental. Had the respondent
    advised the applicant immediately upon settlement that it required
    the rental stipulated in the lease this case may have been decided
    differently. However I cannot see how any court could countenance
    the respondent's behaviour in advising the applicant that his
    'monthly rental of $1,333.33' should be paid and issuing invoices
    for that amount and, at the same time, relying on the payment as
    grounds for refusing a renewal.

I agree with Mr Rochow's submissions. The various arguments put
    to me by the respondent as reasons for its refusal to renew were
    afterthoughts. I also agree that the renewal has been validly
    exercised. The applicant has submitted that in any event the
    court should make orders which will do justice between the parties
    with reference to the Trade Practices Act and the Fair Trading
    Act. Having regard to my determination in favour of the applicant
    I do not feel it necessary to proceed further.

I order that the respondent do deliver to the applicant a renewal
    of the lease for a full term of four years in negotiable form.
    The respondent's counterclaim shall be dismissed."

18. In a separate ruling delivered on 7 June 1996 his Honour said:
    "Following on from my finding in regard to the renewal aspect, I
    am of the view that once the landlord has insisted on the rental
    being at the rate stipulated in the lease, then the tenant is

    obliged to pay that rate and any relevant adjustment such as CPI.

In other words, the renewal aspect is separate and distinct from
    the question of what the landlord can ask in rent. Whilst the
    acceptance of a lower rent will preclude the landlord from
    submitting the breach argument as it relates to a renewal, it
    cannot preclude the landlord at any time from insisting on the
    rent as stipulated in the lease. The tenant is therefore liable
    for the amount of rent plus CPI adjustments from the next payment
    after the landlord has formally requested the full rent. Money
    paid in to court by the tenant prior to the request for rent or
    the withdrawal of the previous arrangement shall be credited to
    the tenants' rent."

19. On the hearing of the appeal, I was informed that the respondents still occupy the premises, but that since 8 April they have been making monthly payments on the basis of an annual rental of $25,853.85 in accordance with Schedule 1 of the Lease.

20. At the hearing before Mr Gumpl SM on 15 April, the appellant applied to amend its defence and counter claim, inter alia, by adding the following plea: "That the applicants(respondents) have breached a covenant of the lease by failing to paint the premises in accordance with clause l(i).Particulars: The appellants(respondents) have failed to paint the premises within three calendar months preceding the expiration of the renewal term."

21. In his judgment, his Honour said apropos this plea:
    "I refused the respondent's application to amend its pleadings to
    include this allegation. It could not have been a reason which
    exercised the respondent's refusal to renew. Neither was the
    alleged breach relating to the failure to paint. On that basis I
    rule that these additional claims are irrelevant."

22. I was informed from the bar table that the alleged breach was denied. If, on appeal, I had allowed the amendment, evidence would need to be given either before me or, on a remitter to the learned Magistrate, by him.

23. I am not entirely sure that I follow his Honour's reasoning in the passage just quoted, and in any event I agree with counsel for the appellant that it could rely on circumstances of which it was unaware at the time it refused to renew (compare Shepherd v Felt and Textiles of Australia Ltd (1931) 45 CLR 359 at pp370-371 and 377-378). However, it was a discretionary matter. The premises had apparently been inspected on behalf of the appellant on 9 April 1996, and the application to amend could have been made immediately thereafter. His Honour's ruling was certainly in accordance with caseflow management principles, and I do not think it should now be disturbed.

24. The appellant does not dispute that the respondents' letter dated 5 January 1996 was given within the relevant period, nor does it dispute that it contained an expression by the respondents of their desire to renew the lease. What the appellant submits is that the other conditions precedent to the option to renew were not satisfied, namely:
    "1. that the lessees shall have duly complied with all the
    covenants terms and conditions of the lease;

2. that the lessees shall not have committed any breach or
    breaches of the lease; and

3. that there shall be no subsisting breach at the time (of the
    notice)"

25. The appellant submits that these conditions are cumulative requirements, not alternative requirements. Furthermore, it submits that they have a wide operation and cannot be read down so as to provide that the lessees are entitled to a renewal unless there is an existing right of action at the time of the notice.

26. Counsel for the respondents on the other hand argue for a less strict construction of clause 2(v), and stressed that whatever might have been the position if Angelfish was still the landlord, the respondents had paid the appellant punctually the precise amount that it was being invoiced for monthly payments, and that there was no subsisting breach of the obligation to insure.

27. Both counsel referred me to a number of relevant authorities, but in none of them were the facts on all fours with the instant case. Moreover, unlike those authorities, the plaintiff here is not the original lessor. In considering the authorities, it is important to consider the wording of the option to renew clause - they often differ widely - and to consider whether there was any breach at the time the lessee purported to exercise the option.

28. In Finch v Underwood (1876) 2 Ch D 310, the landlord covenanted that he would:
    "É at the expiration of the term hereby granted (in case the
    covenants and agreements on the said tenants' part shall have been
    duly observed and performed), grant unto the said tenants, their
    executors and administrators, at their expense, a fresh lease of
    the hereby demised premises for any term not exceeding fifteen
    years, at the annual rent of (pounds) 70, payable half-yearly, and
    under and subject to the same covenants and conditions as are
    herein contained, provided the said tenants or either of them,
    their or either of their executors or administrators, shall,
    twenty-one days before the expiration of the term hereby granted,
    give unto the said landlord, his heirs or assigns, a notice in
    writing under their or his hands or hand, of the intention and
    desire to take such fresh lease;"

29. The Court of Appeal decided that the tenant was not entitled to a renewed lease because the interior of the property required repairs to the amount of at least (pounds) 13. In his judgment at p315, James LJ said:
    "I think, moreover, that the Plaintiff, if otherwise entitled to a
    lease, would have lost that right by breach of the covenants to
    repair. No doubt every property must at times be somewhat out of
    repair, and a tenant must have a reasonable time allowed to do
    what is necessary: but where it is required as a condition
    precedent to the granting a new lease that the lessee's covenants
    shall have been performed, the lessee who comes to claim the new
    lease must shew that at that time the property is in such a state
    as the covenants require it to be. He can easily send in his
    builder, get a report of what repairs are necessary, and do them
    before he applies for the lease. There is no hardship in
    requiring this of him, and I think he is not entitled to excuse
    himself by saying that the want of repair is trifling. The answer
    to that is, 'No matter, your bargain was to leave the property in
    thorough repair.' If he has not fulfilled his legal bargain,
    which is also his bargain in equity, he cannot sustain his claim
    for a lease."

30. Mellish LJ said at pp315-316:
    "I am of the same opinion. The tenant must take the covenant to
    renew as he finds it; if it contains conditions precedent he must
    comply with them before he can claim the benefit of it, and if he
    has not done so a Court of Equity cannot relieve him. Under the
    terms of the covenant in the present case the lease is to be
    granted only in case the covenants and agreements on the part of
    the tenants shall have been duly observed and performed. What
    does that mean? I think it does not mean that the tenants must
    have strictly observed and performed the covenants all through the
    term, for the expression is, 'shall have been duly observed and
    performed;' and I think that this is satisfied if they have been
    so observed and performed that there is no existing right of
    action under them at the time when the lease is applied for. In
    the present case the landlord alleged the premises to be out of
    repair, and sent in his surveyor, who certified that the interior
    required repairs to the amount of (pounds) 45. The Plaintiff's
    surveyor does not deny the accuracy of any one of the items of
    dilapidation set forth by the Defendant's surveyor, but estimates
    the cost of repairing them at (pounds) 20; and another witness for
    the Plaintiff states his readiness to repair them for (pounds) 13
    10s. It is clear, then, that at the time of applying for the
    lease there was an existing breach of the covenant to repair for
    which an action would lie. In a case like this, if a tenant
    wishes to claim the benefit of such a covenant he should send in
    his surveyor to see what repairs are needed, and should effect the
    repairs which the surveyor certifies to be requisite. The Court
    would be inclined to give credit to a survey thus honestly made,
    and would lean towards holding the condition precedent to have
    been complied with. But in the present case it is admitted that
    there was an existing breach of the covenant to repair."

31. Baggallay JA also agreed.

32. The case of Reed and another v Sheehan (1982) 39 ALR 257 concerned a licence agreement with an option to purchase. I cite it not for the decision therein but because at pp265-266, Fox J referred to many of the relevant authorities including two relevant High Court dicta. His Honour said:
    " There is a second and independent ground fatal to the success of
    the appeal, which I put forward with more hesitation because it
    depends on a question of construction which was not argued before
    us, and upon which views can differ. The line of authority to
    which I have already referred concerns conditions related to the
    effective exercise of options, and holds that it is a sufficient
    compliance if a prior breach or non-performance of a term or
    condition of the prime agreement (usually a lease or licence
    agreement) is remedied before the option is exercised or, in some
    cases, before the exercise becomes operative. The learned judge,
    in reliance upon the words 'during the term of the licence' in cl
    11 held that absence of a breach at any time was necessary, and
    that bringing performance up to date was not sufficient. As a
    matter of general principle, I prefer a construction which gives
    business reality to the transaction; payment of rent or a licence
    fee a day or two late (or early) is so common that only very
    positive terms relative to that circumstance should be understood
    to defeat an option given by the same agreement. The option is,
    after all, part of the consideration which the licensee receives.

The cases to which I refer adopt this approach. They show for
    example, that phrases such as 'due compliance' are satisfied by
    late compliance, provided that what has to be done is done in
    sufficient time. The authorities start with the advice of two
judges, Erle and Coleridge JJ in Grey v Friar (1854) 4 HL Cas 565.
    Their effect is expressed by the High Court in Falk v Haugh (1935)
    53 CLR 163 at 177-8, in the joint judgment of Rich, Dixon, Evatt
    and McTiernan JJ: 'Thus a condition precedent to a right to renew
    a lease, requiring that the covenants on the part of the tenant
    shall have been duly observed and performed, does not mean that
    the tenant must have strictly observed and performed the covenants
    all through the term; it is satisfied if the covenants have been
    so observed and performed that there is no existing right of
    action under them at the time when the lease is applied for (per
Mellish LJ, Finch v Underwood (1876) 2 Ch D 310 at 316).'

A similar statement is to be found in the judgment of Dixon CJ in
MacDonald v Robins (1954) 90 CLR 515 at 519: 'The condition
    precedent is expressed in the covenant in the lease by the
    defendant, which confers the option, by the words "the lessees
    having duly observed performed fulfilled and kept all the
    covenants conditions agreements and stipulations herein contained
    or implied on their part to be observed performed fulfilled and
    kept". No doubt these words make it essential to the right to
    exercise the option that the lessees' covenants in the lease "have
    been so observed and performed that there is no existing right of
    action under them at the time when the" option comes to be
exercised: cf per Mellish LJ, Finch v Underwood (1876) 2 Ch D 310;
Bastin v Bidwell (1881) 18 Ch D 238; Wilson v Stewart (1889) 15
    VLR 781' (see also his Honour's observations at p521). In Starkey
v Barton (1909) 1 Ch 284, referred to in Falk v Haugh, supra, an
    option to purchase was given to a lessee. Rent was payable
    quarterly in advance. The option was exercisable provided that
    the plaintiff should 'in the meantime have duly paid the said rent
    hereby reserved'. The plaintiff did not pay the rent due on 25
    December 1907 until 10 January 1908. On 20 March 1908 notice of
    exercise of the option was given. It was held that 'duly' did not
    mean punctually, and that the condition precedent to the exercise
    of the option had been fulfilled. Parker J (at 289) made the
    following pertinent observations: 'The law is quite clear that
    where there is a condition precedent to the exercise of an option
    of this sort the condition must be strictly fulfilled, but, on the
    other hand, there are no special rules of construction by which
    clauses creating conditions precedent are to be interpreted' and,
    later: 'On the other hand, all rent due up to the date at which
    the option was exercised had in fact been paid, and it had been
    duly paid in the sense that the payment made discharged the legal
    obligation and would have been a complete defence to an action for
    rent or on a covenant for repayment of rent, and also, apart from
    any question of waiver, to an action to endorse the provisor for
    re-entry.'

In Robinson v Thames Mead Park Estate Ltd (1947) Ch 334; (1947) 1
    All ER 366, Evershed J held that work completed out of time, but
    before notice given, nevertheless satisfied a requirement that a
    tenant who had purported to exercise an option to continue the
    tenancy, should have 'faithfully performed and observed all her
    agreements'. To the same effect are Simons v Associated
Furnishers Ltd (1931) 1 Ch 379; Australian Can Co Pty Ltd v Levin
and Co Pty Ltd (1947) VLR 332 and Healy v Southern Milk Transport
Pty Ltd (1954) VLR 448."

33. Mr Rochow, counsel for the respondents, relied on the following passage in Duncan's "Commercial Leases", Second Edn p189, a passage which I adopt as the law here:
    "It is standard for a clause giving an option to purchase or renew
    to provide that it shall only be exercisable if the lessee shall
    have paid the rent reserved and have performed and observed the
    several stipulations on the lessee's part contained in the lease
    up until the date of the exercise. Such a provision is properly
    described as a condition precedent to the exercise of the option.
    Strictly, if the clause is so read, past breaches which have been
    remedied would deprive the lessee of the right to exercise the
    option.

However, such a clause has been conventionally construed less
    strictly than it is expressed. Thus, although a lessee may have
    been in breach of covenant, providing the breach is remedied so
    that the account between the parties is clear at the date of
    exercise of the option, the lessee will be given the benefit of
    the less strict construction. Yet, a court will be concerned if
    there is an outstanding breach unremedied, notwithstanding the
    fact that it appears to be only trivial and would not require much
    for remedy. Generally, the condition precedent will be satisfied
    if there is no existing right of action under the conditions and
    covenants at the time when the new lease is sought. The general
    weight of opinion, accepted in the United Kingdom, is that a court
    will look to the state of affairs at the expiration of the period
    of notice which has to be served prior to exercise of the option.
    If there is a clean slate at that time between lessor and lessee,
    then notwithstanding earlier breaches, there will be sufficient
    compliance with that clause."

34. The learned author referred to the decision in Bass Holdings Ltd v Morton Music Ltd at first instance and reported in (1987) 1 All ER
389, but was apparently unaware that the three judgments in the Court of Appeal all support his views (see (1987) 2 All ER 1001). Kerr LJ said at pp1005-1006:
    " In my view the position on the authorities and on the issues
    raised by the present case can be summarised as follows.

(1) The first question is whether, on the true construction of the
    proviso in question, the absence of any material breaches of
    covenant by the tenants is a condition precedent to the exercise
    of the option, as well as the giving of the requisite notice
    purporting to exercise the option.

Generally, and admittedly in the present case, the proviso
    contains a double condition precedent, viz (i) the absence of any
    material breaches of covenants and (ii) compliance with the
    requirement as to notice.

(2) That, however, leaves the crucial question whether the
    condition precedent (i), that there must be no material breaches
    of covenant by the tenants, applies to spent as well as to
    subsisting breaches. This question is covered by dicta in
    numerous cases, going back in particular to Grey v Friar (1854) 4
HL Cas 565, 10 ER 583, and by the decision of Clauson J in Simons
    v Associated Furnishers Ltd (1931) l Ch 379, (1930) All ER Rep
    427. The upshot of these authorities is that spent breaches will
    not destroy the tenant's right to exercise the option, but
    subsisting breaches will. As shown by the passages to which I
    refer below, the reasoning is in effect as follows. Firstly, it
    must be accepted that absolute and precise compliance by the
    tenant with every single covenant throughout the period of the
    lease prior to the operative date is virtually impossible of
    attainment. If this were required as a condition precedent, then
    the option would in practice be worthless or merely at the mercy
    of the landlord. Therefore the parties cannot have intended that
    the absence of spent breaches should be a condition precedent.
    Secondly, however, it is natural and sensible that the landlord
    should require the tenant not to be in breach of any covenant on
    the operative date and that all outstanding claims for breach of
    covenant should have been previously satisfied, so that the lease
    is then effectively clear. The proviso is therefore to be
    construed as intended to apply to subsisting breaches, with the
    result that the relevant condition precedent is the absence of any
    subsisting breach.

(3) The only suggestion that spent breaches might be able to
    preclude the exercise of the option is to be found in the judgment
    of Griffiths LJ in Bassett v Whiteley (1982) 45 P and CR 87. But
    this lies in a different line of authority, as explained below,
    and cannot properly be applied to the present case.

(4) Subject to the question whether the wording of any particular
    proviso imposes a condition precedent to the exercise of the
option, which was the issue in Grey v Friar (1854) 4 HL Cas 565,
10 ER 583, the precise words used in such provisos in relation to
    the observance of the covenants have played no part in the
    conclusions summarised in (2) above. While it would of course be
    possible to formulate a proviso which is sufficiently explicit to
    cause spent breaches to preclude the exercise of the option, there
    appears to be no reported case in which this was so; and the
    wording of the proviso in the present case is in a form similar
    to, and effectively indistinguishable from, the formulations
    adopted in all the cases subsequent to Grey v Friar. Accordingly,
    in mentioning some of these cases below, it would serve no purpose
    to set out the precise terms of the particular provisos.

(5) The reasoning summarised in (2) above, which has led to the

    generally accepted conclusion that the condition precedent imposed
    by provisos like the present was intended to apply only to
    subsisting breaches, is of course particularly cogent in relation
    to 'break' options. In such cases it will obviously be of great
    importance to the landlord that the demised land or premises
    should be surrendered to him free from any subsisting breaches of
    covenant. In cases of options for renewals it may also be of some
    importance to the landlord that the slate should be clean before
    the new lease takes effect. In cases of options to buy the
    freehold, the absence of subsisting breaches may be less important
    to the landlord. However, the authorities suggest no distinction
    between these types of option in relation to the conclusions
    summarised in (2) above. Admittedly, Grey v Friar (1854) 4 HL Cas
565, 10 ER 583 and Porter v Shepherd (1796) 6 Term Rep 665, 101 ER
    761, which was followed in Grey v Friar, both involved 'break'
    options. But their reasoning has been followed and applied in
    relation to tenants' options generally. Accordingly, there is
    nowadays no reason for imposing any different or special
    construction on the familiar forms of provisos governing any
    particular type of tenants' option, such as the option for a
    further lease in the present case.

(6) Strong arguments can admittedly be raised in extreme cases
    against the construction that the effect of the condition
    precedent is to be limited to the absence of subsisting breaches.
    For instance, what about a tenant who has persistently broken his
    covenants and only puts matters right just before the operative
    date? As mentioned below, this troubled Griffiths LJ in Bassett v
    Whiteley (1982) 45 P and CR 87, albeit in a different context.
    But it must also be borne in mind that the condition requiring the
    absence of any subsisting breach on the operative date involves
    not only that any breach should have ceased, but also that there
    should be no subsisting cause of action in respect of any breach.
    Thus, a landlord may perhaps take advantage of the latter
    condition, in order to defeat a tenant's option, by postponing any
    claim for forfeiture or damages in respect of an earlier breach
    until after the operative date. Anomalies on both sides are
    inevitable on any construction. But the consensus to be found in
    the authorities is that the anomaly which must be rejected as too
    great to be acceptable is that any spent breach should disqualify.

(7) The upshot, in cases such as the present, is that we are
    nowadays dealing with what has become a standard conveyancing
    formula imposing a condition precedent concerning the absence of
    (material) breaches of covenant in relation to the exercise of
    virtually any tenants' option in leases. The unanimous consensus
    on the authorities in relation to a proviso such as the present is
    as summarised in (2) above, viz that the condition applies to
    subsisting breaches and not to spent breaches. There is no
    reported case in which any tenant's option has been defeated by a
    spent breach, and virtually none in which this has even been
    suggested. In these circumstances it is in my view of greater
    importance that this accepted long-standing interpretation of
    provisos such as the present should be respected and upheld, since
    it must have been relied on and applied in countless
    transactions." (See also per Nicholls LJ at p1014 and p1018 and
    per Bingham LJ at pp1023-1024. And see Bradbrook and Croft
    "Commercial Tenancy Law in Australia" at p187, and cf. William
    Rethmeier and Anor v Pioneer House Pty Ltd Unrep Jt of Bryson J
    delivered in the NSW Supreme Court on 7 February 1990.)

35. What the appellant says in this case is that notwithstanding that it had no existing right of action against the respondents at the time the renewal was applied for, it can rely on breaches committed by the respondents whilst Angelfish was the lessor for the purpose of denying their rights of renewal, and notwithstanding that Angelfish has never sought to rely on any such breaches. I do not believe that the law permits such an inequitable result.

36. The respondents' plea of estoppel was upheld by the learned Magistrate. They alleged that the waiver by the appellant of the payment of the monthly rentals in accordance with the terms of the lease (which waiver the appellant admits) "gave rise to an estoppel by reason of the conduct of the (appellant) in creating an assumption of continued waiver by rendering invoices for the amounts and accepting rent on the said invoices" (see paragraph 1.2.1). Mr Rochow classified it as estoppel by convention, and referred to Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226 at pp244-245 and Lee and others v Ferno Holdings Pty Ltd (1993) 33 NSWLR 404. Mr Besanko QC, counsel for the appellant, submitted that there was no evidence in the case that the respondents had acted to their detriment, and referred to The Commonwealth of Australia v Verwayen (1990) 170 CLR 394. The learned Magistrate did not comment on this aspect.

37. Consideration of this plea initially led me to the cases of Central London Property Trust Ltd v High Trees House Ltd (1947) KB 130 (see also Hals. Laws of England 4th Edn Vol 27(1) para 216) and Je Maintiendrai Pty Ltd v Quaglia and Quaglia (1980) 26 SASR 101, both cases involving a situation where a lessor accepted a reduced rent, but I have finally reached the conclusion that they are not really in point. They might well be if, for example, Angelfish or the appellant were suing for arrears of rent.

38. In my opinion, clause 2(v) should not be construed to allow the appellant to rely on breaches of covenants when it was not the lessor, or on breaches since becoming lessor which it has waived. His Honour's actual decision, if not all his reasoning, was correct. I would dismiss the appeal.