The Heat Group Pty Ltd v Paragon Care Limited
[2021] VSC 204
•27 April 2021
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
PRACTICE COURT
S ECI 2021 01177
| THE HEAT GROUP PTY LTD (ACN 092 941 430) | Plaintiff |
| v | |
| PARAGON CARE LIMITED (ACN 064 551 426) | Defendant |
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JUDGE: | Forbes J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 20 April 2021 |
DATE OF JUDGMENT: | 27 April 2021 |
CASE MAY BE CITED AS: | The Heat Group Pty Ltd v Paragon Care Limited |
MEDIUM NEUTRAL CITATION: | [2021] VSC 204 First Revision 6 May 2021 |
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CONTRACTS – Landlord and tenant – Forfeiture - Relief against forfeiture - Urgent application seeking relief from forfeiture of lease – Re-entry into premises subject of sub-lease pursuant to s 146 Notice – Notice not complied with by expiry - Rent unpaid and outstanding – Principles of relief from forfeiture - Future capacity to pay rent a consideration – No exceptional circumstances – Injunction to prevent defendant from calling upon bank guarantee without notice not persisted with - Calling on security without notice – Principles for determining costs of application - Plaintiff to pay defendants costs incurred - Shiloh Spinners Ltd v Harding [1973] AC 691 - Baby Zone (Aust) Pty Ltd (Administrator Appointed) v Keira Street Securities Pty Ltd [2016] NSWSC 528 - Jam Factory Pty Ltd v Sunny Paradise Pty Ltd & Ors [1989] VR 584 - Bland v Ingrams Estates Ltd and others(No 2) [2002] 2 WLR 361.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr R. Moore | Merton Lawyers |
| For the Defendant | Mr K. Mihaly | Soho Lawyers |
HER HONOUR:
The plaintiff, tenant of the premises at 11 Dalmore Drive, Scoresby Victoria 3179 (the premises), made an application to the Practice Court for urgent relief against forfeiture of the lease pursuant to s 85 of the Supreme Court Act 1986 (Vic). The application was supported by an affidavit of the managing director of the plaintiff, Ms Gillian Franklin. The defendant filed two affidavits by the solicitor for the defendant, Mr Scott Munro.
At the hearing on 20 April 2021 I made orders granting the relief sought, subject to the plaintiff’s compliance by 23 April 2021 with a condition. I adjourned the hearing to 26 April to allow for compliance with that condition and indicated that I would provide reasons for my decision and make any costs orders at that time. I heard submissions from the parties as to the costs orders sought. The hearing on 26 April was vacated upon the parties informing the Court that the plaintiff had complied with the condition imposed. These are the reasons as foreshadowed.
The premises was subleased by the defendant to the plaintiff from July 2019 for a period of four years and three months. The plaintiff conducts its business from the premises, that being a wholesale supplier of health and associated products, largely supplied to pharmacies. Both warehouse, despatch and office functions were conducted from the premises. The business employs approximately 68 - 85 staff.[1]
[1]Numbers decreased due to COVID-19.
The plaintiff was behind in payment of rent and outgoings. Like many businesses, COVID-19 interruptions to the supply chain had a disruptive effect on the business. A request for rent relief and a payment plan on this basis had been refused. The defendant then served a Notice pursuant to s 146 Property Law Act dated 25 March 2021 (the Notice) demanding payment of $113,510.04, being outstanding rent for the months of February and March which fell due at the start of each month. The Notice expired on 8 April.
On 13 April the plaintiff had made a payment of $40,000. On 14 April the defendant responded indicating that because of non-compliance with the Notice was re-entering the premises and intended to do so on 15 April. The plaintiff paid the balance owing pursuant to the Notice on 14 April and advised the defendant that if the defendant still intended to re-enter the premises on 15 April it would make application to the Court.
On 15 April an agent on behalf of the defendant attended to evict the plaintiff’s staff but following discussions the agent left the premises. The next morning notices were displayed stating that the defendant had exercised its right of re-entry in accordance with the Notice and intended to treat unauthorised access as trespass. The staff of the plaintiff were instructed to remain at home.
On 16 April also the defendant informed the plaintiff that by reason of outstanding outgoings, and rent now due for April, the arrears owing under the sub-lease, over and above the arrears subject to the Notice, stood at an amount of just over $140,000.[2] These amounts were not relied on when serving the Notice. A term of the sublease required the plaintiff to provide a bank guarantee of $141,240. The defendant immediately called on the bank guarantee to meet all outstanding amounts under the lease. Although the lease required 14 days’ notice before calling on the bank guarantee, the defendant called on the guarantee without notice as it asserted the lease had been determined under the Notice.
[2]Over and above the amount paid in satisfaction of the s 146 Notice.
The handwritten notices at the premises indicated it had exercised its right under the Notice dated 25 March 2021. However, in these circumstances the defendant submitted it had two bases upon which it could rely on for the right to re-enter the premises; one under the Notice which had not been complied with by the expiry of the 14-day period, and second in reliance on the term of the lease giving it the right to do so for non-payment of rent for April and outgoings due and payable.
The defendant submitted that the re-entry was effected on 13 April by the email which read ‘Paragon Care is re-entering and taking possession of the property’.[3] It went on to advise as a professional courtesy that a locksmith would attend at 7am on 15 April and that after that time the plaintiff will not be permitted to access the property. The plaintiff submitted that re-entry was effected on 16 April and the earlier email simply indicated the intention to re-enter. Whenever re-entry in fact occurred is not necessary to decide. By the issue of proceedings the plaintiff had complied with the Notice and the hearing proceeded upon the basis that the re-entry, whenever it occurred, was lawful.
[3]Scott Lachlan Munro, ‘Exhibit SLM7 to the Affidavit sworn 19 April 2021’, S ECI 2021 01177, p. 57.
Ultimately, therefore, the plaintiff did not press issues concerning the validity of the re-entry or the calling on the bank guarantee by the defendant without notice. It did not persist with injunctive relief in this regard. The remaining issue for determination was whether the plaintiff was entitled to relief from forfeiture upon lawful determination of the lease by the lessor.
The principles to be applied were not in dispute. They may be summarised as:
(a) The relief is equitable in nature granted in the discretion of the Court.[4]
[4]Shiloh Spinners Ltd v Harding [1973] AC 691; quoted with approval in Legione & Anor v Hateley (1983) 152 CLR 406, 424.
(b) The right of re-entry by a landlord for non-payment by a tenant is viewed as a security for payment of amounts owing by a tenant.[5]
[5]Baby Zone (Aust) Pty Ltd (Administrator Appointed) v Keira Street Securities Pty Ltd [2016] NSWSC 528 [79].
(c) Where a landlord has been put in the position that in the eyes of equity their right of entry is security for, then it will generally be unconscionable for a landlord to insist on the right to re-enter.[6]
[6]Wilkinson v S & S Gikas Pty Ltd [2006] NSWSC 1314; see also Baby Zone (Aust) Pty Ltd (Administrator appointed) v Keira Street Securities Pty Ltd [2016] NSWSC 528 [79].
(d) Where forfeiture is for non-payment of rent and the Court is satisfied that the defaults for which the tenant is evicted have been made good, relief will generally be granted save in exceptional circumstances.[7]
[7]Jam Factory Pty Ltd v Sunny Paradise Pty Ltd & Ors [1989] VR 584, 590.
(e) Exceptional circumstances may include consistently lengthy defaults in the past which may fairly lead to an inference that even if relief be given there is a reasonable likelihood rent will not be paid in the future, at least for some considerable time, or where the tenant is insolvent.[8]
(f) Uncertainty about future capacity to pay rent should be considered favourably to a tenant in granting relief, given that any uncertainty can be met by a landlord subsequently terminating the lease for any future breach.[9]
(g) Relief is unlikely to be refused where the lease provides a guarantee or bond to cover the tenant’s obligations.[10]
[8]Jam Factory Pty Ltd v Sunny Paradise Pty Ltd & Ors [1989] VR 584, 590.
[9]Old Papa’s Franchise Systems [2003] WASCA 11 [131]-[132]; Jam Factory Pty Ltd v Sunny Paradise Pty Ltd & Ors [1989] VR 584.
[10]Baby Zone (Aust) Pty Ltd (Administrator Appointed) v Keira Street Securities Pty Ltd [2016] NSWSC 528 [80]; Wynsix Hotels (Oxford St) Pty Ltd v Toomey [2004] NSWSC 236 [33].
Here, the plaintiff’s action in paying amounts under the Notice and the defendant’s action calling on the bank guarantee in respect of remaining obligations have in combination meant that all outstanding amounts owed by the tenant had now been met.
The defendant submitted that an obligation remains outstanding: that the plaintiff meet its obligation under the lease to replace the expended bank guarantee.
The defendant also submitted that the plaintiff had been persistently in breach of its obligations under the lease since its commencement and that the Court ought not be satisfied that the plaintiff can meet its future obligations so that relief should be refused.
Relations between the parties have been difficult throughout the currency of the lease. The defendant’s affidavit outlined numerous historical defaults in payment of rent and outgoings.
From almost the commencement of the lease the plaintiff did not pay outgoings and then rent. This was in the context of a dispute with the landlord about its failure to complete works and its make good obligations under the lease. Ultimately those matters were the subject of a deed of settlement between the parties signed in March 2020. Since that time any default by the plaintiff has been more limited.
Rent for April 2020 was unpaid and letters of demand for rent and outgoings were sent by the defendant in April and May 2020. It is not clear from the affidavit that this outstanding amount was paid but I infer it was as nothing further was mentioned. Thereafter there were no defaults of rent by the plaintiff until February 2020. The outstanding outgoings as at March 2021 included amounts invoiced since December 2020 but not before.
Apart from the breaches relied on by the defendant to resume possession pursuant to the Notice, it seems that there was only one occasion of rent default, and some three months of outgoings that were not associated with the old dispute with the landlord. In my view these circumstances do not amount to lengthy or persistent defaults and do not constitute exceptional circumstances.
As to the ability to meet future obligations under the lease the defendant submitted that I should not be so satisfied as the plaintiff did not pay all arrears other than by the defendant’s recourse to the bank guarantee. Additionally the plaintiff’s correspondence to the defendant in early 2021 seeking rent relief and a payment plan amounted to an admission that it has been significantly affected by the COVID-19 pandemic. This was submitted to demonstrate that the plaintiff was in significant financial difficulty.
Against this the plaintiff’s managing director has sworn an affidavit that the plaintiff is able to pay rent and outgoings as they fall due and she undertakes on behalf of the plaintiff to do so. The plaintiff instructed that it was in a position to put in place the replacement bank guarantee as obliged under the lease. In granting the relief sought by the plaintiff I made it a condition of that relief that the plaintiff have in place a replacement guarantee by Friday 23rd April 2021. This it has done.
The plaintiff’s business was considered an essential service and so was able to continue trading through the 2020 lockdowns in Victoria but it was nevertheless sufficiently affected that it qualified for JobKeeper between March and September of that year. The plaintiff’s business, despite being disrupted has otherwise demonstrated an ability generally to meet its obligations under the lease, although not always in a timely fashion. An application for rent relief in the context of the COVID effects on the business is not necessarily demonstrative of a company in sufficient financial difficulty such that relief ought be refused.
I am not satisfied that the past non-payments have been persistent or that the ability to meet future obligations is so precarious that I should refuse the relief sought.
Finally the security afforded to the landlord by the guarantee under the lease which is now in place again is sufficient protection against any future obligations.
Accordingly I made orders granting the plaintiff relief from forfeiture, conditional upon providing a replacement guarantee.
The plaintiff sought its costs on the basis that it had obtained the relief it sought. The defendant sought payment of its costs by the plaintiff on the basis that the Court was asked to grant discretionary relief against the lawful acts of the defendant. Although the plaintiff obtained that relief, it did so only upon condition that it rectify the outstanding breach under the lease by replacing the bank guarantee. No issue was raised by the defendant about replenishment of the guarantee until submissions at the hearing. No offer by the plaintiff to do so was forthcoming until reply.
Costs are a matter in the discretion of the Court. In cases of an action brought by a lessee for relief against forfeiture, the general rule that costs follow the event may not always be applicable. In Bland v Ingrams Estates Ltd and others (No 2), Chadwick LJ explained the usual practice that an applicant seeking relief should bear the costs of the action notwithstanding success. He said:
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…..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 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.[11]
[11][2002] 2 WLR 361 [14].
Any such usual practice in applications of this type must take account of the facts of the individual case, including whether the lessor unnecessarily or unreasonably resisted the claim. The formulation by Chadwick LJ does not describe unreasonable opposition but unnecessary opposition. In Re Hi-Fi Sydney Pty Ltd (administrator appointed),[12] Brereton J observed the relevance of a distinction between opposition necessary in order to achieve justice for the lessor in putting the lessor in the position it would have been had there been no default and opposition based on securing a wider interest or benefit by the lessor.
[12][2015] NSWSC 1312.
In Icechest Corporation v Quan,[13] referred to by the defendant, the Court awarded costs in favour of a defendant lessor. The Court in that case adopted the usual approach 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 unreasonably resisting its claim. The Court found that the defendant had acted reasonably in resisting the application for relief prior to the commencement of proceedings and not consenting to an order granting relief until all outstanding obligations had been met. In that case the Notice upon which the defendant acted to re-enter the premises included the failure to provide a security deposit. In summary the Court there found that the defendant acted reasonably in withholding its consent until such time as that breach, as well as others, had been remedied.
[13] [2017] WASC 345.
On the facts here, the security deposit was not in issue in the Notice relied on by the defendant. It became an issue when the defendant, relying on determination of the lease notified the plaintiff on 16 April 2021 that it was drawing on the deposit to meet remaining outstanding amounts. The defendant under the lease must give notice to the plaintiff of its intention to remedy outstanding arrears by recourse to the deposit. It gave no notice as it asserted the lease had been determined.
In circumstances where the hearing before me preceded on the basis that the defendant had lawfully determined the lease (if not by the email of 13 April then by the morning of 16 April 2021 when it in fact had re-entered the premises), I am not persuaded that, in calling on the security without notice after that time, on 16 April, the defendant acted other than in accordance with the terms of the lease which entitled it to do so, and therefore reasonably. It did not seek to obtain, by opposing the application, more than remedy of existing breaches.
Accordingly I would exercise my discretion to order that the plaintiff pay the defendant’s costs, incurred in contesting the application on a standard basis.
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