NightOwl Properties Pty Ltd v Replay Australia Pty Ltd

[2022] QSC 270

SUPREME COURT OF QUEENSLAND

CITATION:

NightOwl Properties Pty Ltd v Replay Australia Pty Ltd [2022] QSC 270

PARTIES:

NIGHTOWL PROPERTIES PTY LTD
(plaintiff)
v
REPLAY AUSTRALIA PTY LTD
(defendant)

FILE NO/S:

BS 8260 of 2021

DIVISION:

Trial

PROCEEDING:

Claim

ORIGINATING COURT:

Supreme Court

DELIVERED ON:

5 December 2022

DELIVERED AT:

Brisbane

HEARING DATE:

Decided without an oral hearing

JUDGE:

Bradley J

ORDER:

THE ORDER OF THE COURT IS THAT:

1.   The plaintiff pay the defendant’s cost of the proceeding to and including 30 November 2021, to be assessed on the indemnity basis.

2.   The defendant pay the plaintiff’s costs of the proceeding from and including 2 June 2022, to be assessed on the standard basis.

CATCHWORDS:

PROCEDURE – CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS – COSTS – GENERAL RULE – COSTS FOLLOW THE EVENT – COSTS OF ISSUES – OFFERS OF COMPROMISE – INFORMAL OFFERS AND CALDERBANK LETTERS – UNREASONABLE REFUSAL OF OFFER – where after a trial the Court made declarations, relieved the plaintiff from the forfeiture of the option and ordered the defendant to specifically perform the lease covenant to grant the plaintiff a further lease for five years within the second five-year option – where the defendant submitted that the plaintiff should pay the defendant’s costs on the indemnity basis to do equity – where the plaintiff concedes that usually a tenant seeking relief would be required to pay the landlord’s costs – where the parties exchanged offers of settlement – where none of the offers was accepted – whether the plaintiff should pay the defendant’s costs of the proceeding on the indemnity basis – whether the defendant should pay the defendant’s costs from its failure to accept the plaintiff’s offer.

Bland v Ingrams Estates Ltd (No 2) [2002] Ch 177, cited.

Egerton v Jones [1939] 2 KB 702, cited.

Howard v Fanshawe [1885] 2 Ch 581, cited.

Icechest Corp Pty Ltd v Quan [2017] WASC 345, cited.

National Building Society v Maybeech Ltd [1985] Ch 190, cited.

Riviera Holdings Pty Ltd v Fingal Glen Pty Ltd (in liq) (No 3) (2013) 120 SASR 515, cited.

COUNSEL:

M Johnsson KC for the plaintiff
R A Quirk for the defendant

SOLICITORS:

Preston Law for the plaintiff
Clinton Mohr Lawyers for the defendant

1. This is a decision about the costs order to be made after a trial and judgment.  The parties filed written submissions and short affidavit evidence, and agreed that a decision on costs could be made by the court without an oral hearing.

   The judgment, the issues, and the reasons

2. In January 2020, the plaintiff gave a notice exercising the first of two options to lease the ground floor premises in Albert Street, Brisbane for another five years.  The option clause was in the registered lease.  The plaintiff had been a tenant there for more than nine years of the ten-year lease term.  It operated a convenience shop.  At that time, there was little inkling of the once in a century public health crisis about to envelop the globe. 

3. About ten months later, in December 2020, the defendant refused to grant the further five-year lease.  The defendant did so because, during the first five months of the COVID-19 lockdown, the plaintiff had paid rent reduced in line with the reduction in its turnover.  The plaintiff had asked the defendant to reduce the rent in this way.  The plaintiff accepted that the defendant had never agreed to do so.

4. The defendant raised the breach for the first time in December 2020.  The plaintiff remedied it immediately, by paying the outstanding rent.  However, the breach meant that some of the conditions in the option clause were not met, so that the defendant was not obliged to grant the further five-year lease.

5. On 30 September 2022, the court made declarations, relieved the plaintiff from the forfeiture of the option, and ordered the defendant to specifically perform the lease covenant to grant the plaintiff a further lease for five years with the second five-year option. 

6. In reasons published on 30 September 2022, the declarations and orders were explained.  In short:

   (a)The court rejected the defendant’s submission that the plaintiff could not ask the court to order the defendant to grant a further lease for the first option period.  The court found that the loss of the contractual right to a new lease did not prevent a grant of equitable relief against the forfeiture of the property interest associated with the contractual right.  If the plaintiff had not lost the contractual right, it would not need equitable relief. 

   (b)The court also rejected the defendant’s submission that a tenant, like the plaintiff, who gave a notice of exercise of an option, and then failed to comply with a post-notice condition, could not seek equitable relief against forfeiture.  The authorities on which the defendant relied did not exclude the availability of equitable relief.[1]  They were decisions about the effect on the availability of statutory relief against forfeiture of a landlord’s alleged waiver of post-notice conditions.     

   (c)The court found the payment of rent reduced “in line with the reduction of turnover”, during the peak of the pandemic restrictions, was not a wilful forfeiture,[2] a wilful or grave breach,[3] or improper in a legal sense.[4]  The lease provisions, by which the plaintiff would lose the option, served the purpose of securing payment of the rent.  There was no evidence that the reduced rent payments affected the value of the premises or otherwise caused any prejudice to the defendant.  There was a disparity between the value to the long-term tenant of a lease for the first option period (with a second option available), and the effect on the landlord of the failure to pay the full rent during the first five months of the COVID-19 “lockdown”.  The loss of the options was disproportionate to any harm occasioned by the late payment.[5]  The supervening events, and the circumstances then prevailing, explained the plaintiff’s breach and justified granting equitable relief.

   (d)The declarations and orders made by the court were the result of findings that the court could relieve the plaintiff from the loss of the option and that it was appropriate for the court to do so. 

   [1]e.g. Grepo & Anor v Jam-Cal Bundaberg Pty Ltd [2015] 131, [107] (Morrison JA). 

   [2]Thomas v Porter (1668) 1 Chan Cas 95 (Bridgeman LK).

   [3]Shiloh Spinners v Harding [1973] AC 691, 723-724 (Lord Wilberforce).

   [4]Dering v Earl of Winchelsea (1787) 1 Cox 318 (Eyre CB).

   [5]Shiloh Spinners Ltd v Harding op cit, 722-724 (Lord Wilberforce).

7. The plaintiff raised two other issues at the trial:

   (a)Whether the defendant had waived the relevant option conditions; and

   (b)Whether the plaintiff had a statutory remedy for loss of a lease for the first option period under s 124(2) of the Property Law Act 1974 (Qld) (PLA). 

8. Given the findings summarised at [6] above, it was not necessary to decide these other issues. They were alternative bases for relief in the pleadings and submissions. However, they were dealt with in the reasons. The court found the defendant had not waived the breaches by the plaintiff. Nor had it waived the benefit of the conditions in the option clause about the plaintiff complying with the lease. The plaintiff’s claim under s 124(2) of the PLA also failed, because its waiver case was rejected.

9. At the trial, the parties also made submissions about the characterisation of the option clause.  The plaintiff submitted that the option provision was a conditional agreement to grant a new lease, to assist its case that the defendant had waived the breach and the related option conditions.  It was not necessary to resolve this issue.  The plaintiff’s waiver case failed for other reasons.  No finding was made about the characterisation of the option clause.   

   Extent of the plaintiff’s success

10. The defendant submitted that the plaintiff should pay the defendant’s costs on an indemnity basis.  According to the defendant:

    “The plaintiff was not wholly, or even substantially, successful in the litigation.  It made the defendant litigate a number of substantial points on which it was unsuccessful.”

1. The plaintiff was successful in obtaining relief.  The defendant was unsuccessful in resisting a grant of relief.  The plaintiff’s lack of “success” on some issues made no difference to the outcome.  The defendant opposed the grant of any relief.  It does not appear that extra costs were associated with the defendant pursuing the waiver and statutory relief issues, which made no difference to the outcome.   

2. The pleadings were commendably brief.  The parties’ written submissions modest in length.  The trial occupied half a day on 16 June 2022.  An agreed bundle of documents was tendered.  No witness was cross-examined.  The court resumed on 4 July 2022 at the defendant’s request to hear its submissions about an alleged deemed admission, which had not been the subject of submissions before or at the trial.  The point was an arid one.  The defendant accepted it should pay the plaintiff’s costs of the mention on that day. 

3. I decline to make the order sought by the defendant on this basis. 

   Whether equity requires the plaintiff to pay the defendant’s costs on the indemnity basis

4. The plaintiff concedes that usually the tenant seeking relief would be required to pay the landlord’s costs.  The defendant submits that if the plaintiff is not ordered to pay the defendant’s costs of the proceeding on the indemnity basis, then the defendant will not be put back in the position it would have been without the plaintiff’s breach. 

5. The defendant relies on the reasons in Icechest Corp Pty Ltd v Quan [2017] WASC 345. There, Le Miere J explained:

   “[6]The general rule that costs follow the event will not usually be a just outcome in an action brought by a lessee for relief against forfeiture.  The usual approach of the court in such cases is that the party who sought relief against forfeiture should bear the costs of the action except so far as they have been increased by the other party unnecessarily or unreasonably resisting its claim and those costs must be borne by that other party.  That approach was explained by Chadwick LJ in Bland v Ingrams Estates Ltd (No 2) [2002] Ch 177 at 184 as follows:

   “Third, the object of the court when granting relief is to put the lessor (as well as the lessee) back in the position in which he would have been if there had been no forfeiture: see Egerton v Jones [1939] 2 KB 702, 706. It is this principle which underlies the practice of requiring the applicant, as a term of relief, to pay the costs properly incurred by the lessor in connection with the re-entry and the proceedings for relief. Accordingly, the applicant will normally be required to pay the lessor's costs of the forfeiture proceedings, save in so far as those costs have been increased by the lessor's opposition to the grant of relief, upon appropriate terms: see Howard v Fanshawe [1885] 2 Ch 581, 592, and Abbey National Building Society v Maybeech Ltd [1985] Ch 190, 206. Prima facie, the costs which the applicant will be required to pay to the lessor as a term of obtaining relief will be assessed on an indemnity basis; if it were otherwise the lessor would not obtain the indemnity against proper expenses to which he is entitled: see Egerton v Jones [1939] 2 KB 702, 710. But, to the extent that costs have been increased by the lessor's unnecessary opposition to the grant of relief, the normal rules apply: the lessor will normally be ordered to pay the applicant's costs on the standard basis, and the applicant will be able to set those costs off against what he would otherwise be required to pay to the lessor as a term of obtaining relief from forfeiture.”

   [7]The practice referred to by Chadwick LJ is the usual approach but does not derogate from the discretion of the court which must be exercised having regard to the circumstances of each case.   In Riviera Holdings Pty Ltd v Fingal Glen Pty Ltd (in liq) (No 3) (2013) 120 SASR 515 [520-521 [17]] Nicholson J reviewed a number of authorities concerning the award of costs in actions for relief against forfeiture and concluded:

   “My general review of the authorities to which my attention has been drawn suggest that each case will turn on its own facts; sometimes the landlord is entitled to be fully indemnified with respect to its costs, sometimes a landlord will receive only some of its costs and sometimes a landlord will be required to pay some or all of the tenants' costs.”

   …

   [26]This is a case where the tenant should pay the landlords' costs. The defendants should be put in the position in which they would have been if there had been no default and forfeiture.  The plaintiff should pay the costs properly incurred by the defendants in connection with the re-entry and the proceedings for relief.  I find that neither the plaintiff nor the defendants' costs of the proceedings have been increased by any unnecessary or unreasonable resistance by the defendants to the granting of relief against forfeiture.  It is appropriate that the plaintiff be required to pay the defendants' costs on an indemnity basis so that the defendants are not out of pocket for any costs incurred as a result of the plaintiff's default and application for relief against forfeiture, except in so far as any costs may have been unreasonably incurred.”

6. In Icechest Corp Pty Ltd v Quan, the landlords had re-entered after the tenant failed to remedy the failure to pay rent for two months and to provide a security deposit.  Within a few days, the tenant commenced the proceeding and sought an urgent interlocutory order requiring the landlords to give it possession of the premises and restraining them from re-taking possession.  Within six weeks, the parties consented to orders discharging the injunction and granting the tenant relief from forfeiture.  Le Miere J found that the landlords did not act unreasonably in not agreeing to reinstate the lease before the tenant commenced the proceeding because the tenant had not remedied all breaches and was not proposing to do so until the end of the following month.  Nor had the landlords acted unreasonably in negotiating the orders disposing of the proceeding. 

7. In Bland v Ingrams Estates Ltd (No 2), to which Le Miere J referred, the landlord had re-entered for non-payment of rent and, within a few days, granted a lease to a new tenant; the old tenants had not remedied all breaches by paying the outstanding rent.  The relief application was brought by persons holding an equitable charge over the lease on behalf of the old tenants.  The landlord and the new tenant had opposed relief.  The applicants had passed through the County Court and the High Court before succeeding in the Court of Appeal.[6]  The landlord was awarded no costs of the proceedings.  The applicants were ordered to pay the new tenants only “the costs that would have been incurred on a short and unopposed application to the county court for relief from forfeiture.”[7]  The landlord and the new tenants were ordered to pay the applicants’ costs in the Court of Appeal.

   [6]The respondents’ costs totalled £100,009.  The annual rent under the lease was £14,000.  

   [7][2002] Ch 177, 199 [36] (Chadwick LJ, Hale LJ agreeing).

8. In Riviera Holdings Pty Ltd v Fingal Glen Pty Ltd (in liq) (No 3) (2013), to which Miere J also referred, Nicholson J noted the general approach of ordering an applicant tenant to pay a respondent landlord’s costs was “based on the notion ... that any relief granted is an indulgence” and that “the landlord should be entitled to be placed in the position it would have been in but for the breaches of lease by the tenant.”  After considering the authorities, his Honour concluded:

   “With respect, I am not persuaded that there is any such general rule, at least, to the extent that it would exclude or fetter a court’s general discretion on matters of costs. In any event, any such general approach will become of less significance the further along the spectrum from summary determination to fully contested trial a matter lies.”[8]

   [8](2013) SASR 515, 520 [16].

9. In Riviera, Nicholson J found “it was or should have been readily apparent” to the landlord (Riviera) from early in the proceeding that it would “struggle to resist” the claim of the tenant (Fingal) for relief in equity.  The tenant would be able to establish its capacity to pay future rent and outgoings; refusal of relief against forfeiture would be extremely detrimental to the tenant, including because the further options for renewal formed a substantial part of the value of the existing lease; any prejudice to the landlord would be relatively minor in comparison to the tenant’s; and a failure to grant relief would likely produce a substantial windfall for the landlord.  His Honour explained:

   “It was in this context … that Riviera opposed Fingal’s application for relief in a manner and to an extent which, in my view, is to be characterised as intransigent and thorough and ultimately unreasonable.”[9]

   [9]Ibid, 522 [20]-[21].

10. His Honour concluded that the landlord Riviera “pressed its defence to the relief against forfeiture claim to an extent that, in the context of costs considerations, was unreasonable.”  Although the tenant “sought an indulgence”, Nicholson J decided “costs should still follow the event” and the landlord should be ordered to pay the tenant’s costs on a standard basis.[10]  As his Honour put it:

    “Riviera should not be allowed to have conducted and lost its case in the knowledge, from the outset, that it was guaranteed to be reimbursed its costs.”

    [10]Ibid, 523 [25].

11. In the present proceeding, the defendant had remedied all the breaches more than six months before the proceeding commenced.  The defendant did not seek equitable relief against forfeiture in its initial claim filed on 20 July 2021.  It raised the relief in a reply served on 6 October 2021, and then in an amended claim served on 11 November 2021.[11]  On 30 November 2021, the registrar made an order by consent granting the plaintiff leave to file an amended claim seeking equitable relief. 

    [11]These dates are from the defendant’s outline of submissions on costs filed on 8 November 2022.  They do not correspond with the filing dates.  I have assumed they are the dates of service.  It makes no difference to the outcome.    

12. Thereafter, the defendant opposed equitable relief, including at the trial, and at the post-trial hearing.  It did so in a manner that might be characterised as intransigent and thorough. 

13. Equity requires that the defendant be put in the position it would have been had the plaintiff not breached the lease.  It does not entitle the defendant to an indemnity for costs it voluntarily incurred at its own risk in opposing relief against forfeiture.

14. The plaintiff should pay the defendant’s cost of the proceeding to 30 November 2021, to be assessed on the indemnity basis.  Subject to any other relevant consideration, the defendant should bear its own costs incurred from that date. Before deciding whether the defendant should pay any of the plaintiff’s costs after 30 November 2021, it is convenient to consider the offers made by the parties.

    Offers of settlement

1. The other potentially significant feature here is that the parties exchanged written offers of settlement. 

2. On 1 February 2022, the plaintiff made an open written offer to settle the proceeding.  It had three elements. 

   (a)The first was that the parties enter into a fresh lease of the premises “at a rental determined consistently with the agreed market review mechanism and otherwise on terms appropriate for a renewed lease”.  

   (b)The second was that the proceeding would be discontinued by consent. 

   (c)The third was that the plaintiff would pay the plaintiff’s costs of the proceeding on a standard basis in accordance with the court’s scale. 

1. The offer was open for acceptance for 15 days.

2. On 1 February 2022, the defendant sought clarification of the offer by telephone.  On 3 February 2022, the plaintiff confirmed by email that it had offered to pay the defendant’s costs to be assessed on the standard basis.  The defendant’s solicitor deposes that she sought clarification by telephone “regarding … the proposed market review date for the market review referred to in the letter” and that she does not recall “receiving clarification”.  The significance of this is not explained.  Its unimportance might be gauged by the fact that the request was never put in writing and was never the subject of any follow up action after the clarifying email was received.

3. The defendant did not accept the offer.  It does not appear to have responded to the substance of the offer at all.

4. On 2 June 2022, the defendant made an offer of settlement “without prejudice save as to costs”, pursuant to the principles set out in Calderbank v Calderbank.  The offer had four elements. 

   (a)The first was the grant of a new lease for a term of five years, with no option for renewal, with rent for the first year to be consistent with the current rent, and “rent to be reviewed annually in accordance with CPI increases.” 

   (b)The second was the dismissal of the proceeding by consent. 

   (c)The third was that the plaintiff pay the defendant $30,000 plus GST for legal costs. 

   (d)The fourth was that the parties enter into a deed of settlement “on standard terms with mutual releases.” 

5. The defendant’s offer was made 14 days before the trial was scheduled to be heard.  It was open for acceptance until 5:00pm on 8 June 2022, about a week before the trial. 

6. On 8 June 2022, the plaintiff rejected the defendant’s offer and made a counteroffer.  The plaintiff proposed that a decree of specific performance of the current lease be made by consent, including the market review mechanism, and that there be no order as to costs.  The counteroffer was open until 10 June 2022.  It was made “without prejudice … save as to costs”.  

7. On 10 June 2022, the defendant rejected the plaintiff’s counteroffer and made its own counteroffer.  The defendant’s counteroffer had six elements. 

   (a)The first was that the parties were to enter into an amendment to extend the term of the existing lease to 13 October 2025 with one five-year option. 

   (b)The second was for a market review to be conducted to determine the rent as at 10 June 2022, at the plaintiff’s cost. 

   (c)The third was that if the market review was less than the current rent, the rent would remain at its current level ($246,614.40 plus GST) until 13 October 2022, when it would be increased by CPI. 

   (d)The fourth was that the proceeding would be dismissed by consent. 

   (e)The fifth was that the plaintiff would pay the defendant’s costs of $30,000 plus GST before the proceeding was discontinued. 

   (f)The sixth was that the parties would enter into a deed of settlement reflecting the other terms of the offer “on standard terms, including mutual releases.”   

8. Like its first offer, the defendant’s counteroffer was made “without prejudice save as to costs”, and pursuant to the principles set out in Calderbank v Calderbank.  The counteroffer was open for acceptance until noon on 13 June 2022.

9. The plaintiff did not respond to the defendant’s counteroffer.  The trial proceeded on 16 June 2022.

10. By its offer, the defendant sought to avoid any obligation to grant the second option. By its counteroffer, the defendant had offered to allow the plaintiff to continue as tenant until the end of the first option period and to have the equivalent of the second five-year option.  By the second element of its counteroffer, the defendant sought to defer a market review of the rent.  By the third element, the defendant sought to create a “ratchet” preventing the rent from falling at the deferred market review.  

11. In declining to accept the plaintiff’s offer and counteroffer and in making its own offer and counteroffer, the defendant sought an interest or benefit.  This was unrelated to the parties’ substantive legal rights that would apply if the court granted relief from forfeiture.  There is nothing improper about the defendant’s conduct.  However, the defendant has no right in equity to be compensated for costs it incurred pursuing its own advantage. 

12. The defendant did not reveal whether the $30,000 it offered to accept for its legal costs was its actual costs or those costs assessed on the indemnity or on the standard basis.  For this reason, it is not possible to determine whether the defendant’s counteroffer of 10 June 2022 differed from the plaintiff’s initial offer in this respect. 

13. The defendant submits that its resistance to a grant of relief was reasonable and did not substantially increase the plaintiff’s costs.  I reject this submission. 

14. On the evidence before the court, the only basis for the defendant’s continued opposition to equitable relief was its aim to advance its own interest in avoiding the second option or obtaining a higher present or future rent.  In pursuing its own interest, the defendant caused the plaintiff to incur the costs of the trial and the post-trial hearing.  From at least when the plaintiff made its initial offer, those costs were incurred because the defendant was seeking to extract a benefit.  In doing so, the defendant was voluntarily risking an order to pay the plaintiff’s costs incurred during that time. 

15. An order that the defendant pay the plaintiff’s costs from the date of the plaintiff’s offer would give effect to the consequences of the decisions the defendant made in pursuit of its own interest.  The plaintiff should recover the costs it incurred because of the defendant’s pursuit of its own interest. 

16. The costs should be assessed on the standard basis.  No higher basis of assessment is justified by the plaintiff’s offer or counteroffer.  The plaintiff’s offer would have allowed the defendant to recover its costs only on the standard basis.  It does not appear to have involved any genuine compromise of the plaintiff’s rights.  On the contrary, the plaintiff was proposing to give the defendant less by way of costs than the defendant would have recovered had it simply consented to a grant of equitable relief.  The plaintiff’s later counteroffer would have prevented the defendant from recovering any of its costs of the proceeding.  It follows that the plaintiff’s offer and counteroffer do not call for a costs order favouring the plaintiff any earlier than the date of the defendant’s offer.

17. In the circumstances, an order that the defendant recover its costs on the indemnity basis only to 30 November 2021, and that the plaintiff recover its costs on the standard basis from 2 June 2022, would appropriately reflect the merits of the parties in this respect.   

    Final disposition

18. For the reasons set out above, the court should order the plaintiff to pay the defendant’s costs of the proceeding to 30 November 2021, to be assessed on the indemnity basis.  The defendant should bear its own costs incurred from that date.

19. The defendant should pay the plaintiff’s costs of the proceeding incurred on and from 2 June 2022, to be assessed on the standard basis.  This latter order will include the costs of the resumed hearing on 4 July 2022.