Kofoo Sussex Pty Ltd v Commerce Building Pty Ltd
[2014] NSWSC 1079
•08 August 2014
Supreme Court
New South Wales
Medium Neutral Citation: Kofoo Sussex Pty Ltd v Commerce Building Pty Ltd. [2014] NSWSC 1079 Hearing dates: 22 July 2014, 24 July 2014, 30 - 31 July 2014 Decision date: 08 August 2014 Jurisdiction: Equity Division Before: Robb J Decision: Directions will be made to allow the parties to address the conditions that should be attached to the court's proposal to grant relief against forfeiture to the plaintiff, as discussed in pars 160 to 172 of these reasons
Catchwords: LANDLORD AND TENANT - termination of the tenancy - relief against forfeiture - principles applicable where there is delay in commencing proceedings, there is doubt about whether the lessee can pay future rent, and a lease has been granted to a new lessee - exercise of discretion to grant relief against forfeiture - conditions upon which relief should be granted. Cases Cited: Bland v Ingrams Estates Ltd [2001] 2 WLR 1638
Chan v Cresdon Pty Ltd (1989) 168 CLR 242
Courtney Creche Pty Ltd v Okko's Fine Art and Custom Framing Pty Ltd (unreported, 22 June 1995)
Dar-Win Pty Ltd v Tagliaferri (1986) Aust & NZ Conv Rep 875
Home Ideas Centre Sydney Pty Ltd v Alem Pty Ltd [2010] NSWSC 695
Melacare International Ltd (in rec) v Daley Investments Pty Ltd [1999] NSWSC 496; (1999) 9 BPR 17,095
Newstart 236 Pty Ltd v Chantal Holdings Pty Ltd [2000] NSWSC 1102; (2000) 10 BPR 18,515
Tannous v Cipolla Bros Holdings Pty Ltd [2001] NSWSC 236; (2001) BPR 18,563
Twinside Pty Ltd v Phoenician Nominees Pty Ltd [2008] WASC 110
Wilkinson v S & S Gikas Pty Ltd [2006] NSWSC 1314; (2006) 12 BPR 23,685
Wynsix Hotels (Oxford St) v Toomey [2004] NSWSC 236; (2004) 17 BPR 32,633Texts Cited: Peter Butt, Land Law, (6th ed 2010, Thomson Reuters) Category: Principal judgment Parties: Kofoo Sussex Pty Ltd (plaintiff)
Commerce Building Pty Ltd (first defendant)
Hawker Restaurant Pty Ltd (second defendant)Representation: Counsel: B Zipser (plaintiff)
D Currie (first defendant)
J Lee (solicitor) (second defendant)
Solicitors: Emanuel Lawyers (plaintiff)
T K Legal (first defendant)
Comasters Law Firm and Notary Public (second defendant)
File Number(s): 2014/215831
Judgment
The plaintiff, Kofoo Sussex Pty Ltd, which I will call "Kofoo Sussex", applies for an order that it be granted relief against forfeiture of a lease dated 28 August 2012 ("the Kofoo lease") over Shops G.02 and G.03 at 345B - 353 Sussex Street Sydney ("the premises").
The lessor, and first defendant, is Commerce Building Pty Ltd ("Commerce Building").
The second defendant, Hawker Restaurant Pty Ltd ("Hawker Restaurant") entered into a lease of the premises from Commerce Building, after the Kofoo lease was terminated by Commerce Building, on 7 April 2014, for non-payment of rent.
Kofoo Sussex is a subsidiary of Kofoo Australia Pty Ltd ("Kofoo Australia"). Kofoo Australia also leased premises in the building at Sussex Street. That lease was also terminated on 7 April 2014, for non-payment of rent. Kofoo Australia has not sought relief against forfeiture. I will sometimes use "Kofoo" to refer to the two Kofoo companies collectively. That is appropriate in the many cases where communications were made to or on behalf of both companies at once.
All of the shares in Kofoo Australia are owned by Mr Jae Ung Heo. Mr Heo is a citizen of South Korea, and is presently resident in that country, although an address in Liverpool Street, Sydney is given as Mr Heo's address in the ASIC search for Kofoo Australia, and an address in Queensland given for Mr Heo with respect to Kofoo Sussex. Mr Heo is presently the only director of both Kofoo companies. Mr Heo gave evidence that since early 2011 he has visited Australia over 8 times for approximately 10 months in total. He says that he owns 10 well-known franchise brands for various food outlets in South Korea. He claims to be a successful businessman.
These proceedings were commenced in the Duty List on 22 July 2014. Counsel appeared for both the plaintiff and the first defendant on that occasion. The summons was made returnable on 24 July 2014, and the matter was heard on 30 and 31 July 2014. At the hearing Hawker Restaurant was represented by its solicitor, Mr Lee.
I do not doubt the professional care and diligence of the legal representatives for the parties in this matter, but in hindsight it appears that Kofoo Sussex should not have sought final relief in the Duty List. I accept that the parties had a reasonable need for expedition, but that is not a sufficient criterion for commencing proceedings in the Duty List. On 24 July 2014 I listed the matter for hearing on 30 July 2014 on the basis of an estimate of 2 to 3 hours given to me by counsel. While it is true that the hearing of the matter did not take much longer than the upper range of that estimate, that result only followed from a truncation of the time that would ordinarily have been devoted to hearing a matter of the complexity of the present case. It may be that I ought to have appreciated at the outset that the matter should not be dealt with in the Duty List, but pressure of business is usually high in the Duty List, which tends to take all comers, and the court is largely dependent on the parties to only bring matters on for hearing in the Duty List, when they are appropriate for the procedures in that list.
The fact that the hearing was conducted on an urgent basis in the Duty List has had consequences to which I will return below.
Facts
By lease dated 28 August 2012 between Commerce Building as lessor and Kofoo Sussex as lessee the former leased shops G.02 and G.03 to the latter for a 10-year period commencing on 20 September 2012 and terminating on 19 September 2022. The use of the premises permitted by clause 10.01 was as a Korean restaurant. The initial rent was $355,000 per annum exclusive of GST, and clause 4.03 provided for annual CPI or market reviews. Clause 15.01 required Kofoo Sussex to provide a bank guarantee in an amount that was the greater of $130,166.67, or an amount equivalent to 4.4 times the monthly GST inclusive rent.
Clause 4.02 required Kofoo Sussex to pay the rent by 12 equal monthly instalments in advance on the first day of each month.
The lease was registered as AH291586J. A title search for the property would reveal the existence of the lease and that it would expire on 19 September 2022.
Earlier, on 6 July 2012, Kofoo Australia had leased Suites 2.04 and 2.05 from Commerce Building for a term of 10 years between 10 July 2012 and 9 July 2022. These premises were to be used as a commercial office. The rent was $45,000 per annum exclusive of GST.
Later, on 31 October 2013, Kofoo Australia leased Suite 1.03 in the building from Commerce Building for a period of 8 years 8 months and 35 days, from 5 November 2013 to 9 July 2022, for use as a storeroom. The initial rent was $32,480 per annum exclusive of GST.
On the same date Kofoo Australia leased from Commerce Building Shop B.03 for the same period, also for use as a storeroom. The initial rent was $32,490 per annum exclusive of GST.
It appears that Kofoo Australia surrendered its lease over Suites 2.04 and 2.05 on 11 December 2013 in return for its lease over Suite 1.03 and Shop B.03.
Mr Heo says in his affidavit that he invested approximately $1.5 million to establish the restaurant. He did not elaborate upon how that money was spent, or provide any documentary corroboration. It is not possible to verify the payment, or to ascertain in the circumstances whether any part of the money expended has been wasted. It is reasonable for the court to accept that it would have been necessary for Kofoo Sussex to expend a significant amount to establish the restaurant, but Mr Heo's bare assertion as to the payment of $1.5 million can only be given limited weight.
On 4 November 2013 Commerce Building delivered notices of breach to Kofoo Sussex and Kofoo Australia addressed to the leased premises (which was in accordance with the leases). The notices claimed that the lessees had not paid rent due for September 2013. The amounts claimed were $18,964.94 and $12,334.10 (which included the rent due for the month of October).
In the following months considerable correspondence occurred between the lessor and the lessees concerning continuing rental defaults and late payments. An email written by Bruce Yip on behalf of the lessor on 17 December 2013 referred to a discussion that morning in which Mr Yip was advised that Kofoo Sussex was planning to add a Korean BBQ to the existing restaurant, and that the lessees were not able to pay the outstanding total rent of some $40,000, but agreed to pay $15,000 by 18 December 2013. Mr Yip advised that if the $15,000 was not paid the lessor would have no alternative but to lock the lessees out.
Mr Jung, on behalf of Kofoo, advised by email on 17 December 2013 that "at the moment, we can't make much money from our restaurant". He suggested that matters would only improve if the council approved an extension of the restaurant's opening hours. By 9 January 2014 the total outstanding rent was $58,260 inclusive of GST for December and $101,278 inclusive of GST for January. By an email of that date Commerce Building set out a schedule for payments for the lessees to catch up.
Mr Jung advised on 17 January 2014 that it was "hard to pay" in accordance with Commerce Building's schedule.
In an email dated 21 January 2014 Mr Jung advised that he had tried to talk with the "big boss" that day but could not do so, but would contact him the next day.
On 21 January 2014, at a later time, Mr Jung advised the lessor that he had already spoken with "our big boss today" and would let the lessor know tomorrow what he would do.
Ms Wei, Commerce Building's leasing officer (employed by its parent company) provided the lessees with an email on 23 January 2014 that listed rent payments since 7 August 2013. It appears that that was the last day upon which the lessees made full payments of rent. Thereafter payments were made in dribs and drabs.
On 30 January 2014 Ms Wei asked Mr Jung to say what his plan was concerning the payment of outstanding rent, and advised that the lessor had two prospective tenants who would like to inspect Shops G.02 and G.03.
Also on 30 January 2014 Mr Jung advised Ms Wei that he was trying to obtain money from Korea by bank transfer, but it was a holiday in Korea. He said that he had contacted head office, but required its permission before a payment would be made.
Mr Jung advised Ms Wei on 11 February 2014 that "we" still wanted to sell the business for a price of $700,000, which was negotiable.
On 19 February 2014 Mr Heo, as owner, entered into a Business Management Service agreement with Mr Jung as manager. The parties did not refer to this agreement in submissions. Although the agreement is written in English, the meaning of some of its terms is not clear. Recital B suggests that Mr Heo appointed Mr Jung as manager of the restaurant on 18 August 2013. Recital E says that the manager acknowledged that he was responsible for the business incurring a debt of around $100,000 during the period 18 August 2013 to 14 February 2014. Recital F states that the manager desired to purchase the business for $500,000. The term of the agreement was 24 months from the Commencement Date as defined in clause 1.1, which was probably around the date of the agreement. Clause 2.1 contained a guarantee by the manager that when the term expired the manager would either return the business back to the owner without any debts, or pay $500,000 to the owner. Clause 2.1.3 implies that the manager was entitled to sell the business to a third party. Clause 2.1.4 required the manager to report to the owner by way of email on the last day of the month in relation to the rent, and if the manager failed to pay the rent for two months, then the manager was required to report to the owner immediately and return the business to the owner.
Mr Heo refers to the management agreement in his affidavit. He says that by about February 2014 the restaurant had suffered losses of about $500,000, and that Mr Jung agreed to pay those losses back to him. The Business Management Service agreement was entered into to secure that purpose. The $500,000 in losses were apparently in addition to the $100,000 debt referred to in the agreement.
Mr Heo also claims that it was not until 26 May 2014 that he heard a rumour that the restaurant had closed, and it was not until 31 May 2014 that Mr Heo learned that Commerce Building had served notices of demand on Mr Jung and had terminated the leases.
The terms of the Business Management Service agreement, and the concessions made by Mr Heo in his affidavit, establish that by February 2014 Mr Heo was well aware that the restaurant had accumulated substantial losses and debts, and was not trading profitably. Mr Heo did not explain the nature of the $100,000 in debts. He apparently saw fit to leave the control of the restaurant in the hands of Mr Jung, for a further 24 months, in the hope that Mr Jung would be able to trade profitably and pay the debts and repay the losses. Mr Heo did not explain why it was reasonable for him to believe that Mr Jung would be capable of achieving this result. Mr Heo did not take any steps to capitalise the restaurant's operations.
The evidence does not disclose who the "big boss" was to whom Mr Jung says he spoke in January 2014. The evidence suggests that the total amount of outstanding rent to the end of February 2014 was $71,648.
Mr Heo's evidence could not be tested in cross-examination, because he is in Korea. The evidence referred to above, however, casts considerable doubt on his claim that he was entirely ignorant of the lessees' difficulties in paying rent until some time in May 2014.
On 3 April 2014 Commerce Building served notices of breach on each of the lessees. The evidence is a little confusing because there are two notices to each of the lessees on that date, which claim slightly differing amounts. The amounts claimed from Kofoo Sussex for Shops G.02 and G.03 were $36,161.41 and $35,907.22. The notices required payment of the outstanding rent that day.
On 7 April 2014 Commerce Building served notices of termination under clause 11.04 of each of the leases.
In these proceedings Kofoo Sussex now accepts the validity of the termination of its lease.
Ms Wei explained the lessor's position in a lengthy and considered email to the lessees on 8 April 2014. She referred to the lessor's belief that: "We think it is better to bring the tenancy to an end than see Kofoo incur more and more debt over a failing business no matter your effort".
On all of the available evidence the probability is that Kofoo Sussex was not able to pay rent in accordance with its lease because the restaurant was unsuccessful and was not able to generate enough income to pay the rent. Ms Wei's reference to "a failing business" was a reasonable conclusion for her to reach based upon her experience of the lessees' defaults, and also the explanations given to her by Mr Jung.
Ms Wei referred to the need for the lessor to mitigate its loss by trying to relet the premises as soon as possible, and suggested that Commerce Building would relet the premises to Mr Jung on a short-term basis, which would assist in reducing the lessor's loss.
There is in the evidence an unsigned letter of offer from Commerce Building to Mr Jung to let Shops B.03, G.02 and G.03 to Mr Jung on a month-to-month basis. Apparently, Mr Jung did enter into a lease of the premises for a short time.
It appears that by no later than about 16 April 2014 Commerce Building started offering terms to third parties for new leases for the premises.
On 2 June 2014 Kofoo Sussex's solicitor, Mr Kim, wrote an email to Ms Wei in which he expressed his shock at learning that the leases had been terminated, and asked whether the termination could be revoked.
On 5 June 2014 Mr Kim made an offer on behalf of Kofoo Sussex to pay all outstanding rent and the next month's rent in advance if Commerce Building would redeliver possession to Kofoo Sussex.
In the letter Mr Kim threatened that, if the offer was not accepted, Kofoo Sussex would commence proceedings in the NSW Civil and Administrative Tribunal for an urgent order granting relief against forfeiture. Kofoo Sussex did not actually commence proceedings in the Supreme Court for that relief until 22 July 2014, some one and a half months later.
Commerce Building responded to Mr Kim on 5 June 2014 and denied liability or any wrongdoing. It advised that it was not aware of the terms of the Business Management Service agreement until that agreement had recently been provided to it by Mr Kim.
Mr Kim again threatened that Kofoo Sussex would make an application for relief against forfeiture on 6 June 2014.
On 11 June 2014 Commerce Building made an offer to Kofoo Australia, addressed to Mr Kim, to lease Suite 1.03 in the building for a period of three years for use as a commercial office.
On 12 June 2014 Commerce Building wrote a letter to Mr Kim, on a without prejudice basis, that referred to his letter dated 5 June 2014. The letter referred to the leases to Kofoo Australia and Kofoo Sussex, including Shops G.02 and G.03. Commerce Building said that it would be prepared to return the premises on the terms set out in the letter. In relation to Shops G.02 and G.03 the lessor required payment by no later than 19 June 2014 of $98,276.34, made up of arrears in rent as at 11 June 2014 of $61,369.12, and rent and outgoings for July of $36,907.22. The total outstanding claim in respect of the four premises was $142,843.41. Commerce Building required that new leases be entered into on the terms and conditions set out in attached leasing proposals.
The leasing proposal in relation to Shops G.02 and G.03 was for a term of 3 years from 1 July 2014, with one 3-year option, at an annual rental of $364,184.07 plus GST, payable three monthly in advance. The total 6 year period would expire on 30 June 2020, about 2 ¼ years earlier than the lease that had been terminated. The only other apparent significant difference is the requirement that rent be paid 3 months in advance rather than 1 month. It is reasonably clear that Commerce Building required that term to protect itself given Kofoo Sussex' history of late payment of rent.
Mr Kim responded on 12 June 2014 by making a counter offer. He claimed that Kofoo Sussex had suffered damages of a lot more than $300,000, because of Mr Jung's conduct, and asked that the amount of outstanding rent be reduced from $142,843.41 to $100,000. He also asked for the term of the new lease to commence on 1 August 2014, and be for a term of 5 years with one 5-year option. Mr Kim did not reject the proposal that rent be paid 3 months in advance. Mr Kim said that the commencement date of 1 August 2014 was required because his client needed sufficient time to interview new prospective employees. That observation may be significant, as it makes it clear that if a new lease had been granted to Kofoo Sussex, that company had to start from scratch in manning its restaurant business.
On 13 June 2014 Commerce Building insisted that it be paid the full amount of outstanding rent of $142,843.41, which was not negotiable. It advised Mr Kim that there were three other applicants for the premises, and Commerce Building would immediately recommence discussions with the other applicants if its offer was not accepted. It said that the new leases were structured in view of the lessees' track record, but that Commerce Building would consider granting further terms when the offered leases expired, if the lessees performed their duties under the new leases punctually. Commerce Building asked Mr Kim to confirm acceptance that day, following which it would forward relevant documents for execution on Monday, 16 June 2014.
On 13 June 2014 Mr Kim advised Commerce Building that Kofoo would accept the offer provided that only $100,000 was required to be paid, and the date for commencement of the leases was 1 August 2014. Mr Kim asserted that, if Commerce Building had informed Mr Kim of Mr Jung's defaults, Kofoo would not have suffered losses of more than $300,000.
Commerce Building did not respond to this letter before, on 16 June 2014, it received a further letter from Mr Kim that advised that Kofoo did not wish to enter into a new lease since the termination was invalid. Somewhat inconsistently, Mr Kim advised that Kofoo would pay the amount of $142,843.41, and accept a new lease with a term of 3 years commencing 1 July 2014. However, the offer was subject to Commerce Building agreeing to allow a 3-months rent-free period for the four premises.
This was the beginning of a series of communications from Mr Kim in which the Kofoo parties regularly changed the terms that they were prepared to accept.
Ms Wei replied to Mr Kim on the same day, by rejecting the counter offer, and requesting acceptance of the terms in Commerce Building's 12 June 2014 letter that day. She pointed out that the lease offered was on the same terms as the terminated leases, subject to a small number of changes to give the lessor better security in view of the past frequent breaches by the lessees. Commerce Building had also offered to forego rent reviews that were due in September and November 2014.
Later on 16 June 2014 (3:39 PM) Mr Kim sent an email to Ms Wei asking for the matter to be settled as soon as possible. He said that his client would pay the outstanding bill, and added: "However, our client will not breach the lease again as there is no suitable employees. As such, our client needs time to run the business properly. Please tell your boss about our client's circumstances and confer with your boss before reaching a decision". This again refers to the fact that Kofoo Sussex did not have employees capable of running the restaurant.
Ms Wei rejected Mr Kim's request on 16 June 2014 (6:33 PM), and explained why Commerce Building would not grant a rent-free period.
Mr Kim replied at 6:51 PM, stating that the lessee should only be liable for rent one month in advance, not two. He made a threat that his client would commence litigation.
At 7:53 PM Mr Kim advised Ms Wei that Kofoo only wanted to enter into a new lease over Shops G.02 and G.03, and B.03.
Ms Wei sent an email to Mr Kim at 9:41 AM in which she acknowledged that under standard leases Commerce Building only required rent to be paid one month in advance, but it had requested three months in advance because of Kofoo's past record, and Mr Kim had previously said this proposal was acceptable.
At 9:50 AM on 17 June 2014 Mr Kim asserted to Ms Wei that his client would have new management, so that it would conduct its affairs differently, and asserted that Kofoo had not accepted payment of rent three months in advance.
Ms Wei responded at 12:18 PM in an email that extracted part of Mr Kim's 13 June 2014 response to the leasing proposal made by Commerce Building in which Mr Kim had not objected to the proposal that the rent be paid three months in advance.
At 12:40 PM Mr Kim advised that his client would take the matter to the court and legal documents would be sent as soon as possible.
At 5:19 PM Ms Wei informed Mr Kim that Commerce Building withdrew its previous offer, and would now resume discussions with the other interested parties
Mr Kim responded at 6:06 PM by threatening that Kofoo would sue Commerce Building for $800,000 in damages because it had terminated the leases improperly.
Ms Wei responded at 10:46 AM on 18 June 2014 by saying that, in order to avoid litigation, she would try to persuade the building owner to compromise by agreeing to a two-month free rental period.
Mr Kim then said at 2:50 PM that Kofoo would enter into a new lease with a rent concession of only one month, provided the lease was on standard terms. He explained that Kofoo had no available employees, and that if Kofoo could not operate the business then it could easily breach the lease again. It is not clear why Mr Kim repeated the need for Kofoo to have time to be able to operate the restaurant profitably, at the same time as it offered to accept a rent-free period of one month. Mr Kim also said that Kofoo did not want to pay the outstanding rent for Suites 2.04 and 2.05.
At 4:11 PM Ms Wei noted that Kofoo's objection to paying the outstanding rent for Suites 2.04 and 2.05 was different from its earlier acceptance and: "His constant shifting position will count against him in any court action and together with his poor track record of supporting the business will make his application for relief very difficult". As a "final gesture of goodwill" Commerce Building offered to grant a new lease commencing on 1 July 2014, with free rent for August, rent to be paid two months in advance, and otherwise on the terms of the 11 June 2014 proposal. The outstanding $142,843.41 was to be paid the next day, 19 June 2014 (which was the day upon which Commerce Building had earlier required that the overdue rent be paid).
Mr Kim replied to this letter at 8:04 PM, by inserting Kofoo's responses into a copy of Ms Wei's earlier offer. Kofoo accepted the offer of a new lease for Shops G.02, G.03 and B.03, it accepted that the lease would commence on 1 July, and would be rent-free for August. Mr Kim seems to say, in a response that is not entirely clear, that Kofoo would agree to pay rent two months in advance if the original lease was revived, but only one month in advance under a new lease. Kofoo seems to have agreed to pay the outstanding rent in relation to Suites 2.04 and 2.05. Mr Kim said his client would pay the outstanding rent if Commerce Building agreed to its terms, and then said that any new lease should start on 1 August 2014.
Mr Kim wrote a further email at 6:46 AM on 19 June 2014, in which he attempted to explain Kofoo's position. The email is with respect difficult to follow, but it does ask Commerce Building to provide a draft lease for his client's perusal as soon as possible.
Ms Wei responded at 10:59 AM by asking for confirmation that the agreement was that the new lease would commence on 1 July 2014, there would be a rent-free period for August, and rent would be paid one month in advance. Upon confirmation she would send formal leases to Mr Kim that day.
At 3:13 PM on 19 June 2014 Mr Kim gave Ms Wei the following response:
We are instructed to advise that our client has determined not to negotiate this matter with you any more. Rather, we are instructed to advise that our client wishes to proceed with litigation to seek damages against you and Mr Jung at the Court since the lease was terminated invalidly and his business was closed.
It is difficult to follow the trail of offer and counter offer, but it does appear that Commerce Building made strenuous efforts in good faith to reach an agreement with Kofoo, which was substantially on the terms of the terminated leases, but provided some additional protection to the lessor against repeated breaches by the lessee. During the course of the negotiations Kofoo appears to have changed its position on many occasions. By this email Mr Kim terminated the negotiations. The threat he made was not that Kofoo Sussex would seek relief against forfeiture, but that it would sue Commerce Building for damages, on the ground that the leases had not validly been terminated.
Commerce Building responded on 19 June 2014 by delivering notices to the two Kofoo companies requiring them to remove all property brought onto the premises as well as all partitions and alterations, and make good any damage.
It also formally notified Mr Kim that it withdrew its offer and would resume discussions with other parties to re-let the premises in an effort to mitigate its loss.
Strangely, given the position that Kofoo had taken, on 20 June 2014 Mr Kim advised Ms Wei that what his client was really upset about was the fact that the original proposal for a new lease was for a term of 3 years with a 3 year option, when the terminated lease had a term of 10 years. He suggested that Commerce Building should propose a genuine offer to his client on standard terms.
Then, at 12:02 PM on 23 June 2014 Mr Kim made a further offer to settle the dispute provided Commerce Building accepted one of two offers. The first was to grant a new lease with a date of commencement on "July 2014" (the day was omitted), rent-free for July, not August, one month's rent in advance, Kofoo would pay the total outstanding rent upon acceptance, but the term would be 5 years with one 5 year option. The alternative was that Commerce Building would pay $300,000 damages to Kofoo for its loss of business.
Ms Wei advised at 1:11 PM on 23 June 2014 that she would seek instructions from the building owner.
Mr Kim responded at 1:47 PM by saying that his client had "misunderstood the lessor's letter" and asked for a response to the attached letter. The letter offered to accept a new lease on the same terms as were set out in the earlier email, save that the requirement for a 5 year lease with a 5 year option was omitted.
On 24 June 2014 Commerce Building advised Mr Kim by letter that it did not accept the terms in Mr Kim's 23 June 2014 letter, and among other things, asserted that it had found recent negotiations very time-consuming and unproductive because Kofoo kept returning to negotiate terms that had already been accepted. It stated:
7. You have advised that your client does not have suitable personnel to start up the business again immediately. Furthermore, despite your client's assertion that future management will improve, we do not have any information available to support this view. We note also that the business has not yet paid up moneys owed to other creditors. These factors lead us to question whether the lessees will be able to perform their obligations under any new leases.
Further:
9. With your rejection of our final offer on 19 June and our subsequent withdrawal of offer, we have now secured a commitment from another applicant to lease the premises to start on 1 August to avoid further delay and additional losses.
Accordingly, Kofoo became aware on 24 June 2014 that a third party prospective lessee may have made a commitment to enter into a lease of the premises.
On 30 June 2014 at 3:16 PM Mr Kim again requested Commerce Building to settle the dispute on terms that were the same as those that Kofoo offered on 23 June 2014. He made another request for settlement at 3:25 PM.
Ms Wei advised Mr Kim at 3:24 PM that she had passed the request on to the owner of the building.
In the course of a number of follow-up emails enquiring as to what the position of Commerce Building was, Mr Kim asked for a response on 30 June 2014 "so that we know whether we lodge summons or not without affidavit".
Commerce Building's response, by letter dated 1 July 2014, was to remind Kofoo that negotiations were terminated by it on 19 June, and that as of 24 June it was already committed to relet the premises.
The evidence suggests that Commerce Building had given a lease proposal to Changfam F & B Pty Ltd on 14 May 2014 for a 5 year lease with a 5 year option, which had been signed by the offeree as being accepted.
That offer was apparently withdrawn on 24 June 2014 because of the continuing uncertainty over the negotiations with Kofoo. By an email of that date from Mr Chang to Ms Wei the former referred to "the legal issues the landlord has had with previous tenant". That suggests that Commerce Building disclosed the position concerning Kofoo, or Mr Chang otherwise became aware of it.
Further, on 20 June 2004 Commerce Building gave a lease proposal to Hawker Restaurant for a lease of the premises for a term of 5 years with two 5 year options, at an initial rental of $382,393.32 per annum plus GST, and that Hawker Restaurant had accepted the proposal on 23 June 2014 and apparently paid one month's gross rent as a deposit. The lease proposal offered Hawker Restaurant a rent-free period of three months.
This accepted proposal was apparently the commitment to which Commerce Building referred in its 1 July 2014 letter to Mr Kim.
Commerce Building's responses to Mr Kim's subsequent requests that it enter into a new lease with Kofoo are therefore explained by the fact that it had given a commitment to Hawker Restaurant and accepted a deposit from that company.
The Hawker Restaurant lease proposal was expressed to be "subject to the Lessor's final board approval". The deposit was received on the basis that it "will be held in trust pending execution of legal documentation and then credited as rental". The proposal requested: "Should you agree to the above terms and conditions, please confirm your acceptance by signing below and return this lease proposal to us". Hawker Restaurant signed under: "On behalf of Hawker Restaurant Pty Ltd, we acknowledge and accept the above terms and conditions and are prepared to execute legal documentation on this basis".
After the lease proposal was signed by Hawker Restaurant there were various communications between that company and Commerce Building and their agents making standard preparations for the grant of the new lease.
On 25 June 2014 Commerce Building forwarded to the solicitor for Walker Restaurant the required Disclosure Statement and a draft lease for Shops G.02 and G.03. The letter stated: "Please note that the issue of the enclosed documents does not constitute any binding agreement and we are not bound to enter into any binding agreement, lease or other agreement with your client until the Lease is executed by us". The letter indicated that if any necessary development application was not lodged and the documents referred to in the letter were not returned to Commerce Building by 25 July 2014, the lessee would be deemed to be unable or unwilling to proceed with the lease.
Ms Wei exchanged a number of emails with Hawker Restaurant between 26 June and 6 July 2014 concerning practical matters preparatory to Hawker Restaurant entering into a lease of the premises. Among other things, those emails show that Ms Wei enquired as to whether Hawker Restaurant was interested in acquiring Kofoo's kitchen equipment and fit out. Hawker Restaurant was not interested, and requested the premises to be cleared. Hawker Restaurant appears to have inspected the premises on a number of occasions. The evidence does not show what the state of the premises was when those inspections occurred. There is some evidence that some steps had been taken at the behest of Commerce Building to remove fixtures, and that those steps may have gone further than expected by Commerce Building and involved some amount of demolition. I find that the state of the premises was that they continued to be set up as a restaurant, with some level of removal of fixtures and fittings. I find on the balance of probabilities that Hawker Restaurant had actual notice that the prior lessee's lease had been terminated for breach. If that is wrong, its inspections of the premises should have led it to enquire from the lessor as to whether that was the case, so that it has constructive notice of that fact.
Mr Kim wrote further emails to Ms Wei on 1 July 2014 (3:03 PM and 3:51 PM), and 2 July 2014 (1:30 PM, 2:05 PM, 4:25 PM, 4:52 PM, 5:37 PM and 7 PM). In the course of this email traffic Ms Wei advised Mr Kim at 1:09 PM on 2 July 2014 that Commerce Building was seeking legal advice and would respond later. On 3 July 2014 (11:08 AM) in a further email Mr Kim said he was "instructed to request humbly that would you reconsider our client as the proposed tenant by offering the new lease set out on 19 June 2014".
On 2 July 2014 Hawker Restaurant's solicitor requested a number of alterations to the documents.
On 3 July 2014 Mr Bruce Yip, who I infer is senior to Ms Wei, wrote an email to Mr Kim in which he referred to an earlier telephone conversation that day, and said: "As we advised you previously and reiterated today, we have already committed to a new tenant to lease shops G.02 & G.03 following your client's decision to terminate the negotiations on 19 June 2014". Nonetheless, Commerce Building relented and made a further offer to Kofoo, which required it to pay $143,000 by 4 July 2014, and to provide by 8 July 2014 a number of additional bank guarantees. So far as Shops G.02 and G.03 were concerned, two guarantees were required on behalf of Kofoo Sussex, one for four months rent ($143,628.88), and one for eight months rent ($287,257.76). The latter bank guarantee would be returned to Kofoo six months after the commencement of the lease. The letter indicated that Commerce Building had already made a number of claims on the existing bank guarantees.
Mr Kim sought some clarification of the offer by email on 3 July 2014. Mr Yip advised that the $143,000 was to cover moneys owing as well as July rent. He said that unless payment was received the next day, Commerce Building would proceed with the other tenant. There were further communications concerning the required $143,000 payment and the additional request for bank guarantees.
Apparently, on 4 July 2014, Ms Wei sent to Mr Kim an attachment in the form of a draft document called "acknowledgement variation and authority to complete". The document provided for the surrender of one old lease and the parties, Commerce Building and to Kofoo Australia, entering into two new leases. The document provided for the relationship between the parties pending new formal leases. The document is unexecuted.
On 7 July 2014 Mr Kim wrote an email to Ms Wei in which he stated (sic in relation to the whole of the email):
We refer to our telephone communication with you today.
We are instructed to advise that our client's financial issues serious more than our client think.
As you know the lessor asked our client only $143,000 on 19 June 2014 including a rent of July. Further you hold the bank guarantee as well.
However, the offer the lessor proposed on 4 July 2014 was too big for our client to comply with.
[Illegible] such, we are instructed to offer the followings:
1. Selling the equipment and stock to the new tenant at $220,000 including GST; or
2. Reduce rent in advance and extension of time frame.
We are so grateful for your assistance in this regards.
Thereafter, between 8 July and 10 July 2014 correspondence passed between the two parties concerning the possibility that Commerce Building could sell some of the fitout to the new tenant.
On 7 July 2014 Commerce Building gave its response to the solicitor for Hawker Restaurant concerning the requested changes to the documentation. The letter stated: "If the above is acceptable to your client, we will amend the documents and send you the replacement pages". There were further communications between Commerce Building and Hawker Restaurant concerning the new lease. Hawker Restaurant's solicitor advised on 8 July 2013 that it agreed to all the amendments, and requested replacement pages for the lease and lessor disclosure statement.
On 11 July 2014 Hawker Restaurant's bank provided a bank guarantee in the sum of $112,729.22 in favour of Commerce Building.
On 16 July 2014 Hawker Restaurant received an invoice from its architect for $2700 for work done in relation to the development application.
On 17 July 2014 Hawker Restaurant paid $1409.96 to the City of Sydney when it submitted its development application.
On 18 July 2014 Mr Kim wrote to Commerce Building to advise that Kofoo Sussex had given instructions to commence proceedings in the Supreme Court for relief against forfeiture, and attached an unfiled summons and notice of motion. No affidavits were included. The letter foreshadowed an application to the duty judge that afternoon. The letter was forwarded by facsimile transmission at 12:11 PM.
After she received the letter, Ms Wei telephoned Hawker Restaurant to enquire as to whether it would return executed lease documents in the terms agreed, and was advised that it would.
Subsequently that day Ms Wei received the executed documents. Commerce Building executed the documents itself later that day.
The parties have agreed that to date Hawker Restaurant has incurred total costs of $9624.26 in respect of entering into its lease.
Commerce Building is liable to pay $51,948.13 to its real estate agent as commission for introducing Hawker Restaurant as a new tenant for the premises.
Legal Principles
In submissions Kofoo Sussex relied upon the decision of Campbell J (as his Honour then was) in Wilkinson v S & S Gikas Pty Ltd [2006] NSWSC 1314; (2006) 12 BPR 23,685, at [23] and [24]:
[23] The granting of relief against forfeiture is discretionary. In relation to a lease, the principle that is generally applied is that the power to re-enter or forfeit for non-payment of rent is regarded as being in substance security for the rent. Provided the lessor and other persons concerned can be put in the same position as before the forfeiture or re-entry, the Court will usually grant relief against forfeiture upon payment of rent, costs, interest and other expenses: Pioneer Quarries (Sydney) Pty Ltd v Permanent Trustee Co of New South Wales Ltd (1970) 2 BPR 9562. If those terms are offered, it is only in a rare case that the Court would refuse relief against forfeiture. The principle on which that is done is that, once the landlord has got all that the right of re-entry was, in equity's eyes, security for, it would be unconscionable for the landlord to insist on its legal right to re-enter.
[24] However, such a rare case can occur if the tenant is unable to pay future rent, or may reasonably be expected to become so: Direct Food Supplies Victoria Pty Ltd v DLV Pty Ltd[1975] VR 358; Tannous v Cipolla Bros Holdings Pty Ltd [2001] NSWSC 236 at [38]. If there is a sufficiently serious risk that the tenant will not be able to perform its obligations in the future, it may be that the consequence is that it is not unconscionable for the landlord to insist on its strict legal right.
The decision of Hope J (as his Honour then was) in Pioneer Quarries is the modern source of the general principle that the court applies on an application for relief against forfeiture, where the lease has been terminated for non-payment of rent, at least as far as decisions in New South Wales are concerned. Apart from Wilkinson, the decision has been followed in many cases, including without being exhaustive, by Bryson J (as his Honour then was) in Melacare International Ltd (in rec) v Daley Investments Pty Ltd [1999] NSWSC 496; (1999) 9 BPR 17,095 at [9]; Simos J in Newstart 236 Pty Ltd v Chantal Holdings Pty Ltd [2000] NSWSC 1102; (2000) 10 BPR 18,515 at [25]; Barrett J (as his Honour then was) in Tannous v Cipolla Bros Holdings Pty Ltd [2001] NSWSC 236; (2001) BPR 18,563 at [23]; and Young CJ in Eq (as his Honour then was) Wynsix Hotels (Oxford St) v Toomey [2004] NSWSC 236; (2004) 17 BPR 32,633 at [25].
In Tannous at [24] and [26] Barrett J drew attention to the fact that Hope J had emphasised that the payment by the lessee of the outstanding rent does not produce a right to automatic relief, and said: "Despite these general statements, it is clear that the lessee is not entitled to relief as of right, and that the court has a discretion in the matter, even though it may only be in very special circumstances in which relief will be refused". The reference to "very special circumstances" must be remembered.
Kofoo Sussex also relied statements of principle in Peter Butt, Land Law, (6th ed 2010, Thomson Reuters), extracts from which I will set out below, without including the authorities referred to in footnotes upon which the principles were based:
[15218] The mere fact that, since the forfeiture, the landlord has re-let the premises to a third party is not, of itself, a bar to granting relief against forfeiture. Nevertheless, as a matter of discretion, the court will generally decline to grant relief where a third party has acquired rights over the property without notice of the tenant's claim. But if the third-party knew of the circumstances surrounding forfeiture of the lease, then he or she may be taken to have notice of the tenant's claim to seek relief and will take subject to that claim. The consequence of granting relief and reinstating the lease will then be to make the third-party a concurrent lessee, interposed between the landlord and the restored tenant...
[15223] Equity has long exercised a jurisdiction to relieve against forfeiture for breach of the covenant to pay rent. Equity looks on the landlord's power of forfeiture for non-payment of rent as "security" for payment, not in the sense of conferring a charge or similar interest to secure repayment but rather in the sense of ensuring or bringing about payment. Provided that the rent is actually paid (even if late) and the landlord is compensated for any loss caused by the tenant's default, then the "security" has served its purpose and the tenant ought to have the lease restored.
The court can impose terms on the grant of relief against forfeiture. For example, in addition to requiring the tenant to pay all arrears of rent, the court may require the successful tenant to pay the landlord's costs of the proceedings and to arrange for future rent payments to be made by standing order with a bank...
[15224] Courts normally relieve against forfeiture for non-payment of rent. Provided the landlord is compensated for all arrears of rent and any loss arising from the non-payment, the tenant will generally succeed in having the lease restored. This is particularly so where the tenant stands to lose a valuable lease for a relatively trivial breach: a concept akin to "proportionality" requires that the lease be reinstated...
In line with this principle, a history of tardy payment is not of itself grounds for refusing relief against forfeiture. Nevertheless, the tenant is not entitled to relief as of right. The court retains the discretion, and in exceptional cases relief will be denied... It has also been denied where the grant of relief would injure third parties who have since acquired rights over the property in ignorance of the tenant's claim...
[15225] Relief generally will be refused where the tenant is hopelessly insolvent, for in such a case an order reinstating the lease would be futile. This is so even though the tenant is able to pay the arrears of rent at the time of the proceedings, because the court is entitled to take into account the improbability that rent will be paid in the future, or that its payment may be a preference for creditors. But where the tenant's financial position was not "hopeless", and the tenant has entered into a scheme of arrangement with creditors to try to trade out of its difficulties, relief was granted on payment of arrears to date. Likewise, relief was granted where the tenant's financial difficulties were due solely to the initial costs of establishing its business on the premises, or poor management practices that had since been improved, or where it was feasible that the tenant's financial predicament would be solved by sale of the business which the tenant conducted on the premises. Relief is unlikely to be refused where the lease provides for a guarantee or bond to cover the tenant's obligation to pay rent.
Terms for relief offered by Kofoo Sussex
In the present case Kofoo Sussex accepted that any order that the court was prepared to make for relief against forfeiture should be subject to its satisfying the following conditions: That within 14 days Kofoo Sussex should:
(1) Pay arrears of rent (as of Thursday, 31 July 2014) of $26,476.55.
(2) Pay the rent due on 1 August 2014 plus outgoings (still to be quantified).
(3) Pay to Commerce Building the amount of its liability to its agent for introducing Hawker Restaurant, being $51,948.13.
(4) Pay to Hawker Building its wasted costs, of $9624.26.
(5) Bring the bank guarantee required under the lease up to the required amount of $130,166.87.
When, in the course of argument, I raised the possibility that, because of Kofoo Sussex's delay in commencing the proceedings, Commerce Building may now be liable to Hawker Restaurant for damages for breach of the lease between those parties, counsel for Kofoo Sussex sought instructions, and then offered the following undertaking on behalf of Mr Heo:
To the extent that an order of the Supreme Court granting the plaintiff relief against forfeiture of its lease with the first defendant dated 28 August 2012 will cause the first defendant to breach its lease with the second defendant dated 18 August 2014 ("the Hawker Lease"), Jae Ung Heo indemnifies the first defendant against amounts for which the first defendant becomes liable to the second defendant in court proceedings (the Court Proceedings") for such breaches of the Hawker Lease. Two conditions or limits concerning the indemnity are as follows:
1. The indemnity is limited to $50,000. Mr Heo may not be liable for more than $50,000 under the indemnity.
2. Mr Heo must be given notice of, and an opportunity to participate in, the Court Proceedings.
In its offer, Kofoo Sussex did not deal with the legal costs incurred by Commerce Building and Hawker Restaurant in this case. The authorities extracted above suggest that, in an appropriate case, payment of the whole of the legal costs incurred by the lessor, and in this case the new lessee, may be required to be paid as a condition for relief against forfeiture. I will return to this issue below.
Consideration
It is sufficient for me to note that, in the present case, if there was no issue as to whether Kofoo Sussex will be able to pay the rent for the balance of the term of the original lease in a timely way; and if the third party rights of Hawker Restaurant had not intervened, established principle would require the court to make an order relieving Kofoo Sussex from the forfeiture of its lease, albeit upon appropriate conditions.
I will consider the issues of Kofoo Sussex's capacity to pay the rent, and also the significance of Hawker Restaurant's rights, in turn.
Capacity of Kofoo Sussex to pay rent
The first issue arises in the following way. Although the evidence is by no means comprehensive, it satisfies me that the Kofoo companies, even when under the control of Mr Jung, were unable to pay the rent from the end of August 2013 because the restaurant that was conducted on the premises was commercially incapable of generating enough income to pay the rent in a timely way. Kofoo Sussex through its solicitor, Mr Kim, asserted from time to time in correspondence, that that circumstance was a result of incompetence on Mr Jung's part. The evidence before the court does not substantiate that claim. I would not accept it except upon proper proof. I find on the balance of probabilities that the restaurant simply was not successful. Why that was so is entirely a matter for speculation. Equally, it is a matter for speculation whether the financial fortunes of the restaurant could be turned around, and what conditions would have to be satisfied to achieve that result, and at what cost.
Whatever significance the course of negotiations between Kofoo Sussex and Commerce Building may have, one thing that is established by statements made on behalf of Kofoo Sussex in those negotiations is that the company is entirely devoid of the staff required to operate the restaurant effectively. Kofoo Sussex will require an amount of time, presently unproven, to re-establish the restaurant.
There is no evidence as to whether or not it is realistic for Kofoo Sussex to re-establish a Korean restaurant at the premises (which is the only use permitted under the lease) in a manner that will be viable.
Kofoo Sussex is admitted to be, as the evidence clearly establishes, a $2.00 company. It is ultimately entirely dependent on the financial backing of Mr Heo, and his Korean company.
Mr Heo did not take any steps before the commencement of these proceedings to capitalise Kofoo Sussex in a manner that would satisfy the court that it presently has the financial wherewithal to re-establish a Korean restaurant on the premises in a way that will enable it to pay rent in accordance with the lease.
The only conditions suggested by Kofoo Sussex to be imposed upon the grant of relief against forfeiture are those set out above, which would only compensate Commerce Building and Hawker Restaurant for wasted costs, but which would do nothing to ensure that Kofoo Sussex will have a realistic possibility of reinstating the restaurant. As the evidence stands, it is perfectly possible that that aspiration is nothing more than wishful thinking on Mr Heo's part.
Kofoo Sussex's solicitor, Mr Kim, affirmed 3 affidavits in the proceedings. He gave evidence on information and belief from Mr Heo that Mr Heo has sufficient funds to promptly pay outstanding rent and to pay any other bills, and to re-establish the restaurant and pay rent whilst it is being re-established. Mr Heo has instructed him that if relief against forfeiture is granted, he could cause the restaurant to resume trading in 2 to 3 weeks.
Mr Heo has made an application for residency in Australia. If he is granted residency, Mr Kim says he would move to Australia so that he could directly manage or oversee the conduct of the restaurant. A letter in evidence dated 27 May 2014 written by the Department of Immigration and Border Protection to Mr Heo refers to a visa application made by him on 2 January 2014. The evidence establishes nothing more concerning Mr Heo's prospects of becoming entitled to Australian residency.
Kofoo Sussex tendered various business records to establish Mr Heo's financial position, largely without comprehensible explanation. One record appears to establish that Mr Heo is entitled to deposits of US$296,384.11 and US$28,113.46 at the Industrial Bank of Korea in South Korea.
There are in evidence financial statements for Kofoo Co Ltd, which I understand is Mr Heo's holding, or trading company, in South Korea, as of 31 December 2012, and 31 December 2013. The statements are written in English and Korean, and the accounts as at 31 December 2012 appear to suggest that total shareholders' equity was 195,478,699 Korean won (see page 5 of Exhibit B). At an exchange rate of 1 USD = 1012.20 won (taken from the Industrial Bank of Korea statement at page 1 of Exhibit B, as at 10 July 2014) the shareholders' equity at 31 December 2012 would be approximately US$193,000. The company's net income after tax for the year to 31 December 2012 was 132,226,129 won (page 6) which would approximate US$130,000. Making the same calculation in relation to the financial statements as at 31 December 2013 (taking shareholders' equity from page 10 and net income from page 11 of Exhibit B), at that date shareholders' funds were 325,998,420 won, and the net loss was 748,480,279 won, or approximately US$322,000 and US$739,000 respectively.
Apart from the obvious inappropriateness of using the exchange rate as at 10 July 2014 to perform the calculations that led to the conclusions set out in the preceding paragraph, I am more than a little diffident about the accuracy of the conclusions that I have drawn from my own examination of financial statements drawn for South Korean purposes, albeit largely written in English.
If the conclusions are approximately correct, the financial statements do not make it obvious that Mr Heo has the wherewithal to re-establish the Korean restaurant at the premises, particularly as there is no evidence as to the present state of the premises, and the funds that would be required to make the restaurant commercially viable.
These considerations make it necessary to look closely at the principles established by the authorities concerning the level of confidence that the court should have on the evidence that granting relief against forfeiture will not be futile, or alternatively will not condemn the lessor to a probable repeat of its difficulties with the lessee, before it grants that relief.
It must be noticed immediately that at [24] of Wilkinson, Campbell J posed the question as to whether "the tenant is unable to pay future rent, or may reasonably be expected to become so". The test as stated by Professor Butt is much more indulgent to the lessee, in so far as he refers to the question whether "the tenant is hopelessly insolvent, for in such a case an order reinstating the lease would be futile".
Uninstructed by authority I would incline to the view that no single formulation of the test for the requisite degree of confidence that the lessee will be able to pay rent in the future will adequately describe all situations. Perhaps, if the issue is whether relief against forfeiture should be granted in relation to a residential lease upon which a lessee and his or her family is dependent for accommodation, the court might not be stringent in what it requires to be satisfied that the lessee will most probably be able to pay the rent on time for the balance of the term of the lease. However, in the present commercial context, that approach is not very attractive. Why should it be that the court should grant relief against forfeiture to a commercial lessee, where the lessee is not hopelessly insolvent, but the capacity of the lessee to pay rent in the future will depend upon a wing and a prayer? In this context Campbell J's formulation of the test is the more attractive.
In Direct Food Supplies Victoria, one of the cases upon which Campbell J relied at [24], Starke J noted at 360 that counsel for the lessor submitted that it was clear on the evidence that it was improbable that any future rent would be paid and that, if payments were made, they may turn out to be preferences. His Honour at 361 declined to grant relief against forfeiture on the grounds that the lessee had conceded that it could not pay all of its debts as they fell due, the lessee could only trade its way out of its financial difficulties if it was entitled to use receipts that may in fact have been payable to a related company, and a creditors' petition for winding up had already been issued against the lessee. Thus, Starke J rejected the application for relief against forfeiture on grounds that were more extreme than the submission made by counsel, and which went much further than an improbability that rent would be paid if relief against forfeiture was given. In Tannous Barrett J at [38] accepted that "if it is shown that the tenant is unable to pay future rent (or may reasonably be expected to become so), the Court will in all probability find that it is not just and equitable to grant relief against forfeiture", but his Honour had earlier noted that "very special circumstances" were required before relief against forfeiture would be denied. Barrett J also quoted at [27] the dictum of Young J in Courtney Creche Pty Ltd v Okko's Fine Art and Custom Framing Pty Ltd (unreported, 22 June 1995): "The current state of the authorities is that before a tenant is refused the remedy of relief against forfeiture, the tenant's attitude to the lease must be such that no reasonable landlord could expect the tenant to honour its obligations."
In Twinside Pty Ltd v Phoenician Nominees Pty Ltd [2008] WASC 110 at [36] and [37] Beech J accepted the views of Professor Butt from the fifth edition of his book equivalent to [15225] and [15225] set out above, and continued:
[38] It is notable that in Greenwood Village Pty Ltd v Tom The Cheap (WA) Pty Ltd [1976] WAR 49, the lessee had entered into a scheme of arrangement with its creditors. Nonetheless, relief against forfeiture was granted.
[39] In Old Papa's Franchise Systems [131]-[132], McLure J (Murray and Parker JJ agreeing) said as follows:
There is authority to the effect that where a tenant undertakes to remedy the breaches giving rise to forfeiture, relief against forfeiture should be granted usually as of course and refused only in exceptional circumstances: Jam Factory Pty Ltd v Sunny Paradise Pty Ltd[1989] VR 584; Greenwood Village Pty Ltd v Tom the Cheap (WA) Pty Ltd [1976] WAR 49. In both cases there was evidence of reasonably based concerns as to the financial ability of the lessees to comply with their financial obligations under the relevant leases. Indeed, in the Greenwood Village case the lessee had entered into a scheme of arrangement with its creditors. The approach in these cases is a reflection of the principle that equity regards forfeiture of the lease as an ultimate security mechanism to ensure compliance with the agreement and if that can be achieved without forfeiture, relief will be granted: Love v Gemma Nominees Pty Ltd [1983-84] ANZ ConvR 68 at 71.
Seen in that light, a lessee may properly be given the benefit of any uncertainty concerning its financial capacity to comply with its obligations because any subsequent breach of the lease can be met with a further termination for which relief from forfeiture is unlikely to be granted ...
[40] It is evident that the starting point is a general rule that relief against forfeiture for non-payment of rent will be granted to a lessee which has remedied its defaults in payment of rent. However, the remedy is discretionary and in exceptional circumstances relief may be refused for reasons arising from the lessee's poor financial position.
[41] In Direct Food Supplies (Vic) Pty Ltd v DLV Pty Ltd[1975] VR 358 at 361 relief was refused on the ground that the lessee company was insolvent and so could not pay its debts, including the rent, and if rent was paid the lessor may well have been asked to disgorge those payments by a liquidator. In that case, a director of the lessee had conceded that the company could not pay its debts as and when they fell due.
[42] The existence of serious grounds for concern as to whether the lessee is able to pay rental in the future is not a sufficient reason to refuse relief. That is because, as McLure J explained in Old Papa's Franchise Systems, any subsequent breach of the lease will lead to a future termination by the lessor from which relief against forfeiture is most unlikely to be granted.
[43] Indeed, there is authority that even if a lessee is insolvent a court may, nonetheless, exercise its discretion to grant relief against forfeiture: Hayes v Gunbola (1986) 4 BPR 9247 at 9250-9251; Wynsix Hotels (Oxford St) Pty Ltd v Toomey[2004] NSWSC 236 [32].
Beech J's summary of the attitude of the court when it is asked to decline relief against forfeiture because of an appearance that the lessee will not be able to pay rent in the future is an accurate review of the authorities, albeit given in an interlocutory judgment.
In Wynsix Hotels Young J at [33] focused on the significance of any rental guarantee available to the lessor, which may be available to protect it against future failures by the lessee to pay rent, and also said that the court should be ready to grant relief against forfeiture on the lessee's first application, because the lessor should be able to protect itself from future breaches by a further termination of the lease, whereupon the court's sympathy to the lessee may expire.
It may be said of the equity to relieve against forfeiture that it is a relatively robust equity. It is available to protect defaulters, and survives proof of a propensity to default. It is not particularly solicitous of the interests of third parties, unless the third parties acquire a leasehold interest in the property with no actual or constructive notice that a prior lessee may have a right to apply for relief against forfeiture, even though the prior lessee may not have acted in an expeditious way to obtain the relief. But the availability of the relief remains an established doctrine of Equity. Little knowledge of the circumstances that have existed over previous centuries in England is required in order to understand the reasons for the development of the equity. It remains attractive in the modern world as it provides succour to susceptible lessees who are down on their luck. However, there is a case to be made that Equity should think carefully about how the doctrine is to be applied in truly commercial contexts.
In the context of the lease of property for commercial purposes in circumstances where there is likely to be considerable competition for the right to enjoy the property - which is the present case - the commercial reality is that both the prospective lessor and lessee in the course of negotiating the terms of the lease, and entering into the lease on particular terms, focus primarily on the quality of the lease as a contract. A deal is a deal. Yet, in the final analysis, Equity in making available relief against forfeiture ignores the deal. So be it, but in so far as the court has a discretion in making an order that relieves against forfeiture, there may be circumstances where the court should act firmly, rather than indulgently, in relation to the conduct of the lessee.
There may be cases where the public good that flows from holding parties to their bargains, and creating a general expectation that that will occur, will outweigh the beneficial consequences of protecting defaulting lessees. There is a case for concluding that that approach should be given some weight in the present circumstances. The reason is that the court should not facilitate the possibility that the commercial value to the lessor of ownership of the property is stultified by practical impediments to the lessor being able safely and effectively to re-lease the property. The specific source of the problem is the probability that, in cases such as the present where the lessor has lawfully terminated a long term lease by re-entry and locking out the lessee, all prospective new tenants will have actual or constructive notice of the forfeiture, and thus the potential for the lessee to seek relief against forfeiture. That will happen because the lessor out of prudence or decency tells prospective lessees, or it is obvious following inspection from the state of the premises, or constructive notice arises from an inspection of the Register concerning the title to the property. It is likely to cause confusion, and weaken the legitimate bargaining position of the lessor, if it cannot safely offer a new lease to a prospective lessee without the position being clouded by an unrealised right of the former lessee to seek relief against forfeiture. The existence of uncertainty in this area will often avail no one. An impediment to the timely and effective re-leasing of the property will likely increase the damages payable by the former lessee. If the former lessee cannot pay those damages, the loss suffered by the lessor will be increased. In the real world the costs and inconvenience that the lessor and new lessee suffer when relief against forfeiture is given will not entirely be covered by the conditions upon which the order is made, as the court does not contemplate an enquiry into the internal costs of either party, or the opportunity cost of the exercise.
That my concern is not an idle speculation is given some weight in the present case by the circumstances in which Changfam F & B Pty Ltd withdrew from its provisional agreement with Commerce Building.
As the issue is one of the discretion of the court, no rules can or should be suggested. It should not ordinarily be required that in the commercial context with which I am concerned the lessee should immediately commence proceedings for relief against forfeiture following the termination of the lease, as that would preclude the opportunity for the lessee and the lessor to negotiate the terms of the reinstatement of the lessee's possession of the premises, in a way that may suit the parties, and avoid litigation. However, there is a case for the suggestion that, if negotiations break down, and the lessor formally notifies the former lessee that the lessor is seeking a new lessee, the former lessee should make any application for relief against forfeiture with all expedition. If, with due notice, the former lessee bides its time, and only acts after the lessor has entered into a genuine commercial commitment with a new lessee, even if less than entering into a formal lease, it is difficult to see why in this commercial context the dilatory former lessee should always be allowed to prevail over the new lessee, who has entered into the commitment in good faith, even if unavoidably with notice of the potential claim by the original lessee.
In the present case the formal commitment occurred on 23 June 2014, when Hawker Restaurant signed and returned Commerce Building's lease proposal. It will almost inevitably be the case that further negotiations and procedures will be required before the commitment matures into a formal lease, particularly if registration is required. However, it should not be a contentious observation that Equity should in appropriate cases foster the implementation in good faith of commitments as serious as those contained in the lease proposal, and do so in a way that assists in the effective operation of the commercial leasing market.
The forfeiture occurred on 7 April 2014, although Mr Heo claims that he did not learn of this occurrence until 31 May 2014. That was more than 3 weeks before Hawker Restaurant signed the lease proposal, and more than 7 weeks before Kofoo Sussex commenced the present proceedings. Kofoo threatened to make an application for relief against forfeiture on 5 and 6 June 2014, but did not do anything to carry out the threat. It entered into negotiations for new leases. It is true that Commerce Building did not offer the same terms as Kofoo would enjoy had the original leases been reinstated. It sought additional security against Kofoo's demonstrated propensity to breach the leases, and the apparent lack of viability of the restaurant. On the other hand Kofoo clearly pursued a later date of commencement, and a rent-free period, in order to enable it to re-establish the restaurant from scratch.
However, on 19 June 2014 Kofoo withdrew from the negotiations and advised that it would sue Commerce Building for damages on the ground that the leases had invalidly been terminated. That position is diametrically inconsistent to the position adopted at the hearing, which accepted the validity of the termination. It also informed Commerce Building that it was free to seek a new lessee, as it faced an action for damages, rather than a suit for relief against forfeiture.
I will return to this issue below, when I address the discretionary considerations relevant to the grant of relief against forfeiture of the Kofoo lease.
Grant of new lease to Hawker Restaurant
I will now address the fact that on 18 July 2014 Commerce Building granted a lease of the premises to Hawker Restaurant.
Counsel for Kofoo Sussex acknowledged that it was necessary for him to be able to distinguish the decision of Franklyn J in Dar-Win Pty Ltd v Tagliaferri (1986) Aust & NZ Conv Rep 875, where his Honour refused relief against forfeiture to a lessee in circumstances where, before the application was made, the lessor had re-let the premises to a new lessee who took without any notice of the former lessee's entitlement to seek relief against forfeiture. He sought to distinguish the decision on the ground that Hawker Restaurant had actual or constructive notice of Kofoo Sussex's right to seek relief against forfeiture in the present case. As the lease to Hawker Restaurant has not been registered, Kofoo Sussex relies upon Chan v Cresdon Pty Ltd (1989) 168 CLR 242 at 248 per Mason CJ, Brennan, Deane and McHugh JJ for the principle that Hawker Restaurant only has an equitable lease. It relied upon the decision of the English Court of Appeal in Bland v Ingrams Estates Ltd [2001] 2 WLR 1638 at 1643 and 1650 for the principle that if the new lessee has notice (including constructive notice) of the right of the former lessee to apply for relief against forfeiture, it is in no better position than the lessor to resist that relief being given.
I accept Kofoo Sussex's submissions on this issue. I have already found above that on the balance of probabilities Hawker Restaurant had actual notice of Kofoo Sussex's right, but if that is wrong I find that it had constructive notice by reason of the state of the Register and the state of the premises. Walker Restaurant did not call any evidence to dispel these findings.
One issue that arose in the hearing was whether Commerce Building was already obliged as a matter of law or equity to grant the new lease of the premises to Hawker Restaurant at the time it received notice that Kofoo Sussex proposed to commence proceedings for relief against forfeiture on 18 July 2014. I find that, by reason of the reservation in the 20 June 2004 lease proposal that the acceptance by Hawker Restaurant of the offer would not bind Commerce Building until board approval was given, and the statement in Commerce Building's 25 June 2014 letter that delivery of the draft documents did not give rise to a binding agreement, that on the evidence a binding agreement was not entered into until Commerce Building signed the lease on the afternoon of 18 July 2014, after it had received notice of the intended proceedings. It is not necessary to decide whether any other conduct on the part of Commerce Building obliged it in equity to grant the lease to Hawker Restaurant, before notice of the proceedings was received. At all times Hawker Restaurant's rights have been equitable, and as I have found, it acquired those rights with notice of Kofoo Sussex's right to apply for relief against forfeiture.
The exercise of the discretion in this case
It is now necessary for me to consider whether I should grant relief against forfeiture to Kofoo Sussex, and if so on what terms.
I start by noting that, at the date the Kofoo lease was terminated, the lease still had some 8 ½ years to run. It was therefore potentially valuable asset to Kofoo Sussex.
Kofoo Sussex has made the offer, which I have set out above, as a condition for any relief against forfeiture becoming effective.
Kofoo Sussex was tardy in making the application for relief against forfeiture after Commerce Building formality advised it on 24 June 2014 that it was seeking a new lessee.
However, HoHowevKofoo Sussex did give notice to Commerce Building before it signed the lease, and commenced these proceedings before Hawker Restaurant had gone into possession, and before that company had carried out the work necessary to re-configure the premises for its own purposes. The weight of authority, to which I have referred above, concerning the preparedness of the court to grant relief has caused me to conclude that, in the present case, Kofoo Sussex has just managed to act quickly enough, so that I should not find it is disentitled to the relief sought by reason of the intervening position of Hawker Restaurant. I would have been much more ready to decline relief against forfeiture, notwithstanding notice on Hawker Restaurant's part, if in a practical sense Hawker Restaurant had established its business in the premises before Kofoo Sussex applied for relief. That is an issue that does not arise in the present case, as Hawker Restaurant has only expended a small amount of costs at this stage (although I do not ignore that it will be deprived of a rent-free period of three months).
One condition of relief against forfeiture being granted is that Kofoo Sussex will be required to reinstate the bank guarantee, which will give Commerce Building a security for 4.4 months' rent. That would seem to be an adequate security, to give the lessor time to terminate the lease again, if Kofoo Sussex fails to pay rent in the future. Commerce Building did not argue that Kofoo Sussex should be obliged to provide more security.
It is of some relevance that, even as late as 3 July 2014, Commerce Building relented and offered to grant a new lease of the premises to Kofoo Sussex, provided that it received a permanent bank guarantee for 4 months' rent, and a short-term bank guarantee for 8 months' rent.
Notwithstanding my acceptance of the weight of authority discussed above concerning the preparedness of the court to grant relief against forfeiture even though there is severe doubt about the capacity of the lessee to pay rent in the future, I remain of the view that the court should hesitate to grant relief if, on the evidence, there is a real chance that the relief will be futile. Indulging the defaulting lessee is one thing, but if the relief will probably be futile, there is no justification in the court subjecting the lessor to the cost and inconvenience that the making of the order will cause it to suffer, and equally no justification in depriving the new lessee of its opportunity to enjoy its lease.
I propose in all of the circumstances to make an order in favour of Kofoo Sussex granting it the relief against forfeiture that it seeks, but only on conditions, and my satisfaction of certain matters, which go beyond the offer that it made to the court.
It is likely to be a product of the speed with which the matter was brought on for final hearing in the Duty List that the evidence establishes that Kofoo Sussex itself is entirely incapable of paying rent and re-establishing the restaurant, and it must rely entirely on capital injected by Mr Heo. However, the evidence concerning Mr Heo's financial capabilities is largely a matter of assertion, mostly hearsay, and the significance of the evidence concerning his financial capacity is to my mind entirely unclear.
As I have noted above, the assertions that were frequently made by Mr Kim during the negotiations, primarily with Ms Wei, establish that there is no restaurant presently operating at the premises; in ways that are unclear the premises are not now set up for the immediate re-commencement of the restaurant; it seems likely that some further fit out will be required; no staff have been hired; and it is likely that even if the restaurant can be made successful, that will take some time.
Accordingly, conditions which simply cause the outstanding rent to be paid, and compensate the defendants for costs thrown away, will do nothing to exclude the possible futility of the relief against forfeiture being granted.
In my view, even if the conduct of Kofoo Sussex following the termination of the Kofoo lease does not as a matter of discretion disentitle it to a grant of relief against forfeiture, the dilatory way in which it pursued its right to relief justifies the court in imposing a condition which will ensure that at least some reasonable provision for capital is made available to Kofoo Sussex that gives a sufficient prospect of avoiding the making of the order being futile. The reinstatement of the bank guarantee is not, in my view, sufficient for this purpose. At the end of the day, all that I contemplate is that Mr Heo be required to prove properly that he can and will do that which he says he will do, before relief against forfeiture is granted to Kofoo Sussex.
Given the way the matter was conducted, I am not prepared to guess on this issue, or to make a decision based upon burden of proof. The probability of an appeal, and further contention between the parties, is likely to be increased if the need for Kofoo Sussex to be adequately capitalised is not clearly and objectively addressed.
Plainly the court cannot get involved in some assessment of the capital which may be necessary, and it may be that some simple approach, such as being satisfied that Kofoo Sussex will have enough funds to cover a suitable period of rent payments, will be appropriate. In this regard I note that Mr Kim initially sought a three-month rent-free period from Commerce Building (see Mr Kim's 16 June 2014 letter referred to above), although this issue will require further consideration.
As noted above, the first condition offered by Kofoo Sussex is that it would pay arrears of rent calculated at $26,476.55 to 31 July 2014. In its written submissions, Commerce Building asserts at par 30 that the rental arrears are $73,814. I do not propose to try to reconcile these claims and to decide which is correct. I will require the parties to agree on the appropriate amount, or provide schedules that will facilitate my determining the issue.
I do not know whether Kofoo Sussex proposes to pay only the outstanding rent in relation to the premises, and leave Commerce Building in the lurch in relation to any rent still outstanding from Kofoo Australia in relation to the other parts of the property leased to that company. I will give Commerce Building an opportunity to submit that Kofoo Sussex should be obliged to pay all outstanding rent owed by the group. It seems to be relatively clear on the evidence that the other parts of the property were used for purposes associated with the restaurant, but that view may be wrong. In Tannous Barrett J appears to have accepted that, where separate leases are entered into for related purposes, and relief against forfeiture is sought in relation to one, regard may be had to breaches of the other when considering how the court should exercise its discretion.
As I have noted above, the amount of the rent and outgoings due on 1 August 2014 must be determined.
Kofoo Sussex has offered to reinstate the bank guarantee at $130,166.87, but that may no longer be at least 4.4 times the monthly GST inclusive rent.
I will also give the defendants' an opportunity to argue that it should be a condition of relief that Kofoo Sussex pays all of their legal costs of the proceedings on an indemnity basis. Such an order was made by Palmer J in Home Ideas Centre Sydney Pty Ltd v Alem Pty Ltd [2010] NSWSC 695. I will not prejudge the issue, but it is arguable that one consequence of Kofoo Sussex's conduct in delaying the commencement of proceedings was that it put both defendants in the position where it was reasonable for them to contest these proceedings.
The defendants did not have an opportunity to make submissions concerning Mr Heo's offer of an indemnity concerning damages to which Hawker Restaurant may be entitled from Commerce Building, or the limit of the indemnity, I will allow them to do so.
I should record that the outcome of these proceedings may fairly be regarded by the defendants as being unfortunate. In my view throughout the whole of this saga Commerce Building has acted in an entirely proper manner, often showing considerable indulgence towards Kofoo. In particular, Ms Wei has acted in a very professional manner, and was obviously a candid witness. Also, even though Hawker Restaurant had notice of Kofoo Sussex's right to claim relief against forfeiture, its conduct was entirely innocent. If the conditions to the grant of relief are satisfied, and relief against forfeiture is given, that in my view will not in any way reflect badly on the conduct of the defendants.
I will give directions as to the future conduct of this matter.
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Decision last updated: 27 August 2014
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