Sparway Pty Ltd v CPQ Corporation Pty Ltd
[2018] ACTSC 210
•7 August 2018
SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Case Title: | Sparway Pty Ltd v CPQ Corporation Pty Ltd |
Citation: | [2018] ACTSC 210 |
Hearing Date: | 2 August 2018 |
DecisionDate: | 7 August 2018 |
Before: | Elkaim J |
Decision: | See [37] |
Catchwords: | LANDLORD AND TENANT – Subleases - covenants - exercise of option to renew - validity |
Cases Cited: | Chan v Cresdon Pty Ltd (1989) 168 CLR 242 Finch v Underwood (1876) 2 Ch D 310 |
Texts Cited: | M J Redfern and D I Cassidy, Australian Tenancy Practice and Precedents (LexisNexis Butterworths, 1987) |
Parties: | Sparway Pty Ltd (ACN 076 353 878) (First Plaintiff ) United Petroleum Pty Ltd (ACN 085 779 255) (Second Plaintiff/ Defendant) CPQ Corporation Pty Ltd (ACN 116 267 648) (First Defendant/First Plaintiff) Mr Christopher Alex Desmond (Second Defendant/Second Plaintiff) |
Representation: | Counsel Mr W Sharwood (First and Second Plaintiff/Defendant) Mr R Arthur & Mr J Larkings (First and Second Defendant/First and Second Plaintiff) |
| Solicitors McCullough Robertson Lawyers (First and Second Plaintiff/ Defendant) Macphillamy’s Lawyers (First and Second Defendant/First and Second Plaintiff) | |
File Numbers: | SC 128 of 2018; SC 188 of 2018 |
ELKAIM J:
There are two applications before me. In the first, dated 20 March 2018, Sparway Pty Ltd (“Sparway”) and United Petroleum Pty Ltd (“United”) seek declarations to the effect that they have a valid sublease, in respect of certain premises, with CPQ Corporation Pty Ltd and Mr Christopher Desmond. Adopting the sensible approach taken by the parties, I will refer to the applicants as the “tenants” (except where a distinction is necessary between them) and the respondents as the “landlords”.
The second application, dated 1 May 2018, is effectively the reverse of the first. The landlords are seeking possession of the premises together with damages. The two applications were heard together with the evidence being common to both applications. It was agreed that the loser of any one of the applications would also fail on the other application.
The first application is supported by an affidavit of Ms Fiona Garvey, sworn on 21 March 2018. The second application is supported by two affidavits of Mr Christopher Desmond, both sworn on 1 May 2018.
The tenants tendered some documents which I will refer to below (Exhibit A).
The tenants have also issued notices to admit facts and authenticity of documents. The landlords have not responded formally to the notices but have written to the tenants giving reasons for the lack of a formal response.
Background
The whole of the facts behind this dispute are more complicated than the summary I will give. My intention is to only highlight those matters which are central to the dispute.
On 1 March 2008, Sparway entered into a sublease (“lease”) of premises in Fyshwick with the landlords. The lease was for a term of five years but contained two options to renew the lease at five yearly intervals. The lease commences at page 86 of the Court Book (“CB”).
On 16 October 2012, Sparway exercised the first option to renew the sublease (CB 111).
On 9 September 2013, the landlords sent Sparway a new lease with the intent that it be executed and returned for registration (CB 177). The letter attaching the lease contains this paragraph:
On return of the executed Sublease (in duplicate), Disclosure Statement, Bank Guarantee and Certificates of Currency in respect of the insurances required by the Sublease together with the cheque requested in the previous paragraph we shall arrange for execution of the Sublease by our client and registration of the Sublease.
Despite a further three reminders on 1, 10 and 25 October 2013, Sparway did not return the lease.
On 4 December 2013, Sparway sought permission from the landlords to assign its interest in the lease to United (CB 224).
The landlords permitted the assignment and gave effect to their permission by sending a further lease for execution to United on 25 August 2014 (CB 227). Notably, the letter attaching this lease contains the same paragraph as quoted above from the letter of 9 September 2013.
Despite reminders on 9 September and 1, 17 and 31 October 2014, United did not return an executed lease.
On 20 November 2017, United attempted to exercise an option to renew the lease (CB 150 and 151). The landlords refused to accept the renewal for the reasons set out in the letter of 14 February 2018 (CB 237).
The landlords made it clear, in a letter dated 2 March 2018, that any rent received after 28 February 2018 would be “held in escrow on account of the damages/mesne profits in respect of your client’s trespass” (CB 156).
The three leases relevant to the dispute may be described as the 2008 lease (CB 86), the 2013 lease (CB 103) and the 2014 lease. The last lease is not included in the Court Book but other than the name of the lessee I understood there was no difference to the 2013 lease. The 2008 lease and the 2013 lease have a different format but it was agreed that the relevant terms, although perhaps differently numbered, were the same.
The failure to return the executed lease led to the creation of an equitable lease between United and the landlords. The landlords accepted that the terms of this lease were the same as the terms of the 2013 (or 2014) lease. For the purposes of the primary argument in the dispute, it does not matter that the lease was equitable or contractual.
The relevant terms of the lease include the definition of “Bank Guarantee” (CB 131), Clause 3.1(j) (CB 135), Clause 4 (CB 137-138) and Clause 5.2 (CB 139). The important parts of Clause 4 are the introduction and the option provision. These are as follows:
4.1 Covenants
Conditionally upon the Lessee paying the rent reserved by this Lease and observing and performing all the covenants obligations and conditions on its part to be observed or performed, the Lessor covenants with the Lessee that…
(d) Option of Renewal
It will, upon written request by the Lessee delivered to the Lessor at least three (3) months before the expiration of the Term, at the cost and expense of the Lessee where permitted by law, grant to the Lessee and the Lessee shall accept a renewal of this Lease for the further Term set out in Item 15(i) at a rental per annum on and from each of the dates stated in the Second Schedule changed to the amount:
(i)stated beside each date; or
(ii)determined by the method of rent review stated beside each date;
and otherwise upon the same terms and conditions as are contained in the Lessor’s standard form of lease for the Building current at the date of commencement of the renewal of lease with the exception of this clause but containing provisions for further renewals on similar terms to this clause for the periods shown in Items 15(ii) and (iii) but no longer.
The dispute
My initial impression of the dispute between the parties was that it concerned the identification of the current tenant (Sparway or United) and the identification of the governing lease (that executed in 2008 or 2013 (or 2014) which had been provided by the landlord for execution)).
Having heard submissions from the parties, which to some extent regarding the tenants, were a little different to the written submissions, the scope of the dispute was significantly narrower than I had an anticipated.
The dispute can be simply stated: were the landlords entitled to not abide by their obligation to renew the lease once renewal of the lease was requested by United pursuant to Clause 4(d)?
The landlords said they were not bound to grant a renewal of the lease because the conditions precedent imposed at the start of Clause 4 had not been met.
United responded by stating:
(a)The conditions precedent were trivial;
(b)They had been ignored for more than three years;
(c)The landlords had, in effect, waived their right to rely on the conditions;
(d)The landlords had not given any indication of their intent to rely on the conditions in the years preceding the purported exercise of the option in November 2017;
(e)United has now complied with the conditions.
The landlords responded that it did not matter whether the conditions were trivial. Further, the landlords emphasised that the conditions had been specifically referred to in the letters accompanying the proposed 2013 and 2014 leases.
The legal basis behind the landlords’ assertions are as follows:
(a)The lease required United to comply with two conditions before the landlords’ obligation under Clause 4.1(d) arose. The two conditions were to effect and provide proof of certain insurance cover and to provide an unconditional Bank Guarantee.
(b)These two conditions are to be regarded as conditions precedent to the obligation on the landlords to renew the lease.
The landlords began by referring me to Chan v Cresdon Pty Ltd (1989) 168 CLR 242 at 252. This was to establish that the terms of an equitable lease will be the same as the terms of a lease at law. I do not think there was any dispute about this principle.
The landlords then went to this passage from Finch v Underwood (1876) 2 Ch D 310 at 315, firstly from the judgment of James LJ and then from the judgment of Mellish LJ:
I think, moreover, that the Plaintiff, if otherwise entitled to a lease, would have lost that right by breach of the covenants to repair. No doubt every property must at times be somewhat out of repair, and a tenant must have a reasonable time allowed to do what is necessary: but where it is required as a condition precedent to the granting a new lease that the lessee’s covenants shall have been performed, the lessee who comes to claim the new lease must show that at that time the property is in such a state as the covenant require it to be.
The tenant must take the covenant to renew as he finds it; if it contains conditions precedent he must comply with them before he can claim the benefit of it, and if he has not done so a Court of Equity cannot relieve him. Under the terms of the covenant in the present case the lease is to be granted only in case the covenants and agreements on the part of the tenants shall have been duly observed and performed.
I was then referred to the text, M J Redfern and D I Cassidy, Australian Tenancy Practice and Precedents (LexisNexis Butterworths, 1987), commencing at [14 15]:
An option to renew a lease or to sell the leased premises may be subject to the happening of an event…Clauses of this kind come with many variations. One form which has been productive of litigation requires the tenant to have paid the rent and performed the covenants when the notice of exercise is given and when the initial term expires.
The legal principles referred to by the landlords, in my view, establish a strong case in their favour. The response by United does not defeat this case. The fact that the covenants may be seen as trivial is not relevant. In any event, I do not regard them as trivial and again note that they were referred to in each of the letters enclosing the new lease for execution.
The long period during which the covenants were not mentioned, and following the sending of the new leases, does not in my view assist United. One or other of the tenants was requested on nine occasions to return the lease. Each request was ignored. The landlords were accepting rent and were bound by the lease, at least as an equitable lease. They were entitled to continue to receive rent and to treat the lease as being in force until its termination date. The fact that the landlords did not raise the matter after 2014 does not amount to a waiver of their entitlements.
United relied on a passage from the above text on page 2035.13 where a list is given of examples of a condition precedent not preventing the exercise of an option. The passage states:
It is generally accepted that any condition precedent to the exercise of the option must be strictly complied with. Where the condition is the common one referred to above any breach by the tenant, whether cured or not, whether waived by the landlord or not, whether serious or trivial, has been regarded as sufficient to deprive the tenant of it. There is no power, either pursuant to the ordinary statutes or the inherent jurisdiction, to grant relief against the forfeiture of an option and relief against forfeiture of the lease does not restore the option. These consequences necessarily follow from the general acceptance of the second view as to the nature of options and from the common form of an option clause:
It is meaningless to speak of the substantial performance of a condition precedent; either it has been performed or it has not.
A condition precedent to the exercise of an option was that the tenant had observed and performed its covenants.
The difficulty with reliance on this passage is that it simply does not apply. A fresh lease had not been granted nor had the landlords done any other act which might have suggested they were prepared to issue a new lease.
Finally, the provision of the Bank Guarantee and the Certificates of Currency, as contained in Exhibit A, is simply too late. These documents were provided by letter, dated 11 June 2018, which is well after the expiry of the term of the lease (28 February 2018).
The result of the above is firstly, that the tenants’ application must fail and secondly, that the landlords are now entitled to treat the lease as having ended.
The landlords have sought an order for possession. Following discussion with the parties, I indicated that I would not make that order but would request the parties to bring in orders reflecting my decision. I did this in case the tenants contemplated any further action, or applications, in order to maintain their occupation of the premises.
Having regard to the strength of the landlords’ case, as set out above, I do not think it necessary to deal with the secondary positions advanced by the parties.
I make the following orders:
(a)The application bearing the file number SC 128/2018 is dismissed.
(b)The application bearing the file number SC 188/2018 is allowed subject to final orders.
(c)United Petroleum Pty Ltd (ACN 085 779 255) and Sparway Pty Ltd (ACN 076 353 878) are to pay the costs of CPQ Corporation Pty Ltd (ACN 116 267 648) and Christopher Alex Desmond in respect of both applications.
| I certify that the preceding thirty-seven [37] numbered paragraphs are a true copy of the Reasons for Judgment of his Honour Justice Elkaim. Associate: Date: |
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