Synergy Scaffolding Holdings Pty Ltd v Goodman Funds Management Australia Limited as trustee for GAI1 RPF Subtrust of the Hayesbery

[2023] NSWSC 538

Supreme Court

New South Wales

Medium Neutral Citation:

Synergy Scaffolding Holdings Pty Ltd v Goodman Funds Management Australia Limited as trustee for GAI1 RPF Subtrust of the Hayesbery [2023] NSWSC 538

Hearing dates:

26, 27 April 2023; further written submissions 1 May 2023

Decision date:

22 May 2023

Jurisdiction:

Equity - Real Property List

Before:

Peden J

Decision:

The Plaintiffs’ Summons is dismissed with costs: see [160]

Catchwords:

LEASES AND TENANCIES — Default and termination — Relief against forfeiture — Forfeiture of a lease — Where plaintiffs are sublessees — Where sublessees sought to stay forfeiture on terms that new lease be granted — Whether sublessees entitled to relief if head lessee repudiated head lease — Whether s 130 of the Conveyancing Act 1919 (NSW) is available where head lessee relies on common law rights — Where head lessee repudiated contract and s 130 not available

CONTRACTS — Termination — Repudiation of contract — Whether head lessee repudiated lease with head lessor — Where head lessee entered voluntary administration and administrators did not seek to exercise property rights — Whether the issue of a s 443B notice and an attached letter amounted to repudiation — Where repudiation established other than by reference to s 443B notice

LEASES AND TENANCIES — Relief against forfeiture — Conditions under new lease to be granted to a sublessee — Broad discretion to be exercised as to appropriate terms according to the circumstances — Whether sublessee should be required to pay head lessee’s rental arrears — Whether sublessee should be required to rectify a stormwater basin — Whether a bank guarantee should be given and for what duration — Whether lease should be on a “triple net” or “net” basis

Legislation Cited:

Civil Procedure Act 2005 (NSW) s 98

Civil Procedure Rules (UK)

Conveyancing Act 1919 (NSW) ss 85, 129, 130

Corporations Act 2001 (Cth) s 443B

Conveyancing and Law of Property Act 1881 (UK) s 14(3)

Conveyancing and Law of Property Act 1892 (UK) s 4

Property Law Act 1925 (UK) s 146

Cases Cited:

Abbey National Building Society v Maybeech Ltd [1985] Ch 190

ADCO Constructions Pty Ltd v Goudappel (2014) 254 CLR 1

Batiste v Lenin (2002) 11 BPR 20,403

Billson v Residential Apartments Ltd [1991] 3 WLR 264

Burt v Gray [1891] 2 QB 98

Cadogan v Dimovic [1984] 1 WLR 609

Chatham Empire Theatre (1955) Ltd v Ultrans Ltd [1961] 2 All ER 381

Commonwealth Development Bank of Australia v Eagle Hotels Pty Limited [1990] ANZ Conv R 100

Creery v Summersell and Flowerdew and Co Ltd [1949] Ch 751

Creswell v Davidson (1887) 56 LT 811

Dainford Ltd v Smith (1985) 155 CLR 342

Egerton v Jones [1939] 2 KB 702

Elevation (NSW) Pty Ltd v The Uniting Church [2014] NSWSC 331

English and Australian Copper Co Ltd v Thomas Johnson (1911) 13 CLR 490

Ewart v Fryer [1901] 1 Ch 499

Fleeton v Fitzgerald (1998) 9 BPR 16,715

Joint Coal Board v Noone Pty Ltd (1994) 3 BPR 9440

Keybridge Capital Ltd v WAM Active Ltd (2021) 105 NSWLR 278

Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115

Laurinda Pty Ltd v Capabala Park Shopping Centre Pty Ltd (1989) 166 CLR 623

Leahy v Austwin Management Services Pty Ltd [2011] QCA 186

Leahy v Fimiston Investments Pty Ltd [2011] QSC 22

Legione v Hateley (1983) 152 CLR 406

Nind v Nineteenth Century Building Society [1894] 2 QB 226

Pioneer Quarries (Sydney) Pty Ltd v Permanent Trustee Co of NSW Ltd (1970) 2 BPR 9562

Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17

Re Oliver Brown Pty Ltd (No 2) (2012) 17 BPR 32253

Riviera Holdings Pty Ltd v Fingal Glen Pty Ltd [2013] SASC 77

Shepherd v Felt Textiles of Australia Ltd (1931) 45 CLR 359

Shiloh Spinners Limited v Harding [1973] AC 691

Silvia v FEA Carbon Pty Ltd (2010) 185 FCR 301

Stieper v Deviot Pty Ltd (1977) 2 BPR 9602

Tutita Pty Ltd v Ryleaco Pty Ltd (1989) 4 BPR 9635

Wardens and Governors of Cholmeley School Highgate v Sewell [1894] 2 QB 906

Wilkinson v S & S Gikas Pty Ltd (2006) 12 BPR 23,685

World Best Holdings Limited v Sarker (2010) 14 BPR 27,549

Texts Cited:

Brendan Edgeworth, Butt’s Land Law (7th ed, 2017, Lawbook Co)

Clyde Croft, Robert Hay and Luke Virgona, Commercial Tenancy Law (4th ed, 2018, LexisNexis)

Law Commission of England and Wales, Codification of the Law of Landlord and Tenant: Forfeiture of Tenancies (Report, March 1985)

Stephen Tromans, ‘Forfeiture of leases: relief for underlessees and holders of other derivative interests’ (1986) Conveyancer and Property Lawyer 187

Stuart Bridge, Elizabeth Cooke and Martin Dixon, Megarry and Wade’s The Law of Real Property (9th ed, 2019, Sweet & Maxwell)

W D Duncan and Sharon Christensen, Commercial Leases in Australia (9th ed, 2020, Lawbook Co)

Category:

Principal judgment

Parties:

Synergy Scaffolding Holdings Pty Ltd (First Plaintiff)
MRL Technologies Pty Ltd (Second Plaintiff)
Goodman Funds Management Australia Limited (First Defendant)
The Trust Company Limited (Second Defendant)

Representation:

Counsel:
T Lynch SC and A Carr (Plaintiffs)
M Izzo SC and T Boyle (Defendants)

Solicitors:
Chamberlains (Plaintiffs)
Clayton Utz (Defendants)

File Number(s):

2022/279783

Publication restriction:

Nil

Judgment

1. This is a case, in which, sublessees are seeking statutory relief against forfeiture from the head lessor in relation to a commercial warehouse property in Heathcote Road, Moorebank (the Property).

2. The first plaintiff, Synergy Scaffolding Holdings Pty Ltd (Synergy), and the second plaintiff, MRL Technologies Pty Ltd (MRL), were the sublessees of part of the Property.

3. The second defendant, The Trust Company Limited (Trust), is the registered proprietor of the Property. The Trust holds the legal title of the Property in its capacity as custodian for the GA1 RPF Subtrust and, pursuant to the relevant custody agreement, is obliged to act on properly authorised instructions issued by the trustee of that Subtrust.

4. The first defendant, Goodman Funds Management Australia Limited (Goodman), is the trustee of the GAI1 RPF Subtrust and the beneficial owner of the Property. For convenience, I will refer generally in this judgment to both defendants as Goodman.

5. In about August or September 2022, Goodman’s head lease was terminated, which had the effect of terminating the plaintiffs’ subleases. However, the plaintiffs remain in possession of the formerly subleased areas pursuant to consent orders of the Court dated 28 October 2022. Two other sublessees, ARE Direct and Concept Logistics, currently occupy other parts of the Property but are not involved in these proceedings.

6. The plaintiffs seek orders pursuant to s 130 of the Conveyancing Act 1919 (NSW) to stay Goodman’s enforcement of a right of forfeiture on terms that new leases formulated by the Court be executed between Goodman and the plaintiffs in relation to those parts of the property they occupied pursuant to their subleases.

7. The defendants resist the s 130 relief sought by the plaintiffs. If the Court is satisfied that s 130 is engaged and is minded to grant relief in the form of leases to the plantiffs, the defendants propose conditions upon which such leases ought to be granted.

8. The first issue turns upon the proper construction of s 130. As to the second issue, the parties are in dispute about what conditions of “rent, costs, expenses, damages, compensation, giving security, or otherwise” are appropriate in the circumstances.

Background

9. Some matters are not in dispute.

10. On 11 March 2013, the former registered proprietor of the Property granted Ovato Print Pty Ltd (Ovato Print) a lease (Head Lease) of the whole of the Property. That Head Lease commenced on 14 March 2013 with a term ending 13 March 2025.

11. On 24 May 2013, Goodman became the registered proprietor of the Property.

12. On 10 October 2019, Ovato Print granted Synergy a licence over 4000 square metres of the Property.

13. On 12 May 2020, Ovato Print entered into a sublease with Synergy of the same part over the Property, with a commencement date of 1 June 2020 (Synergy Sublease).

14. On 19 October 2020, Goodman, as head lessor, Ovato Print (as head lessee) and MRL (as sublessee) entered into a Deed of Consent to sublease part of the Property (MRL Sublease). On 29 October 2020, a similar Deed of Consent was entered into in respect of Synergy, as sublessee (Synergy Sublease).

15. On 21 December 2020, the Head Lease was transferred to Ovato Limited (Ovato).

16. On 12 May 2022, the defendants, Ovato (as sublandlord) and MRL (as sublessee) entered into a Deed of Consent to Sublease part of the Property (Second MRL Sublease).

17. On 21 July 2022, administrators were appointed to Ovato and its subsidiaries.

18. On 4 August 2022, Goodman directed Synergy and MRL to pay rent and other moneys payable under the Synergy Sublease, the MRL Sublease and the Second MRL Sublease directly to it, as head lessor.

19. On 18 August 2022, the Ovato administrators sent a letter and a notice to Goodman that, after 18 August 2022, indicating, inter alia, that they did not intend to exercise rights under the Head Lease and that Ovato would cease to occupy the Property. As detailed further below, the proper construction of this letter and notice is central to whether s 130 is engaged or not.

20. On 18 August 2022, Synergy and MRL engaged in negotiations with Goodman for licences.

21. On 12 September 2022, Goodman wrote to Ovato to inform them that it had accepted the repudiation of the Head Lease and terminated the Head Lease on 19 August 2022.

22. It is not in dispute that upon the termination of the Head Lease, the subleases to Synergy and MRL were also terminated.

23. Between 19 August 2022 and when the plaintiffs commenced proceedings on 19 September 2022, Goodman offered the plaintiffs three-month licences for those parts of the Property they had previously occupied, and the possibility of negotiating a longer direct lease with each of them.

24. On 23 December 2022, Goodman proposed a Heads of Agreement to the plaintiffs (Heads of Agreement), but the parties have not agreed on lease terms.

Issues to be determined

25. The parties agreed on the issues to be determined.

26. First, whether it is possible for the plaintiffs to obtain relief pursuant to s 130 Conveyancing Act 1919 (NSW).

27. Secondly, if such relief is available to the plaintiffs, whether any new lease should be conditioned on substantially similar terms as those which previously bound Synergy and MRL under the Synergy sublease or otherwise.

28. Some terms and conditions of any lease are agreed, and are those set out in the two Heads of Agreement in evidence, save for those conditions disputed and detailed below.

29. I note that several conditions originally in dispute were agreed during the hearing, namely:

1. The plaintiffs now accept they must immediately pay invoices for past electricity usage in accordance with the consent orders made on 28 October 2022;

2. The plaintiffs must pay expenditure on repairs, maintenance and capital works, incurred by the defendants since 19 August 2022, in the sum of $137,651.52 for Synergy and $44,200.59 for MRL.

3. The plaintiffs must pay any difference in the occupation fee, payable under the consent orders made on 28 October 2022, and any final rate of rent ordered by the Court, for the period from 19 August 2022 to the date of these orders.

4. The plaintiffs must pay a management fee of 1%.

5. Goodman accepted that rent will increase annually at the rate of 3% or CPI, whichever is the greater, rather than 4%, as originally proffered.

30. The conditions remaining in dispute to be determined by the Court are as follows.

31. First, the defendants seek a condition that the plaintiffs pay Ovato’s rental arrears under the Head Lease relative to those parts of the Property, in relation to which the plaintiffs have possession. Goodman appropriately conceded that the Court ought not be asked to require the plaintiffs to pay the whole of the outstanding rent for the whole of the Property: see for example, Joint Coal Board v Noone Pty Ltd (1994) 3 BPR 9440 at 9456 (Yeldham J). The plaintiffs resist paying any of Ovato’s outstanding rent on the basis that the defendants have rights against Ovato which ought to be exercised instead of looking to the plaintiffs for that lost rent.

32. Secondly, Goodman seeks a condition that the plaintiffs pay the cost of rectification of the stormwater detention basin at the Property. The plaintiffs accept they ought to bear the cost of such rectification, but want to carry out the work themselves.

33. Thirdly, Goodman seeks a guarantee in the sum of six months’ rent, whereas the plaintiffs submit that a four month guarantee is sufficient.

34. Fourthly, Goodman seeks rent payable on a “net basis lease”, with an uplift to make the rent closer to market rent than the rent under the Head Lease. The plaintiffs seek rent on a “triple net basis” and at the rate in the Subleases, or alternatively the Head Lease. As part of this, Goodman seeks to invoice the plaintiffs for electricity use based on a net portion of lettable area in the whole Property. The plaintiffs consider such apportionment could work unfairly and seek to pay electricity based on individual metering that must be installed by Goodman.

35. Finally, Goodman seeks its costs of the proceedings on the basis that the plaintiffs are seeking the Court’s indulgence. Goodman also foreshadows they will be seeking a gross sum costs order in due course. The plaintiffs submit that a costs order ought to await the judgment.

Is s 130 Conveyancing Act enlivened in the circumstances?

36. Section 130 of the Conveyancing Act1919 (NSW) provides:

130 Power of court to protect under-lessee on forfeiture of superior leases

(1) Where a lessor is proceeding, by action or otherwise, to enforce a right of re-entry or forfeiture, under any covenant, proviso, or stipulation in a lease made either before or after the commencement of this Act or for non-payment of rent, the Court may, on application by any person claiming as under-lessee any estate or interest in the property comprised in the lease, or any part thereof, make an order staying any such action or other proceeding on such terms as to the Court may seem just, and vesting, for the whole term of the lease, or any less term, the property comprised in the lease, or any part thereof, in any person entitled as under-lessee to any estate or interest in such property, upon such conditions as to execution of any deed or other document, payment of proper and reasonable rent, costs, expenses, damages, compensation, giving security, or otherwise as the Court in the circumstances of each case, and having regard to the consent or otherwise of the lessor to the creation of the estate or interest claimed by the under-lessee, thinks fit; but in no case shall any such under-lessee be entitled to require a lease to be granted to him or her for a larger area of land or for any longer term than he or she had under his or her original under-lease.

(2) Any such order may be made in proceedings brought for the purpose by the person claiming as under-lessee or, where the proceedings brought by the lessor are in the Court, may be made in the latter proceedings.

37. The parties suggested different approaches to the proper construction of the section and, in particular, whether Goodman was “proceeding to enforce a right of re-entry or forfeiture”.

38. The principles which govern the task of construing s 130 were set out by Bathurst CJ (with whom White JA agreed) in Keybridge Capital Ltd v WAM Active Ltd (2021) 105 NSWLR 278 at 298-299:

In Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (Northern Territory) (2009) 239 CLR 27; [2009] HCA 41, the plurality stated at [47] that the task of statutory construction must begin with a consideration of the text itself, although the meaning of the text may require consideration of the context, which includes the general purpose and policy of a provision, in particular the mischief it seeks to remedy.

It has been subsequently emphasised that context in its widest sense should be considered at the first stage of the construction process and not at some later stage. The principles were stated by the plurality in SZTAL v Minister for Immigration and Border Protection (2017) 262 CLR 362; [2017] HCA 34 in the following terms (at [14]):

“[14] The starting point for the ascertainment of the meaning of a statutory provision is the text of the statute whilst, at the same time, regard is had to its context and purpose. Context should be regarded at this first stage and not at some later stage and it should be regarded in its widest sense. This is not to deny the importance of the natural and ordinary meaning of a word, namely how it is ordinarily understood in discourse, to the process of construction. Considerations of context and purpose simply recognise that, understood in its statutory, historical or other context, some other meaning of a word may be suggested, and so too, if its ordinary meaning is not consistent with the statutory purpose, that meaning must be rejected.”

In R v A2; R v Magennis; R v Vaziri [2019] HCA 35; (2019) 93 ALJR 1106, Kiefel CJ and Keane J emphasised the importance of considering context at the first stage of the process, stating that “[a] literal approach to construction, which requires the courts to obey the ordinary meaning or usage of the words of a provision, even if the result is improbable, has long been eschewed by this Court”: 93 ALJR 1106 at [31]-[34] (footnotes omitted); see also Bell and Gageler JJ at [124].

39. Goodman submits that the s 130 discretion is unavailable, because Goodman accepted Ovato’s repudiation and terminated the lease. In doing so, it was exercising a common law right, and was not enforcing a “right of re-entry or forfeiture”. The distinction between the two was referred to by Yeldham J in Joint Coal Board v Noone Pty Ltd (1994) 3 BPR 9440 at 9453-9454, however, there his Honour was satisfied the head lessor had enforced a right of re-entry and not terminated by reason of a repudiation by the head lessee.

40. To support its construction of s 130, Goodman relies upon the commentary in Brendan Edgeworth, Butt’s Land Law (7^th ed, 2017, Lawbook Co) which identifies the separate sets of rights between a landlord and tenant as being “contractual rights and rights that derive from the character of the lease as an estate” (at [7.1600]).

41. Because there is no commentary or authority directly on the question of how s 130, or equivalent provisions in other states, operates in the context of a head lessee’s repudiation, it is useful to set out parts of the commentary explaining the different rights. The learned author continues at [7.1600]:

In parallel fashion to their creation the lease may be terminated by reference to two sets of rights. The first is the right, commonly found in leases, to “re-enter and forfeit” the tenant’s leasehold estate for the tenant’s breach of covenant. Because the action in this instance entails termination of the estate held in the tenant’s hands, it is a right available only to the landlord. The second is the common law contractual right to terminate the lease for repudiation. This second right is merely an application to the law of leases of the general contract law principle that if one party to a contract repudiates their obligations under the contract, the other party may accept that repudiation and terminate the contract.

42. The effect of these dual rights is that the landlord can elect how to regain possession from a lessee in any particular case.

43. At [7.1640] – [7.1650], the author explains the nature of the right to forfeit:

[7.1640] The landlord’s most far-reaching remedy for the tenant’s breach is the right to re-enter the premises and put an end to (“forfeit”) the lease. However, a landlord has no right to re-enter and forfeit for breach of a covenant without express provision in the lease, or unless the landlord has some statutory right to do so. The mere fact that the tenant has breached a covenant does not, in itself, give the landlord such a right, even if the breach is a very serious one. …at common law certain covenants were implied into leases; but a right to re-enter and forfeit is not one of them. …

[7.1650] Most leases contain an express “proviso for re-entry”, stipulating that if the tenant breaches a covenant in the lease, the landlord has the right to re-enter the premises and forfeit the lease. In the absence of an express proviso for re-entry, statutes in all jurisdictions imply one. For instance, s 85(1)(d) of the Conveyancing Act 1919 (NSW) implies into every lease a power in the landlord to re-enter and determine the tenant’s interest if rent is in arrears for one month, or if the tenant defaults for two months in performing any stipulation in the lease, or if the tenant fails to comply with a notice to repair. This implied power may be varied by agreement…

Where the tenant is a corporation under administration, the landlord cannot take possession of the property except with the administrator’s consent or court permission. …

44. Finally, at [7.1680] the author states:

Where the tenant’s breach amounts to a repudiation… the landlord who wishes to put an end to the lease has two courses of action: either to accept the repudiation and terminate under principles of general contract law, or to re-enter and forfeit the lase by exercising the right of re-entry in the lease.

See also Stuart Bridge, Elizabeth Cooke and Martin Dixon, Megarry and Wade’s The Law of Real Property (9^th ed, 2019, Sweet & Maxwell) at [17-052].

45. A sublessee cannot seek relief against forfeiture pursuant to s 129 of the Conveyancing Act 1919 (NSW). Thus, it appears that the purpose of s 130 is to provide a statutory basis for a remedy for sublessees, who, through no fault of their own, are liable to lose possession of premises because the head lessee has defaulted in obligations owed to the head lessor. At the same time, practically s 130 recognises that a sublessee, for whatever reason, has chosen to take a sublease in relation to a particular property and has no privity of contract with the head lessor.

46. Sublessees or licence holders face the risk that the lessor may be entitled to exercise a right of re-entry. In Egerton v Jones [1939] 2 KB 702, a case concerning a mortgagee to an sublessee, Greene MR (with whom Finlay and MacKinnon LJJ agreed) observed at 707:

Accordingly, in the case of a mortgagee by sub-demise, that mortgagee is always at the risk of the lessor obtaining re-entry for breach of covenant without the mortgagee knowing anything about it; in which case the mortgagee is completely shut out. Every mortgagee, therefore, knows that that is the risk he runs. If, after taking a covenant from his mortgagor to observe the covenants in the lease, he takes no steps whatsoever to satisfy himself from time to time that no breach of covenant is taking place, he is always exposed to the risk that, behind his back and without his knowledge, the lessor will succeed in re-entering, and so determining the lease, with the result that all possibility of relief from forfeiture is lost to the mortgagee. That is one of the risks of the game.

47. Therefore, the effect of s 130 is to enable a sublessee to obtain a lease directly from the head lessor in circumstances where otherwise any interaction between the lessor and sublessee is likely to be minimal and confined to, for instance, a deed of consent to the sublease: see, eg, W D Duncan and Sharon Christensen, Commercial Leases in Australia (9^th ed, 2020, Lawbook Co) at [130.7200].

48. There are authorities which suggest the Court is to be mindful of imposing a lease with the former sublessee upon a blameless lessor where the blameless lessor has also forfeited the head lease: see, eg, Creery v Summersell and Flowerdew and Co Ltd [1949] Ch 751 at 767 (Harman J); Leahy v Austwin Management Services Pty Ltd [2011] QCA 186 at [26] (McMurdo J, with whom Fraser JA and Boddice J agreed).

49. Before the Court can consider the discretion in s 130 as to the appropriate terms of any lease to be vested in the sublessee, the text of the section requires a consideration of how the head lessor brought the head lease to an end. The same is true for a lessee seeking relief against forfeiture and s 129.

50. Section 130 is in similar terms to its English counterpart, 146(4) of the Law of Property Act 1925 (UK), and for that reason authorities that consider the English legislation are relevant to the application of s 130.

51. The following background to the text of s 130 is appropriate. Prior to 1892, the Conveyancing and Law of Property Act 1881 (UK) provided for statutory relief against forfeiture for “lessees”. Section 14(3) defined lessee as “includ[ing] an original or derivative underlessee”. That section was found not to apply to sublessees: Burt v Gray [1891] 2 QB 98 (Mathew J, with whom Williams J agreed); Creswell v Davidson (1887) 56 LT 811 at 812 (Kay J) and Nind v Nineteenth Century Building Society [1894] 2 QB 226 at 232 (Esher MR, with whom Smith LJ agreed at 231).

52. In 1892, s 4 of the Conveyancing and Law of Property Act 1892 (UK) was enacted in terms, which expressly provided for applications by sublessees for relief against forfeiture. Section 4 was included in almost the same terms as are now found in s 146(4) of the Law of Property Act 1925 (UK). As noted above, s 130 Conveyancing Act 1919 is materially similar.

53. One difference between s 130 and s 146(4) is the latter provision requires a lessor to serve a notice on the lessee and any sublessee specifying, inter alia, the particular breach, in order to enforce any right of re-entry or forfeiture: s 146(1); see also Civil Procedure Rules (UK) PD 55A at [2.4]. Although a similar notice must be served on the lessee under s 129 Conveyancing Act, the definition of “Lessee” in s 128 does not expressly include sublessees, and therefore it appears no notice must be served on sublessees.

54. The language of s 130 expressly provides that the Court’s jurisdiction is enlivened where a head lessor is enforcing a “right of re-entry or forfeiture” that arises either:

1. “under any covenant, proviso, or stipulation” in a head lease; or

2. “for non-payment of rent”. As noted above, s 85(1)(d) of the Conveyancing Act 1919 implies into every lease that a landlord has a power to re-enter and determine a lease where there has been a failure to pay rent that continues for a specified period of time.

55. Neither sections 129 and 130 refer to a head lessor exercising common law rights, including termination of a lease for repudiation.

56. The High Court’s decision in Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17 (Progressive Mailing House) settled, as a matter of Australian law, that the ordinary principles of contract law apply to leases. However, as Mason J detailed the history of the law in England (and Canada), that was not always the accepted position because “the law of landlord and tenant had … its origins in feudal tenure” (at 29). By 1985, Mason J was prepared to conclude that (at 29):

Accordingly, the balance of authority here as well as overseas and the reasons on which it is based, support the proposition that the ordinary principles of contract law, including that of termination for repudiation or fundamental breach, apply to leases.

57. Despite the fact that the common law has moved on since the enactment of s 130 in 1919, the language of the section must be construed in accordance with the express terms of the provision. Since Progressive Mailing House, it is also accepted in Australia that s 129 does not operate where a lessor accepts the repudiation of a lessee and terminates a lease: see, for example, World Best Holdings Limited v Sarker (2010) 14 BPR 27,549; [2010] NSWCA 24 at [31]-[42] (Handley AJA; Tobias and Campbell JJA agreeing). Section 129 also does not operate where a head lease has been terminated because of a surrender by operation of law. However, I note that a surrender by a head lessee does not thereby terminate a sublease: see, for example, obiter in Fleeton v Fitzgerald (1998) 9 BPR 16,715 at 16,719 (Beazley JA, with whom Mason P and Meagher JA agreed).

58. Both sections 129 and 130 include a threshold question of whether a right of re-entry or forfeiture is being enforced by the head lessor. In my view, s 130 is not available where the head lessor has elected to exercise common law rights instead of enforcing such a right of re-entry or forfeiture.

59. Here, Goodman submits that it accepted the repudiation of Ovato and terminated the lease, exercising a common law right to do so. Goodman further submits that as they did not exercise any express right of re-entry or forfeiture provided in the Head Lease, s 130 was not engaged.

60. The plaintiffs do not submit that s 130 applies where a head lessor exercises common law rights. Rather, they submit that Goodman did not exercise the common law right to terminate the head lease by accepting a repudiation. They submit instead that as a matter of fact and law, Goodman had re-entered the Property, and it ought to be inferred that such re-entry was pursuant to provisions in the Head Lease for re-entry upon “default”.

61. I note for completeness that the plaintiffs did not seek to invoke any inherent jurisdiction of the Court to provide sublessees relief against forfeiture, whether for non-payment of rent or equity’s jurisdiction to relieve against forfeiture for “fraud, mistake, accident or surprise”: Shiloh Spinners Limited v Harding [1973] AC 691 at 701 (Lord Wilberforce) (Shiloh Spinners); Legione v Hateley (1983) 152 CLR 406 at 447 (Mason and Deane JJ). There are statutory provisions which appear to preserve the application of at least some of the inherent jurisdiction: Conveyancing Act 1919 (NSW) s 129(8); Property Law Act 1974 (Qld) s 124(7). It is unclear whether an inherent jurisdiction to assist sublessees exists in the context of the Conveyancing Act: see Commonwealth Development Bank of Australia v Eagle Hotels Pty Limited [1990] ANZ Conv R 100. English authority appears to suggest that any such equitable jurisdiction to relieve against forfeiture has been displaced by the legislation: Billson v Residential Apartments Ltd [1991] 3 WLR 264 at 279 (Lord Browne-Wilkinson VC; reversed on appeal on other grounds); Shiloh Spinners at 724 (Lord Wilberforce); but to the contrary see Abbey National Building Society v Maybeech Ltd [1985] Ch 190 at 204-206 (Nicholls J).

Did Ovato Limited repudiate the Head Lease on 18 August 2022?

62. As noted above, there is no question that the ordinary common law principles of repudiation of contract apply to executed leases: Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17. Whether a party has repudiated a contract is a question of fact: English and Australian Copper Co Ltd v Thomas Johnson (1911) 13 CLR 490 at 497 (Griffith CJ); Dainford Ltd v Smith (1985) 155 CLR 342 at 366 (Brennan J).

63. In Laurinda Pty Ltd v Capabala Park Shopping Centre Pty Ltd (1989) 166 CLR 623 at 634, Mason CJ described repudiatory conduct as conduct evincing an intention no longer to be bound by the contract, or to fulfil it only in a manner substantially inconsistent with the promisor’s obligations. In Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115, Gleeson CJ, Gummow, Heydon and Crennan JJ stated the test as being whether the conduct of one party is such as to convey to a reasonable person, in the position of the other party, renunciation of the contract as a whole or a substantial part of it (at 135-136). Often it has been said that repudiation is where a party evinces that they are unready, unwilling or unable to perform their contractual obligations.

64. Here, the relevant timeline of events is as follows.

65. On 21 July 2022, administrators were appointed to Ovato Limited.

66. On 4 August 2022, Goodman directed the plaintiffs to pay rent pursuant to their subleases directly to a bank account nominated by them, exercising a right given in the relevant deeds of consent to sublease.

67. On 18 August 2022, Ovato’s administrators sent a letter to Goodman attaching a s 443B notice, the substance of which are reproduced below.

We refer to our appointment as Joint and Several Administrators of the Group on 21 July 2022.

Attached is a Form 509B being our “Notice of Administrators’ Intention Not to Exercise Property Rights”.

At the conclusion of the rent free period (18 August 2022), the Administrators of the Group do not intend to exercise rights in respect of the abovementioned property.

As a landlord, you will be able to lodge a proof of debt in respect of any amounts falling due or loss suffered as a consequence of Ovato Limited ACN 050 148 644 ceasing to occupy the property. We note, in ths respect, that there are ongoing commercial discussions between the Administrators and you to reach a settlement figure in respect of the bank guarantee and the Administrators propose to continue with these negotiations.

However, if the negotiations are successful, we remind you of your obligations to mitigate your loss, including finding a new tenant for the property to reduce any exposure in respect of rent. We ask that you inform us of al steps taken by you to mitigate your loss including informing us when a new tenant is found and the start date of that new lease.

Please also ensure that you account to us in respect to any amounts you intend to deduct from the bank guarantee in accordance with your obligations to do so.

…

68. The attached s 443B Notice relevantly indicated:

I advise that Ross Blakeley, Ben Campbell and I, Christopher Hill, the Administrators of the Group give you notice that we do not propose to exercise rights in relation to the property.

Dated this 18^th day of August 2022.

…

Notes:

1. Under subsection 443B(4), the administrator is not liable for rent or other amounts payable by the company in relation to the specified property while this notice is in force, but the notice does not affect a liability of the company.

2. Under subsection 443B(5), this notice ceases to have effect if:

a. the administrator revokes the notice, by writing to the owner/lessor; or

b. the company exercises or purports to exercise a right in relation to the specified property.

69. The effect of a s 443B notice is that an administrator is not liable for rent or other amounts payable by the company in relation to the property specified while the notice is in force: s 443B(4) Corporations Act 2001 (Cth). A s 443B notice ceases to have effect if revoked by the administrator, or if the company in administration exercises or purports to exercise a right in relation to the property: s 443B(5).

70. On 12 September 2022, Goodman responded to the administrators’ letter as reproduced below.

We refer to the lease of the Premises between The Trust Company Limited ACN 004 027 749 as custodian of the GAI1 RPF Subtrust (Landlord) and Ovato Limited ACN 050 148 644 (transferred from Ovato Print Pty Limited ACN 051 706 499) (Tenant) dated 11 March 2013 with registered number AH753219 (Lease).

Capitalised terms which are not defined in this notice have the meaning given to them under the Lease.

We note that the Tenant’s administrators issued notice to the Landlord pursuant to section 443B of the Corporations Act 2001 (Cth) that the Tenant did not propose to exercise rights in relation to the Lease with effect from 18 August 2022. This constituted a repudiation of the Lease and we confirm that the Landlord accepted the Tenant’s repudiation on 19 August 2022. This notice records the fact that the repudiation was accepted and the Lease was terminated on19 August 2022. We further note that the appointment of administrators to the Tenant on 21 July 2022 was an Insolvency Event which separately entitles the Landlord to terminate the Lease, pursuant to clause 20.2(a)(ii) of the Lease.

We assume that the Tenant has removed all Tenant’s Property from the Premises and vacated the Premises on and from 18 August 2022. However, for avoidance of doubt, any Tenant’s Property not removed will be treated as having been abandoned, entitling the Landlord to exercise all rights available to it pursuant to, without limitation, clause 15.5 of the Lease.

The Landlord has terminated the Lease without prejudice to any other rights or remedies available to it under the Lease, at law or in equity.

The Landlord reserves its rights to lodge a proof of debt in the external administration of the Tenant in relation to any amounts that are owing to the Landlord under the Lease or for any loss suffered by the Landlord as a consequence of the termination of the Lease.

71. On 19 September 2022, the plaintiffs obtained ex parte injunctions against Goodman, preventing it from evicting the plaintiffs from the Property.

72. On 20 September 2022, Synergy lodged a caveat on title claiming an interest in the land.

73. On 30 September 2022, Goodman wrote to the plaintiffs, stating inter alia:

On 21 July 2022 Ovato Limited (Ovato), our clients’ former lessee and the former sub-landlord of part of the …Premises to … Synergy and MRL, appointed administrators. Ovato subsequently repudiated the lease of the Premises on 18 August 2022. Our clients terminated the lease (and, in consequence, the subleases from Ovato to [Synergy and MRL] automatically terminated) on 19 August 2022.

74. Ovato and its administrators were not parties to the proceedings and did not express a view on the proper construction of the 18 August letter and notice.

75. The plaintiffs submit that s 130 operated for various reasons considered below.

76. First, the plaintiffs submit that there was no repudiation by Ovato merely because the administrators issued a notice under s 443B of the Corporations Act 2001 (Cth) relying on Finkelstein J’s decision in Silvia v FEA Carbon Pty Ltd (2010) 185 FCR 301 at 305 (Silvia). Therefore, the plaintiffs submit the purported termination was ineffective relying on the s 443B notice.

77. I accept that the mere service of a notice under s 443B(3) is not, in itself, a repudiation: Silvia at 305, and see also In the matter of Oliver Brown Pty Ltd (No 2) (2012) 17 BPR 32,253; [2012] NSWSC 1222 at [48] (Black J). Here, I do not accept that the reference in the 12 September 2022 letter to Goodman relying on the “notice” as repudiatory conduct could reasonably be construed as limited to the bare notice. Plainly, the letter attaching the notice provided more context and information about the position of Ovato and the administrators. The letter must also be considered. The question of repudiation is to be resolved by asking what the letter and notice in their terms would convey to a reasonable person.

78. The 18 August 2022 letter specified that:

1. From the conclusion of the rent-free period on 18 August 2022, the administrators did not intend to exercise rights in respect of the Property. The notice attached to the letter set out something similar.

2. Goodman could lodge a proof of debt for any loss suffered “as a consequence of [Ovato] ceasing to occupy the property”.

3. Goodman had “obligations to mitigate [its] loss, including finding a new tenant for the property to reduce any exposure in respect of rent”.

4. Goodman ought to keep the administrators informed of the amount of the guarantee called upon.

79. I consider that, objectively construed, this letter in particular, and the notice, amounted to repudiatory conduct, evincing an intention no longer to be bound by the terms of the Head Lease. In effect, the administrators were indicating that Ovato would no longer comply with the obligations of a tenant by way of occupying the Property or paying rent.

80. Even if it was the case that the 12 September letter relied upon a repudiation on the basis of the s 443B notice alone, Goodman had other available bases to terminate, including the appointment of the administrators, discussed further below. Where a party expressly relies upon a particular basis to terminate and such basis did not provide such a right, providing there is an alternative valid basis to terminate, the termination is effective: see, eg, Shepherd v Felt Textiles of Australia Ltd (1931) 45 CLR 359 at 378 (Dixon J).

79. Secondly, the plaintiffs referred to clause 20.2(a)(ii) of the Head Lease which provided:

20.2 Termination by Landlord

(a) Subject to clause 20.2(b), if the Tenant is in default of this Lease pursuant to clause 20.1, the Landlord may:

…

(ii) By notice to the tenant terminate this Lease (and from the date of giving such notice this Lease will be at an end).

82. The plaintiffs submit that Goodman placed reliance on the administrators’ appointment as an “event of insolvency” that permitted termination under clause 20.2(a)(ii), which was said to demonstrate the exercise of a right of re-entry pursuant to a “covenant, proviso or stipulation”.

83. The fact that contractual and common law rights of termination for breach or repudiation may lead to a similar result as express rights of forfeiture and re-entry does not mean they are the same thing.

84. Goodman’s 12 September 2022 letter “noted” a further right for Goodman to terminate, namely by reference to the appointment of administrators, which was an “event of default” under clause 20.1(d) which relevantly provided:

20.1 Default

The Tenant shall be in default of this Lease (whether or not it is in control of the Tenant) if:

…

(d) the Tenant or any Guarantor commits an Insolvency Event.

85. Clause 2.1(k) contains a definition of “Insolvency Event” which includes both liquidation and the appointment of voluntary administrators.

86. Therefore, it was submitted that Goodman was alternatively entitled to terminate pursuant to clause 20.2(a)(ii). However, while the breach of lease covenant 20.2(a)(ii) entitled Goodman to terminate the Head Lease, that right was not engaged but only “noted” as an alternative basis that would support the same result, being termination. Further, there was no suggestion in the letter that Goodman had in fact exercised, or was seeking to exercise any right to re-enter and forfeit the Head Lease. For example, there was an express right to re-enter and forfeit when administrators were appointed, pursuant to 20.2(b), not 20.2(a). No reference was made to clause 20.2(b) in the letter.

87. Thirdly, the plaintiffs submit, as an alternative to their submissions that there was no repudiation, that Goodman’s conduct in terminating can properly be characterised as a “proceeding… [by action or otherwise … for non-payment of rent” so as to satisfy the trigger words in s 130. This submission was not fully developed in oral submissions. If this submission is suggesting that s 130 should be construed as comprising two limbs, one which is predicated on enforcement of a “right of re-entry or forfeiture”, and another limb which is based simply on a proceeding for non-payment of rent, that is plainly overinclusive and misconceived. There are many proceedings concerning rental arrears, which would not allow any relief against forfeiture. In any event, such a construction would require the conjunction, “or”, to be read with the starting words of s 130, rather than the words immediately preceding “non-payment of rent”, namely “any covenant, proviso, or stipulation in a lease”. See also Clyde Croft, Robert Hay and Luke Virgona, Commercial Tenancy Law (4^th ed, 2018, LexisNexis) at [19.6]:

88. In my view, as stated at [54], the conjunction “or” points to the difference between provisions expressed in the lease and the more specific category of terms for non-payment of rent, which are implied into leases. There has long been an equitable jurisdiction to relieve against forfeiture for non-payment of rent: Law Commission of England and Wales, Codification of the Law of Landlord and Tenant: Forfeiture of Tenancies (Report, March 1985) 10-13; Shiloh Spinners at 723 (Lord Wilberforce).

89. Therefore, the words of s 130 can be seen as remedial in the sense of providing statute-based relief against forfeiture, not limited to situations of non-payment of rent. Even if s 130 is understood as having a remedial purpose, that does not allow a court to find a meaning which the language of the provision does not fairly allow: ADCO Constructions Pty Ltd v Goudappel (2014) 254 CLR 1 at 16 (French CJ, Crennan J, Kiefel J, Gageler J, Keane J). Accordingly, I do not accept that a termination where non-payment of rent is one possible reason is a way of “proceeding” to “enforce” a right of re-entry and forfeiture.

90. Fourthly, the plaintiffs submit that a re-entry can be inferred from a schedule itemising work carried out by Goodman on “the estate” on 25 August, 30 August and 8 September of 2022. The work is described as “landscaping, fire service R&M, and repair and maintenance electrical activity”. In the submission, it follows that because there was an earlier re-entry, the Head Lease could not have been terminated by the acceptance of a repudiation at a later time on 12 September 2022. Mr Lynch SC put it this way:

We say, having regard to the circumstance, that all of the items of activity identified by me - 25 August, 30 August, 8 September - are all estate matters, your Honour, and so it can be inferred from the circumstance of the work being for the estate, that there had been re-entry.

Because, otherwise, there was no right to enter onto the estate - which is what we say the inference should be drawn that occurred after receipt at 18 August notice - because the letter does allude to something happening on the 19th but your Honour doesn’t know what it is and the balance of the evidence points to it being a re-entry.

91. I do not accept that it can be inferred that Goodman in fact exercised the right of re-entry, because it carried out works on the “estate” between 19 August and 12 September 2022, and therefore s 130 was enlivened for the following reasons.

92. While a lessor may exercise a right of re-entry by physical re-entry, I do not consider it has been established by the plaintiffs that the works carried out by Goodman were an attempt to exercise the right of re-entry.

93. There was no evidence, beyond the descriptions given to entries in the schedule, as to why the particular works were carried out on those particular dates. The evidence of Goodman’s general manager of property services, Ms Ellen Slaven, did not assist in clarifying the position; she stated that she was not involved in authorising the works in question and had visited the Property between 18 August 2022 and 25 August 2022, but did not recall the precise date.

94. The works can be explained in other ways. First, Goodman states that it terminated the Head Lease on 19 August 2022. While there is no evidence of a letter or conversation to that effect, the administrators did indicate that they expected communication with Goodman in their 18 August 2022 letter. If there had been a termination, then the entire burden of maintenance works fell to Goodman from 19 August 2022

95. Secondly, if there was not a termination on 19 August 2022, another way of viewing the conduct was that the Head Lease remained on foot. For example, while Ovato was obliged to maintain and repair the whole Property, clause 20.6 of the Head Lease entitled Goodman to carry out any works not done by Ovato, (and by extension the plaintiffs).

96. Doing the limited works identified therefore is, at most, equivocal, and does not clearly demonstrate Goodman was exercising a right of re-entry and forfeiture. For example, there is no evidence that the locks were changed and Ovato or the plaintiffs were excluded from the Property.

97. It follows from the above reasons that the plaintiffs’ claim ought to be dismissed with costs.

98. On the basis that the above conclusion is wrong, and s 130 does apply in the circumstances, the Court has power to grant relief to MRL and Synergy “upon such conditions … as the Court … thinks fit”.

Terms of s 130 relief

99. Goodman does not dispute that MRL and Synergy would suffer prejudice, should no relief be granted.

100. Further, it is not in dispute, consistent with the express words of s 130, that MRL and Synergy are not entitled to relief in the form of a lease “for a larger area of land or for any longer term” than was the case under its “original under-lease”. Accordingly, any lease ordered would expire on in March 2025 in accordance with the term of the Head Lease.

101. As with the doctrine of relief against forfeiture generally, the Court has a broad discretion under s 130 in relation to determining the appropriate lease terms: see, eg, Clyde Croft, Robert Hay and Luke Virgona, Commercial Tenancy Law (4^th ed, 2018, LexisNexis) at [19.4]; see also Pioneer Quarries (Sydney) Pty Ltd v Permanent Trustee Co of NSW Ltd (1970) 2 BPR 9562 at 9572 (Hope J); Ewart v Fryer [1901] 1 Ch 499 at 515-516 in the context of s 4 Conveyancing and Law of Property Act 1892 (UK) (Romer LJ).

102. What is in dispute here are the appropriate conditions that ought to be included in any lease before relief against forfeiture will be granted.

103. Goodman submits that because s 130 relief is in the form of relief against forfeiture, similar principles ought to apply in granting relief.

104. A plaintiff head lessee, seeking relief against forfeiture must satisfy the usual equitable maxims, “he who seeks equity must do equity” and an applicant must “come to equity with clean hands”: Riviera Holdings Pty Ltd v Fingal Glen Pty Ltd [2013] SASC 77 at [17] (Nicholson J); Wilkinson v S & S Gikas Pty Ltd [2006] NSWSC 1314 at [30] (Campbell J, as his Honour then was).

105. In Wilkinson v S & S Gikas Pty Ltd (2006) 12 BPR 23,685; [2006] NSWSC 1314 at [23]-[24], Campbell J (as his Honour then was) stated:

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 Limited (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.

106. His Honour continued at [30]:

… the relief is moulded by reference to the circumstances of each case, in light of the general principle about the aim of equitable relief.

107. Relief against forfeiture of a lease may be declined in circumstances including where:

1. there have been non-monetary breaches of the sublease, particularly if they are ongoing breaches: Batiste v Lenin (2002) 11 BPR 20,403; [2002] NSWCA 316 at [61]-[62] (Sheller JA, with whom Giles and Santow JJA agreed), citing Tutita Pty Ltd v Ryleaco Pty Ltd (1989) 4 BPR 9635 at 9638 (Meagher JA); or

2. the lessee has demonstrated an unwillingness to honour its obligations under the lease and where the lessee's future compliance with the lease appears unlikely: Shiloh Spinners at 725-726 (Lord Wilberforce); or where future compliance is in real doubt: Elevation (NSW) Pty Ltd v The Uniting Church (2014) 17 BPR 32,797; [2014] NSWSC 331 at [13] (Young AJA); or

3. there are other “exceptional circumstances” on the facts of the particular case by reference to the conduct of the lessee, such as where a lessee has stored flammable liquids on the property in breach of statute: Stieper v Deviot Pty Ltd (1977) 2 BPR 9602 at 9603 (Moffitt P).

108. There is less authority on the operation of relief for sublessees pursuant to s 130. The Court usually does not grant relief against forfeiture unless the sublessee is prepared to put the head lessor back into the position the head lessor occupied before the head lease was forfeited: Chatham Empire Theatre (1955) Ltd v Ultrans Ltd [1961] 2 All ER 381 at 383 (Salmon J) (Chatham Empire); see also Brendan Edgeworth, Butt’s Land Law (7th ed, 2017, Lawbook Co) at [7.2020].

109. Where the imposition of a sublease would cause significant hardship to the head lessor by making it impossible to deal with the premises as a whole, this factor militates against the exercise of the discretion: Chatham Empire at 384. Further, because the new sublease is not merely a restoration of the old one, but a new grant, the parties, terms and other provisions may be different from those of the forfeited sublease: Cadogan v Dimovic [1984] 1 WLR 609 at 613 (Fox LJ, with whom Robert Goff and Waller LJJ agreed).

110. Goodman submits that relief ought not be granted in circumstances where the plaintiffs have failed to comply with the consent orders as to payment of past electricity invoices and where Goodman has concerns about the plaintiffs’ misuse of the stormwater detention basin.

111. The plaintiffs accepted that past electricity invoices must be paid immediately, and apologised for not having done so earlier. The explanation for the delay was that the plaintiffs sought further information as to the quantum of the invoices.

112. Payment must be made, and ought to have been made without requiring further information. However, I do not consider the late payment in the circumstances would be a sufficient impediment to the grant of relief, were it otherwise appropriate.

113. I deal with the stormwater detention basin in the context of the other disputed conditions below.

Rental arrears

114. There is a dispute as to whether the plaintiffs ought to be required to discharge the arrears of rent owed by the head lessee.

115. In Chatham Empire, Salmon J considered (at 383) there was no general principle confining the Court’s discretion so as to require discharge of the whole of the head lessee’s arrears but concluded (at 383):

In my judgment it is clearly equitable that the landlord should be put in the I same position as he was in before the forfeiture qua that part of the property …

See also discussion in Stephen Tromans, ‘Forfeiture of leases: relief for underlessees and holders of other derivative interests’ (1986) Conveyancer and Property Lawyer 187, 201-206.

116. Ovato failed to pay Goodman, before 18 August 2022, the sum of $88,667.59 in rent. The defendants seek an order that the plaintiffs pay part of that sum representing that proportion of area of Property they occupy, namely $42,477.75 by Synergy and $12,567.52 by MRL.

117. The plaintiffs resist such an order on the basis that Goodman has access to Ovato’s bank guarantee of $7.6 million and that money ought to be called upon to pay the rental arrears. However, it is not clear that the bank guarantee will be sufficient for the debts Goodman claims from Ovato. There was evidence that Goodman is in the process of lodging a proof of debt with the administrators that is likely to seek over $9 million and the administrators’ report to creditors has indicated that unsecured creditors will not receive any sum during the administration process. This suggests that there is a risk Goodman will not receive sufficient money for that portion of debts which are unsecured by the bank guarantee.

118. While I accept that the plaintiffs may have paid their rent to Ovato and therefore will be burdened by being required to pay Goodman rental sums, in effect, for the second time (to discharge Ovato’s outstanding liability rather than pursuant to its own obligations under the sublease), I consider it just to require the plaintiffs to pay any arrears of rent outstanding from the head lessee in relation to the part of the property sublet: see for example Chatham Empire.

119. In the circumstances, it is appropriate for the plaintiffs to pay that portion of Ovato’s rental arrears referable to their part of the Property.

Rectification of stormwater detention basin

120. Pursuant to an easement registered on title DP1059138, Goodman “shall not … make any alterations to the ground surface levels, grates, pits, kerbs, tanks, gutters or any other structure associated with the on-site stormwater detention system”. Further, the easement requires Goodman to “maintain and repair the system so that it functions in a safe and efficient manner” at its own expense.

121. The parties accept that the stormwater detention system was filled in, such that it no longer operates as intended and must be rectified by excavation in accordance with an expert’s specifications that were in evidence.

122. The plaintiffs, without admitting they caused the problem, accept the obligation of rectifying the system. I have not been asked to determine the cause of the issue. While the plaintiffs accept they will bear the cost of rectification, the dispute between the parties is that both wish to be responsible exclusively for carrying out the work.

123. The plaintiffs provided no principled reason for wishing to be responsible for carrying out the works, and only raised a concern about the size of the quotation for the work provided by Goodman. In oral submissions, senior counsel for Goodman indicated that his clients were in the process of obtaining a further quotation for the works in an attempt to reduce the cost that would be passed to the plaintiffs.

124. I do not consider it appropriate for the plaintiffs to carry out the works, in circumstances where Goodman is personally responsible for the easement obligations and is entitled to organise the rectification works in its own preferred timeframe, particularly where the term of any lease to the plaintiffs is limited.

Length of bank guarantee

125. There was limited evidence and submissions as to whether the appropriate quantum of a bank guarantee was six months’ rent, as sought by Goodman, or 4 months, as sought by the plaintiffs.

126. Goodman relies upon a supplementary expert report prepared by Mr Simon Andreatta of Colliers, based on an assessment on 20 March 2023 which indicated that in the current market, bank guarantees of over 12 months’ rent were normal for leases of over five years. He also expressed an opinion that a guarantee of between 6-12 months’ rent was appropriate for the proposed leases to the plaintiffs of less than two years. Mr Andreatta’s opinion was not challenged by alternative expert evidence or cross-examination.

127. The plaintiffs submitted that six months was too substantial without further elaboration.

128. In the circumstances, I consider it appropriate to include a bank guarantee of six months’ rent.

Measure of Rent

129. The three issues concerning rent to be determined are:

1. Whether the lease is on a “triple net” or “net” basis;

2. How electricity ought to be paid by the plaintiffs; and

3. The rate at which rent ought to be set.

130. Each issue is considered below.

Triple net or net basis

131. Ovato was granted the Head Lease on a “triple net basis”, which meant that it was obliged to carry out maintenance and repair work, and also structural and capital works to its own cost. Because of those terms of the Head Lease, the plaintiffs’ subleases contained the same provision.

132. The unchallenged expert evidence of Mr Andreatta was that such “triple net basis” leases are unusual, but might be expected where a tenant requires specific features in a property, and where the tenant leases the whole of premises. An alternative is a “net basis” lease, which means that the landlord is responsible for all works and passes on to the tenant the cost of maintenance and outgoings, such as electricity.

133. Mr Andreatta did not consider a triple net lease would be appropriate in the circumstances, but could not give an opinion on the difference in likely rent between a triple net rent and a net rent for the proposed leases.

131. Goodman submits that it is not appropriate to grant the plaintiffs “triple net basis” leases because:

1. If a new lease were granted, the plaintiffs would only have possession of part, not the whole of the Property. Other parts of the Property are leased on a “net basis”, such that Goodman is in the best position to maintain the Property, including capital works, particularly in relation to matters that concern the whole Property, such as fire safety;

2. It is a different situation to the Head Lease where there was a single tenant, who had also provided a 24 month rent bank guarantee;

3. There is correspondence between the parties indicating that there have been concerns raised by Goodman in relation to the plaintiffs’ use of the Property, including maintenance, such as the stormwater detention drain. This is said to justify a concern that there may be further disputes if the plaintiffs have the obligation to maintain and carry out works.

135. The plaintiffs did not make any substantive submissions in response to these submissions. I consider it appropriate that a lease be on a “net basis”, where the plaintiffs are obliged to pay for the costs of maintenance incurred by Goodman.

Electricity

136. The plaintiffs accept that they will be liable for outgoings, including electricity. They submit that it is appropriate that electricity meters be installed, so that the parties will have confidence that the plaintiffs are being charged for their usage and no more.

137. The plaintiffs relied upon evidence that was said to demonstrate that, over a period of about 6-7 days, the electricity usage of certain boards within the premises occupied by the plaintiffs was less than the percentage currently being invoiced on a proportion of net lettable areas (pursuant to consent orders).

138. Goodman submits that the plaintiffs’ evidence is unreliable, and it is disputed that all of the relevant boards had been identified and measured. Further it is said that measuring a mere seven days of usage is insufficient to allow any conclusion of unfair apportionment of electricity costs under a lease.

139. Goodman is in the process of investigating whether separate metering is possible in the Property. It may well be that such separate metering would assist Goodman with the rental of all parts of the Property. However, I am not prepared to impose an obligation on Goodman to install such metering and only invoice on an actual use basis. In circumstances where the term of any lease to the plaintiffs is limited to less than two years, and actual unfairness of the current invoicing basis has not been demonstrated, I do not consider the basis of invoicing for electricity ought to change.

Rental amount

140. The plaintiffs seek to pay an amount of rent in accordance with the previous subleases.

141. Goodman submits that the Court ought to decide the rental amount according to a principle that the landlord should be no worse off than the position it would be in had the forfeiture not occurred, citing Chatham Empire at 383 (Salmon J).

142. The question of appropriate rental conditions turns on the Court’s discretion and what will be fair in the circumstances: see, eg, Ewart v Fryer [1901] 1 Ch 499 at 506 (Kekewich J).

143. The evidence demonstrates that Ovato was charging the plaintiffs less rent than it was paying Goodman for the subleased parts of the Property.

144. I do not consider allowing the plaintiffs to pay Goodman less than it was receiving from Ovato would be appropriate. Merely because the plaintiffs obtained a highly favourable arrangement with Ovato does not mean that Goodman ought to suffer a loss if leases are imposed. Therefore, I consider the starting point is that the plaintiffs pay rent in accordance with the Head Lease rate for the proportion of the Property occupied by the plaintiffs.

145. However, Goodman seeks a rent that is higher than the Head Lease rent for two reasons.

146. First, because a “net basis” lease might generally command a higher rent than a “triple net basis” lease. This might seem a logical conclusion because under the former the landlord bears all costs of a capital and structural nature.

147. Secondly, because the evidence of available market rents would yield for the defendants a rent from Synergy of up to $2,521,353 (rather than the Head Lease amount of $2,211,650.40) and from MRL of up to $935,854 (rather than the Head Lease amount of $610,298.94).

148. Senior counsel for Goodman candidly accepted that the expert witness had not provided a basis for translating the difference between the Head Lease “triple net basis” to a “net basis” into a rental increase. Mr Izzo SC submitted:

So the Court doing the best it can either says, well, I'm going to pick a point between the baseline and the market, it may as well be the midpoint, and one sets it at that.

149. It has been held in other cases that it was not just in the particular circumstances to require the former sublessee to pay a rent higher than the former head lessee: see, eg, Wardens and Governors of Cholmeley School Highgate v Sewell [1894] 2 QB 906 at 913 (Charles J).

150. However, one principled way to achieve a specific uplift would have been if there was a capital works schedule prepared, so that the likely cost to Goodman in relation to the plaintiffs’ lettable areas could have been known. That was not done.

151. In the circumstances, I do not consider it is possible to simply choose a figure in the midpoint without some better evidence justifying that course. Further, in relation to the evidence of market prices, other factors may operate in determining the price agreed in particular situations, and therefore it is not appropriate to merely adopt current market rental comparisons.

152. I consider the fair outcome would be that the plaintiffs pay the rent at the Head Lease rate proportionate to their sublease areas.

Costs

153. Often a plaintiff pays the defendant’s costs of any application for relief against forfeiture.

154. The same is true in s 130 cases: see, eg, Chatham Empire at 384 (Salmon J); Leahy v Fimiston Investments Pty Ltd [2011] QSC 22 at [48] (McMeekin J). However, the Court also retains a costs discretion, pursuant to statutory provisions like Civil Procedure Act 2005 (NSW) s 98, and the inherent jurisdiction, as to costs and as to whether payment of costs ought to be a condition of any lease.

155. Here, the plaintiffs have either during the hearing capitulated in relation to conditions sought by Goodman or been unsuccessful in arguing the appropriate conditions of any lease granted by way of relief. Therefore, I consider it appropriate that costs follow the event, and the plaintiffs should pay Goodman’s costs of the proceedings as a condition of any lease.

156. For completeness, I note that Goodman does not seek the costs of the preparation of the lease documentation in the Heads of Agreement, which might otherwise have been sought as a condition of a lease.

Conclusion

157. Therefore, should a different construction of the operation of s 130 Conveyancing Act be adopted, then I consider that the terms of any lease to be granted to the plaintiffs by way of relief, ought to be in accordance with the terms of Goodman’s Heads of Agreement, with the amendments specified in this judgment.

The Defendants’ Notice of Motion

158. By Notice of Motion filed in Court on 26 April 2023 with leave, Goodman sought orders vacating order 4 of the interlocutory regime made by Kunc J on 19 September 2022, and extended on 5 October 2022, 12 October 2022, 20 October 2022 and 28 October 2022.

159. In light of my decision that the plaintiffs’ claim for relief has failed, it is appropriate to dissolve the consent regime, pursuant to which the plaintiffs have remained in occupation of the previously subleased parts of the Property.

Orders

160. In the circumstances, the appropriate orders are:

1. The plaintiffs’ summons is dismissed with costs.

2. Order 4 of Kunc J on 19 September 2022, as extended on 5 October 2022, 12 October 2022, 20 October 2022 and 28 October 2022, is also vacated.

3. Should any party seek an alternative costs order:

1. The parties are to attempt to resolve the issue and provide consent orders by email to the Associate to Peden J within 7 days of this judgment.

2. Failing agreement, the party seeking an alternative costs order is to provide any evidence and submissions of not more than 5 pages by email to the Associate to Peden J within 10 days of this judgment, and the opposing party is to provide responsive evidence and submissions within 15 days of this judgment.

3. Such costs application will be determined on the papers if appropriate.

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Decision last updated: 22 May 2023