Todarello Property Investments Pty Ltd v GJA Kalra Pty Ltd

[2021] NSWSC 1678

Supreme Court

New South Wales

Medium Neutral Citation:

Todarello Property Investments Pty Ltd v GJA Kalra Pty Ltd [2021] NSWSC 1678

Hearing dates:

16 June 2021; 15 and 22 September 2021; 3 December 2021

Date of orders:

20 December 2021

Decision date:

20 December 2021

Jurisdiction:

Equity

Before:

Darke J

Decision:

Option for renewed lease validly exercised by defendant. Plaintiff’s purported termination of the lease invalid. Judgment given in favour of plaintiff for arrears owed to it under the lease.

Catchwords:

LAND LAW – leases – options to renew – defendant lessee purported to exercise option to renew lease – plaintiff lessor served a notice under section 133E of the Conveyancing Act 1919 (NSW) – notice not served until seven months after date of expiry of lease – notice alleged breaches that existed at that date and continued thereafter – held that regardless of whether breaches are continuing, only breaches occurring up to date of expiry of lease can preclude lessor from exercising option – notice held invalid because not given within time – defendant not precluded from exercising option – declaration made that the defendant validly exercised option to renew and is entitled to a new lease

LAND LAW – leases – termination of leases – plaintiff lessor served a Notice of Termination for the defendant’s failure to pay $117,702.94 in rent and operating expenses – COVID-19 pandemic special provisions – where defendant an “impacted lessee” under Schedule 5 to the Conveyancing (General) Regulation 2018 (NSW) – Regulation prohibits lessors terminating leases in certain circumstances – Regulation prohibited plaintiff from terminating lease for failure to pay rent during “prescribed period” unless plaintiff complies with requirement to renegotiate in good faith rent payable under lease – plaintiff fails to comply with requirement and is not deemed to have complied due to a failure of defendant to provide information – plaintiff’s termination of lease invalid – declaration made that termination invalid and of no effect

Legislation Cited:

Conveyancing Act 1919 (NSW), s 133E

Conveyancing (General) Regulation 2018 (NSW), Schedule 5

Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW)

Retail and Other Commercial Leases (COVID-19) Amendment Regulation 2020 (NSW)

Retail and Other Commercial Leases (COVID-19) Regulation (No 2) 2020 (NSW)

Retail and Other Commercial Leases (COVID-19) Amendment Regulation 2021 (NSW)

Cases Cited:

Dee-Tech Pty Ltd v Neddam Holdings Pty Ltd [2012] NSWSC 251

Category:

Principal judgment

Parties:

Todarello Property Investments Pty Ltd (Plaintiff/Cross-Defendant)
GJA Kalra Pty Ltd (Defendant/Cross-Claimant)

Representation:

Counsel:
Mr P Afshar (Plaintiff/Cross-Defendant)
Mr J Mack (Defendant/Cross-Claimant)

Solicitors:

KB Legals (Plaintiff/Cross-Defendant)
Felicio Law Firm (Defendant/Cross-Claimant)

File Number(s):

2020/317719

Publication restriction:

None

Judgment

Introduction

1. These proceedings concern a lease of a service station and motel premises located on the Great Western Highway at Yetholme, between Lithgow and Bathurst. The premises consist of the land contained in folio identifier 100/1150054.

2. The plaintiff is the registered proprietor of the land. There is a registered lease in respect of the land (AF572475) for a 10 year term ending on 17 January 2020, with three options for renewed terms of 5 years each. The original lessees under the lease transferred the lease to the defendant by deed made in about 2010, although the Transfer was not registered until about March 2012. I note that the name of the defendant is incorrectly spelt in the folio of the register but nothing turns upon this in the present case.

3. The parties are in dispute about whether the defendant validly exercised the option to renew in 2019 so as to become entitled to a further term of 5 years from 18 January 2020. However, even if the option was validly exercised, the plaintiff claims that on 26 October 2020 it validly terminated the lease for breaches by the defendant. The validity of the asserted termination is challenged by the defendant, including on the basis that the termination was precluded by the provisions of Schedule 5 to the Conveyancing (General) Regulation 2018 (NSW) (“the Conveyancing Regulation”). Schedule 5 to the Conveyancing Regulation applies to certain commercial leases. The Schedule, which was inserted into the Conveyancing Regulation on 24 April 2020 (and subsequently amended), contained what are described as COVID-19 pandemic special provisions. An important issue in the case is whether the provisions of the Schedule applied to the lease and operated so as to prevent the purported termination, and otherwise affect the positions of the parties under the lease, including in relation to the amount of rent payable.

4. Against the possibility that the plaintiff validly terminated the lease, the defendant seeks relief against forfeiture. In relation to that matter, and also the plaintiff’s claim to recover amounts due under the lease, issues arose concerning the quantification of the amounts of rent and operating expenses that have fallen due. These issues were narrowed to an extent by an agreement reached between the parties on 5 November 2021, following a mediation that took place on 21 October 2021. The agreement concerned amounts of rent to be waived or deferred in respect of rent payable in the period May 2020 to September 2021, and a waiver of part of the interest amount claimed by the plaintiff under the terms of the lease.

Summary of salient evidence

5. It is convenient to commence by referring to some of the provisions of the lease.

6. Rent and operating expenses are dealt with in cl 2. By cl 2.1 the Rent (as set out in Item 3 of the Schedule to the lease, and as varied in accordance with cl 2.2) is payable by the lessee, free from all deductions, in equal monthly instalments in advance on the first day of each month. By cl 2.4, the lessee is obliged to pay the lessee’s share (being 100%) of Operating Expenses as defined in cl 2.4.4. The definition of Operating Expenses includes “All reasonable management expenses, (including any fees payable to the Lessor’s managing agents)”. The plaintiff’s managing agents have at all relevant times been Raine & Horne of Penrith.

7. As already noted, the 10 year term of the lease ended on 17 January 2020, but the lease contained three options to renew for further five year terms. Clause 3.2.1 provides:

3.2.1   If the Lessee desires to have a further lease of the Premises for the period stated in Item 7 of the Reference Schedule and ;-

3.2.1.1   the Lessee has not more than six (6) months and not less than three (3) months prior to the date of termination of this Lease notified the Lessor in writing that the Lessee has exercised the Lessee’s option for renewal of this Lease; and

3.2.1.2   there is neither then nor at the date of expiry of this Lease any existing breach of any of the terms of the Lease which the Lessee has failed to rectify; and

3.2.1.3   if the Lessee has not already done so deliver a bank guarantee or provide a security bond as the case may be;

THEN the Lessor shall grant (and the Lessee shall accept) a new lease in accordance with clause 3.3 hereof.

8. Clause 3.3 relevantly provides that the further lease will be on the same terms as the original lease save as to term and adjustments to the provisions concerning options to renew.

9. Other provisions of the lease, relevant to the plaintiff’s claims of breach, include cl 5.7 (which obliges the lessee to monitor the premises for any leakage or migration of contaminants) and cl 6.1 (which obliges the lessee to effect and keep in force a comprehensive maintenance and repair contract in respect of the air-conditioning plant).

10. Default and termination is dealt with in cl 11 of the lease. Clause 11.1 provides that certain provisions, including cll 2.1 and 2.4 concerning the payment of rent and operating expenses, are essential and fundamental terms of the lease. Clause 11.2 relevantly provides:

In the event that:

(a)   any rent or any other moneys payable under this Lease shall remain unpaid for fourteen (14) days next after the date appointed for payment and formal demand has been made; or

(b)   any moneys herein specifically made payable on demand remain unpaid for fourteen (14) days after demand; or

(c)   the Lessee defaults in performing or observing any one or more of the covenants or provisions on the part of the Lessee expressed or implied in this Lease (unless the default in performance or observance has been waived or excused by the Lessor in writing) and such default shall have remained unremedied for fourteen (14) days after notice in writing shall have been given by the Lessor to the Lessee specifying such default; or

…

THEN the Lessor may at any time thereafter but without prejudice to any claim which the Lessor may have against the Lessee in respect of any breach of the covenants and provisions in this Lease on the part of the Lessee to be observed and performed either re-enter into and repossess and enjoy the Premises as of the Lessor’s former estate (anything herein contained to the contrary notwithstanding) and thereupon this Lease shall be determined, or call for an immediate surrender of the Lessee’s estate and interest under this lease and for the most effectual enforcement of this right the Lessee hereby irrevocably appoints the Lessor the Lessee’s true and lawful Attorney to surrender or cause to be surrendered this Lease and to sign all notices deeds and documents for the purpose of such surrender in the name of the Lessee, and upon such surrender the Lessor shall be freed and discharged from any action suit claim or demand by or obligation to the Lessee under or by virtue of this Lease.

11. The period within which the first option to renew could be exercised was 17 July 2019 to 17 October 2019.

12. On 19 July 2019 the managing agents sent a letter to the defendant which included a formal demand for payment of what was described as outstanding rent in the sum of $35,450.71. It appears from a further letter sent by the managing agents on 6 August 2019 that the defendant had made a payment of $31,214.44 on 24 July 2019, but was not prepared to pay the sum of $4,236.27 (which seems to have been an amount claimed for management fees rather than rent). The parties were in dispute at that time in relation to the amount of management fees. In any event, the managing agents, by their 6 August 2019 letter, made a formal demand for payment of the $4,236.27 within 14 days. It seems that this demand was not met. In August and September 2019, the defendant made only payments in the amount of the claimed rent. No amounts were paid in those months in respect of operating expenses (including management fees).

13. On 6 September 2019 the managing agents sent another letter to the defendant. This letter requested the defendant to provide evidence of its compliance with its obligations under cll 5.7 and 6.1 of the lease.

14. The plaintiff’s solicitors sent a letter to the defendant’s solicitors on 6 September 2019. The letter stated, inter alia, that the management fees referred to in the letter of 6 August 2019 remained outstanding, and that the rent due on 1 September 2019 had not been paid.

15. Also on 6 September 2019 the defendant’s solicitors sent a letter addressed to the Secretary of Amgade Pty Ltd. That company is the former owner of the land, and is named as the lessor in the lease. However, the street address specified in the letter, namely, the office of EG Bolos & Co, is that of the plaintiff’s accountants. There is evidence that it is also the address of the plaintiff’s registered office. The managing agents had previously informed the defendant of that, by means of another letter sent by them on 19 July 2019. In any event, the letter from the defendant’s solicitors stated:

We act for the registered lessee, GJA Kalra Pty Limited.

Pursuant to clause 3.2.1 of the lease dated 5 February 2020, we give notice of our client’s intention to exercise the option to renew the lease. We are instructed that our client has already provided a security bond in accordance with clause 3.2.1.3.

A copy of the letter was sent by email to the managing agents on the same day.

16. On 24 September 2019 the defendant’s solicitors sent a letter addressed to the Secretary of the plaintiff. The street address specified in the letter is the same as the address specified in their earlier 6 September 2019 letter, namely, the office of EG Bolos & Co. The 24 September 2019 letter is in precisely the same terms as the 6 September 2019 letter. Again, a copy of the letter was sent by email to the managing agents on the same day.

17. I note in passing that the plaintiff did not promptly serve any notice under s 133E of the Conveyancing Act 1919 (NSW) in response to the defendant’s solicitors’ letters of 6 September 2019 or 24 September 2019. The plaintiff did not seek to serve any such notice until 25 August 2020, well after the expiry of the period during which the option to renew could be exercised, and indeed well after the expiry of the 10 year term of the lease. Nevertheless, the plaintiff’s solicitors sent a letter to the defendant’s solicitors on 14 February 2020 in which it was asserted, inter alia, that the defendant had failed to validly exercise the option to renew because the defendant was in breach of the lease as at 26 September 2019 (when the 24 September 2019 letter was received), and also at the time of expiry of the lease (17 January 2020). The plaintiff’s solicitors further asserted that the 24 September 2019 letter was nothing more than an expression of an intention to exercise the option “which is not deliberative and not in accordance with the language of clause 3.2”. It was contended that the lease had expired without the option to renew having been exercised, such that the defendant was in occupation as a monthly tenant pursuant to the holding over provisions of the lease (cl 9.4). There does not seem to have been any reply to this letter.

18. On 6 April 2020 the defendant’s solicitors sent a letter to the managing agents and the plaintiff’s solicitors in the following terms:

We act for the registered lessee, GJA Kalra Pty Limited.

Due to a dramatic decrease of revenue due to the impacts of COVID-19, we are instructed to request rent relief as our client is struggling to make ends meet.

Our client’s business is classified as an essential service and has not ceased training, [sic] however, the number of vehicles on the roads has significantly decreased, signifying a severe reduction in revenue.

Our client asks for a rent free period (including property management fees and outgoings) for 6 months. The property is a combination of essential and non-essential services, being a motel and restaurant with dine in facilities. Due to COVID 19 these two components are not generating any revenue at all, hence due to reduction in more than 50 percent in shop and fuel sales it has become practically impossible to pay any part of rent until such circumstances where business becomes normal.

Please provide a response urgently.

There was no reply to the letter until June 2020.

19. In the meantime, on 24 April 2020 the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) commenced operation. By Schedule 1 to that regulation, Schedule 5 was inserted into the Conveyancing Regulation. As noted earlier, there is an issue about whether the Conveyancing Regulation relevantly applied to the lease and operated so as to prevent the plaintiff’s purported termination of the lease, and otherwise affect the positions of the parties under the lease.

20. On 9 June 2020 the managing agents sent an email to the defendant’s solicitors which attached a letter that was in the following terms:

We are the managing agents for Amgade Pty Ltd (now Todarello Property Investments Pty Ltd).

We are in receipt of your email of 6^th April 2020.

With regards to your request from [sic] rent relief, please provide the following documentation to assist in determining what rent relief may be given:

Copies of the BAS portal statements from January 2019 to date, whether they be monthly or quarterly

Summary of monthly bank statements from January 2019 to date

Monthly sales reports from January 2019 to date

21. There is in evidence a copy of an earlier letter from the managing agents dated 2 June 2020 which is in similar terms. It is not entirely clear whether the earlier letter was actually sent on about the date it bears, but it seems unlikely that it was, because on 13 June 2020 the managing agents sent an email to the defendant’s solicitors which attached the 2 June 2020 letter. That letter is in the following terms:

We are the managing agents for Amgade Pty Ltd (now Todarello Property Investments Pty Ltd).

We are in receipt of your email of 6^th April 2020.

With regards to your request from [sic] rent relief, please provide all the following documentation to assist in determining what rent relief be given:-

Copies of the ATO-Portal BAS Returns from January 2019 to date, whether they be monthly or quarterly;

Copies of Monthly Bank Statements from January 2019 to date, being the first & late [sic] pages only, which show the totals & transactions summaries;

Monthly System-Generated Sales Reports from January 2019 to date

Please note that without this information, were [sic] are not able to allow any rent relief sought.

22. There was no reply to either letter before 13 July 2020 when the managing agents sent an email to the defendant’s solicitors in the following terms:

Further to previous correspondence.

Your client now has outstanding arrears amounting to $87,505.32 as at today’s date.

Your client is not paying outgoings per the terms and conditions of the lease.

Your client has also taken it upon themselves to pay 50% of the rent from April 2020, without the Lessor’s approval.

Please advise urgently.

23. On 17 July 2020 the plaintiff’s solicitors sent a letter to the defendant’s solicitors in relation to a foreshadowed inspection of the premises by a prospective tenant or purchaser, as provided for in cl 14.6 of the lease. It was asserted in the letter that the defendant was a monthly tenant under cl 9.4 of the lease, and it was stated:

For the record, the re-entering into possession of premises following the termination of the monthly tenancy is not precluded under regulation 6 of the Retail and Other Commercial Leases (COVID-19) Regulation 2020.

24. On 30 July 2020 the plaintiff’s solicitors sent a letter to the defendant’s solicitors in relation to a foreshadowed inspection of the premises by the plaintiff to view its state of repair, as provided for in cl 8.1 of the lease. The morning of 3 August 2020 was nominated as the time for the inspection.

25. On 31 July 2020, the defendant objected to the inspection. Mr Kalra, the Chief Executive Officer of what he described as the Kalra Group of Companies, sent an email to the managing agents in which he stated that on such short notice he would “not allow anyone to conduct the inspection until my issues are resolved and my solicitor advise me [sic]”. Later on 31 July 2020 the plaintiff’s solicitors sent a letter to the defendant’s solicitors in which it was maintained that the plaintiff had the right to inspect the premises on 3 August 2020. I note that it was stated in the letter that the defendant had not responded to the managing agent’s letter of 6 September 2019 (which concerned the defendant’s obligations under cll 5.7 and 6.1 of the lease). The defendant’s solicitors sent a letter in response later on 31 July 2020 which included a request that the plaintiff and its agent refrain from entering the premises until full instructions were obtained.

26. Shortly thereafter, still on 31 July 2020, the defendant’s solicitors sent an email to the managing agents in the following terms:

We refer to your email dated 13 June 2020 which attached a letter dated 2 June 2020.

For the record, we did not receive an email from you on 2 June 2020.

We now attach our client’s financial records as requested:-

A. Jobkkeeper [sic] claims for April, May and June 2020;

B. Letter from JAG Business Advisory dated 7 May 2020 confirming drop in sales.

The attached Jobkeeper claims indicate that throughout the months April to June 2020 the defendant claimed a wage subsidy in respect of eleven employees, in each case in the amount of $1,500 per fortnight. The attached letter from JAG Business Advisory (dated 7 May 2020) stated:

TO WHOM IT MAY CONCERN

REFERENCE: TURNOVER DROP FOR GJA KALRA PTY LTD T/AS CALTEX YETHOLME ABN 66 144 865 770 (company)

We are the tax agents for the above company.

Based on the information supplied to us, we can confirm that this site has experienced and continues to experience more than 30% drop in its revenues since 1^st April 2020 as it has been impacted by COVID 19.

27. On 1 August 2020 the managing agents sent an email to Mr Kalra stating that the inspection planned for 3 August 2020 had been cancelled.

28. On 25 August 2020 the plaintiff’s solicitors served two notices upon the defendant. The first notice was described as a Notice to Lessee Under Section 133E Conveyancing Act 1919. It is not necessary to set out the entirety of the notice. It relevantly provided:

TAKE NOTICE, pursuant to s 133E of the Conveyancing Act 1919 (NSW) (“the Act”) that by reason of the acts/omissions set out in paragraphs [2.1] – [2.12] below and the continuing and constituting breaches of the above recited covenant(s) the lessor proposes (subject to any order of the Court under s 133F of the Act) to treat these acts/omissions as having precluded you from exercising the option above referred to.

AND NOTE that the [sic] each of these acts/omissions are continuing breaches for each moment in time that you have failed to maintain the covenanted state of affairs, and continue to date.

…

1.2   The Lessee served an option for renewal exercise notice addressed to “The Secretary Amgade Pty Ltd” dated 6 September, 2019 (such date hereinafter referred to as the “First Exercise Date”). The company Amgade Pty Ltd was not the registered proprietor of the Premises nor the Lessor as at the date of the purported exercise of the option for renewal.

1.3   The Lessee served a further notice on the registered office of the Lessor on 26 September, 2019 (such date hereinafter referred to as the “Second Exercise Date”) by a registered letter dated 24 September 2019.

1.4   The term of the Lease expired on 17 January 2020 (such date hereinafter referred to as the “Lease Expiry Date”).

…

2.3   As at the First Exercise Date, the Second Exercise Date and the Lease Expiry Date the Lessee was in breach of clause 5.7 of the Lease and continues to be in breach of clause 5.7 of the Lease.

…

2.6   As at the First Exercise Date, the Second Exercise Date and the Lease Expiry Date the Lessee was in breach of clause 6.1 of the Lease and continues to be in breach of clause 6.1 of the Lease.

…

2.9   As at the First Election [sic] Date the sum of $39,518.22 was outstanding to the Lessor under clauses 2.1 and/or 2.4 of the Lease.

2.10   As at the Second Election [sic] Date the sum of $8,303.78 was outstanding to the Lessor.

2.11   As at the Lease Expiry Date the sum of $13,757.14 was outstanding to the Lessor

2.12   The breaches of clauses 2.1 and 2.4 are continuing breaches by the Lessee.

29. The second notice was described as a Notice of Breaches of Lease Covenants. It relevantly provided:

THE LESSOR MAKES FORMAL DEMAND AND PROVIDES NOTICE under clauses 11.2(a) and 11.2(b) that the breaches by the Lessee of clause 2.1 and clause 2.4 of the Lease are required to be remedied by the Lessee:

(a)   by paying within 14 days of the date of service of this notice (and in this respect being of the essence) the amount of $104,999.04 being the outstanding rent and the outstanding Lessee’s share of operating expenses (including GST) as listed and stated in the attached Tax Invoice/Statement of Account marked as Annexure “B” issued by Raine & Horne Commercial Penrith and dated 25/08/2020; and

(b)   the Lessor reserves its rights in relation to interest payable under clause 11.7.

FURTHERMORE THE LESSOR MAKES FORMAL DEMAND AND PROVIDES NOTICE under clause 11.2(c) for the Lessee to remedy its breach of clause 5.7 by providing to the Lessor evidence within 14 days of the date of service of this notice that the Lessee has monitored the Premises for any leakage or migration of any Contaminant onto the Premises, such demand being previously made in a letter dated 6 September, 2019 sent by the Lessor’s managing property agent Raine & Horne Commercial Penrith a copy of which is attached to this notice.

FURTHERMORE THE LESSOR MAKES FORMAL DEMAND AND PROVIDES NOTICE under clause 11.2(c) for the Lessee to remedy its breach of clause 6.1 of the Lease by providing to the Lessor within 14 days of the date of service of this notice a comprehensive maintenance and repair contract in respect to the airconditioning with a competent contractor approved by the Lessor as was demanded by the Lessor’s managing property agent Raine & Horne Commercial Penrith by a letter to the Lessee dated 6 September 2019 a copy of which is attached.

FAILURE TO COMPLY WITH THIS NOTICE will give the LESSOR the right to inter alia terminate the Lease and repossess the demised premises of the Lease.

30. The defendant made no formal response to either notice. It appears, however, that on 4 September 2020 the defendant made a payment of rent in the amount of $31,214.44. That is the amount of monthly rent under the lease (including GST). The defendant had been making payments of only half of that amount from April to August 2020 inclusive. On 7 October 2020 the defendant made a payment of rent in the amount of only $22,283.54. There is evidence that the amount of $8,930.90 was deducted by the defendant on account of the cost of certain repairs it had undertaken.

31. On 26 October 2020 the plaintiff’s solicitors served a Notice of Termination of Lease upon the defendant. The covering letter was in the following terms:

We attach hereto by way of service a Notice of Termination of Lease.

We also attach a rent reconciliation for the period 1 January 2020 to 16 October, 2020 and a copy of the property agent’s ledger for the said period. As at 16 October, 2020 the monies outstanding to our client was $117,702.94.

Despite demands for evidence that you were entitled to Covid Rent Relief by our client’s managing agent Raine & Horne Commercial in letters to you dated 2 June 2020 and 9 June 2020, you have unilaterally without consent have paid reduced the rent [sic] to our client.

Not only have you failed to comply with the requests of the said agent, you have failed to comply with clause 5(3A) of the Retail and Other Commercial Leases (COVID-19) Amendement Regulation 2020 (NSW) which is as follows:-

(3A)   An impacted lessee must give the lessor the following in respect of the impacted lease-

(a)   a statement to the effect that the lessee is an impacted lessee,

(b)   evidence that the lessee is an impacted lessee.

You have continued such actions despite a Notice of Breaches of Lease Covenants dated 25 August, 2020 (Breach Notice).

You have also failed to remedy the other defaults set out in the Breach Notice.

Our client reserves unto itself the right to re-enter and take possession of the premises now at any time without notice.

32. The Notice of Termination of Lease was relevantly in the following terms:

We refer to the notice of breaches of lease covenants dated 25 August 2020 (Breach Notice), a copy of which is attached. The Breach Notice was issued for the purposes of Section 129 of the Conveyancing Act 1919 (NSW).

The Lessee has failed to comply with the notices and demands set out in the Breach Notice, noting that:

The sum of $104,999.04 referred to in the Breach Notice remains outstanding, and as at 16 October 2020, the sum of $117,702.94 was outstanding;

The Lessee has failed to provide evidence that the Lessee has monitored the Premises for any leakage or migration of any contaminant on to the Premises as set out in the Breach Notice; and

The Lessee has failed to provide a comprehensive maintenance and repair contract as set out in the Breach Notice.

The Breach Notice provided 14 days for you to remedy the defects specified therein.

For the purposes of Section 129 of the Conveyancing Act 1919 (NSW), more than a reasonable period of time has lapsed for the breaches to be remedied.

TAKE NOTICE THAT the Lessor hereby terminates the lease as at midnight on 26 October 2020 and will thereafter enter upon and take physical possession of the premises and thereby determine the demise.

33. The validity of the termination was challenged by the defendant. On 28 October 2020 the defendant’s solicitors sent a letter to the plaintiff’s solicitors which included the following:

Our client disputes the validity of that Notice of Termination on the following grounds:

Our client is not in breach of an essential term of the lease. The moneys alleged by your client to be outstanding, namely “the Lessee’s share of Operating Expenses”, consist of charged management fees which our client says are unreasonable and are the subject of our client’s claim for damages in NSW Supreme Court Proceeding 2019/00198412.

Our client has continually monitored the premises as required by clause 5.7.

Our client has maintained a comprehensive maintenance and repair contract in respect of the air conditioning as required by clause 6.1.

In any event, if your client were to seek to re-enter and take possession of the premises, we put you on notice that we are instructed to seek an order pursuant to s 129 Conveyancing Act 1919 for relief against forfeiture of the lease.

34. The letter also contained a proposal that the issues concerning the exercise of the option to renew, and the termination of the lease, be dealt with in the existing Supreme Court proceedings between the parties. That proposal was not accepted. The plaintiff commenced these proceedings on 6 November 2020. The defendant remains in occupation.

Exercise of the option to renew

35. The first issue to consider is whether the defendant validly exercised the option to renew the lease for a further term of 5 years.

36. Exercise of the option is governed by cl 3.2.1 of the lease, which is set out above at [7]. The defendant’s solicitors sent two letters in relation to the exercise of the option, dated 6 September 2019 and 24 September 2019 respectively. The first letter was addressed to Amgade Pty Ltd. That company is named as the lessor in the lease but when the letter was sent it was no longer the owner of the land. It is highly doubtful that the notice to Amgade Pty Ltd was a notice to the lessor for the purposes of cl 3.2.1, but it is not necessary to determine that question. The second letter, which was in the same terms, was sent to the plaintiff, and there is no doubt that notice to the plaintiff is notice to the lessor for the purposes of cl 3.2.1.

37. It is clear that the 24 September 2019 letter was sent and received within the period prescribed by cl 3.2.1.1. The plaintiff initially contended that the letter failed to comply with cl 3.2.1.1 because it was not notice that the lessee “has exercised the Lessee’s option for renewal of this Lease”. However, the point was not developed in the plaintiff’s submissions, either in writing or orally, and it was abandoned in the course of closing submissions.

38. Sections 133E and 133F of the Conveyancing Act provide:

133E Breach of certain obligations not to preclude option except in certain circumstances

(1)   This section applies to a lease that contains—

(a)   an option exercisable by the lessee, and

(b)   provision by which the lessee’s entitlement to the option is made to depend on performance by the lessee of any specified obligation, whether such performance is required before, or after, or before and after, the giving of any notice by which the option is exercised.

(2)   Despite any provision of the kind referred to in subsection (1)(b), no breach by the lessee of any relevant obligation precludes the lessee’s entitlement to the option unless—

(a)   the prescribed notice has been served on the lessee in respect of the breach, and

(b)   the lessee’s rights are extinguished in relation to the notice.

(3)   In subsection (2)—

breach of an obligation includes, where the obligation requires any thing to be done, any neglect or failure to do the thing concerned.

obligation includes any agreement, covenant, condition or stipulation by which the lessee is required to do or refrain from doing any thing.

prescribed notice means a notice in writing—

(a)   specifying the lessee’s breach of the relevant obligation and served on the lessee—

(i)   within 14 days after the giving of a notice by which the option is exercised, if the breach occurred before the giving of that notice, or

(ii)   within 14 days after the breach, if the breach occurred after the giving of that notice, and

(b) states that, subject to any order of the court under section 133F, the lessor proposes to treat the breach as precluding the lessee from entitlement to the option.

(4)   For the purposes of subsection (2)(b), the lessee’s rights are extinguished in relation to a prescribed notice—

(a)   if an order for relief against the effect of the breach in relation to the lessee’s entitlement to the option is not sought from the court within one month after service of the prescribed notice, or

(b)   if proceedings in which such relief is sought are disposed of, in so far as they relate to that relief, otherwise than by granting relief, or

(c)   if such relief is granted on terms to be complied with by the lessee before compliance by the lessor with the order granting relief, and the lessee fails to comply with those terms within the time stipulated by the court for the purpose.

133F Court may grant relief from breach of certain obligations

(1) Relief referred to in section 133E may be sought—

(a)   in proceedings instituted in the court for the purpose, or

(b)   in proceedings in the court in which—

(i)   the existence of an alleged breach by the lessee of the lessee’s obligations under the lease, or

(ii)   the effect of the breach from which relief is sought,

is in issue.

(2) The court may, in proceedings in which relief referred to in section 133E is sought—

(a)   make such orders (including orders affecting an assignee of the reversion) as it thinks fit for the purpose of granting the relief sought, or

(b)   refuse to grant the relief sought.

(3)   The court may, in proceedings referred to in subsection (2), take into consideration—

(a)   the nature of the breach complained of,

(b)   the extent to which, at the date of the institution of the proceedings, the lessor was prejudiced by the breach,

(c) the conduct of the lessor and the lessee, including conduct after the giving of the prescribed notice referred to in section 133E(2),

(d)   the rights of persons other than the lessor and the lessee,

(e)   the operation of section 133G, and

(f)   any other circumstances considered by the court to be relevant.

(4)   The court—

(a)   may make an order under subsection (2) on such terms as to costs, damages, compensation or penalty, or on such other terms, as the court thinks fit, and

(b)   may make any consequential or ancillary order it considers necessary to give effect to an order made under that subsection.

39. There is no doubt that s 133E applies to the option to renew contained in the lease, and that cl 3.2.1.2 is a provision that falls within s 133E(1)(b). By that clause, the Lessee’s entitlement to the option is made to depend on performance of its obligations under the lease. The option can only be exercised effectively if at the time of notice of exercise, and at the date of expiry of the lease, there is no existing breach of any of the terms of the lease which the lessee has failed to rectify. In these circumstances, s 133E(2) operates so that, despite cl 3.2.1.2, no such breach precludes the lessee’s entitlement to the option unless:

1. the “prescribed notice” has been served on the lessee in respect of the breach; and

2. the lessee’s rights are extinguished in relation to the notice.

40. “Prescribed notice” is defined in s 133E(3). Amongst other requirements, the notice must be served on the lessee,

1. within 14 days after the giving of a notice by which the option is exercised, if the breach occurred before the giving of that notice; or

2. within 14 days after the breach, if the breach occurred after the giving of that notice.

41. The only notice purporting to be a s 133E notice was served on the defendant on 25 August 2020. It specifies breaches alleged to have occurred both before and after the giving of the notice by which the option was exercised. The notice states that the lessee was in breach of the lease in various respects at the time the option was exercised and at the time the lease expired. It is further stated that those breaches were continuing.

42. In respect of any breaches that occurred before the giving of the notice of exercise, a prescribed notice would need to be served on the lessee within 14 days after the giving of the notice of exercise. In respect of any breaches that occurred after the giving of the notice of exercise a prescribed notice would need to be served within 14 days after the breach.

43. The notice served by the plaintiff on 25 August 2020 was plainly not served within 14 days after the giving by the defendant of the notice of exercise of the option. Accordingly, in order for the notice served on 25 August 2020 to be a prescribed notice for the purposes of s 133E, it would need to be served within 14 days after a breach, being a breach that occurred after the giving of the notice of exercise of the option.

44. The plaintiff submitted that the notice served on 25 August 2020 was served within 14 days after certain breaches, being breaches that existed at the date of expiry of the lease (17 January 2020) which the defendant thereafter failed to rectify. As I understood it, the plaintiff submitted that cl 3.2.1.2 on its true construction operates to preclude the exercise of the option whilst any breach that existed at the date of expiry of the lease has not been rectified by the defendant. The plaintiff submitted that it was thus open to it to serve a prescribed notice in respect of a breach that existed at the date of expiry and continued unrectified thereafter. It was further submitted that where, as here, the breaches remained unrectified as at 25 August 2020, the notice served on that day was served in time.

45. I do not accept those submissions. The opening words of cl 3.2.1.2 refer to two points in time, being:

1. when the lessee gives written notice to the lessor that the lessee has exercised the option; and

2. the date of expiry of the lease.

Exercise of the option is made conditional upon an absence, at both of those points in time, of “any existing breach of any of the terms of the Lease which the Lessee has failed to rectify”. I would read the language of that expression as essentially referring to unrectified breaches of the lease. The exercise of the option is made conditional upon the absence of that state of affairs at two specified points in time. Where, at either of those times, there exists an unrectified breach of lease, the lessee is not entitled to exercise the option (subject to the operation of s 133E of the Act). That is so even if the breach occurs at or close to one of those times, such that there is little time for the lessee to rectify the breach.

46. Despite the different terms of the leases in question, the situation is the same as that in Dee-Tech Pty Ltd v Neddam Holdings Pty Ltd [2012] NSWSC 251 at [119] in that, regardless of whether breaches are continuing, only breaches occurring up to the date of expiry of the lease can preclude the lessee from exercising the option.

47. Contrary to the submissions of the plaintiff, the continued existence of unrectified breaches after the date of expiry of the lease does not provide a further ground of disentitlement. If that were the case the question of the lessee’s entitlement to exercise the option would be kept open for an indefinite period after the expiry of the lease. In my opinion, reasonable business persons in the positions of the parties are unlikely to have intended cl 3.2.1 to operate in that fashion

46. It follows that in respect of any breaches that occurred after the giving of the notice of exercise of option and which were unrectified as at 17 January 2020, a prescribed notice would need to be given within 14 days after the breach. The notice served on 25 August 2020, which refers to breaches that occurred during the term of the lease (albeit that the breaches are said to have continued thereafter) is therefore not a prescribed notice for the purposes of s 133E(2) of the Act. The notice was not given in time. Accordingly, s 133E(2) operates so that, despite cl 3.2.1.2, any breaches falling within that provision do not preclude the lessee’s entitlement to the option.

47. I therefore conclude that by the letter sent by its solicitors on 24 September 2019, the defendant validly exercised the option to renew the lease for a further term of 5 years. The plaintiff thereby became bound by cl 3.2.1 to grant a new lease to the defendant in accordance with cl 3.3 of the lease for a term commencing on 18 January 2020 and terminating on 17 January 2025.

48. The above conclusion renders it unnecessary to consider certain further arguments raised by the defendant to the effect that the giving of the purported s 133E notice on 25 August 2020 was in any case prohibited by the operation of Schedule 5 to the Conveyancing Regulation. It is also unnecessary to consider any question of relief to the defendant under s 133F of the Act.

49. The defendant, having validly exercised the option to renew the lease, became entitled to a new lease for the term commencing on 18 January 2020 and terminating on 17 January 2025. That lease has not yet been executed or registered, but the parties are to be treated as being in the positions of landlord and tenant pursuant to the terms of the new lease.

Termination of the lease

52. The next issue to consider is whether the plaintiff validly terminated the lease on 26 October 2020. On that day, the plaintiff served a Notice of Termination upon the defendant, the relevant terms of which are set out above at [32]. The Notice of Termination referred to the Notice of Breaches of Lease Covenants that had been served on 25 August 2020, and stated that the defendant had failed to comply with that notice in various respects. It was stated that more than a reasonable period of time had elapsed for the purposes of s 129 of the Conveyancing Act. Finally, it was stated that the plaintiff terminates the lease as at midnight on 26 October 2020.

53. The alleged breaches relied upon by the plaintiff to justify the termination were:

1. outstanding rent and operating expenses totalling $104,999.04 as at the date of the breach notice, and $117,702.94 as at the date of the Notice of Termination;

2. breach of the obligation under cl 5.7 of the lease to monitor the premises for contamination; and

3. breach of the obligation under cl 6.1 of the lease to have in force a comprehensive maintenance and repair contract.

54. The alleged non-monetary breaches, which were denied by the defendant, received no attention at the hearing. The plaintiff’s case was squarely focussed upon the alleged failures to pay rent and operating expenses.

55. The amounts of outstanding rent and operating expenses are supported by entries in ledgers kept by the plaintiff’s managing agents (see Exhibits B and C). The existence of such arrears would ordinarily give rise to rights in the lessor to re-enter the premises and terminate the lease pursuant to cl 11.2 of the lease. However, Schedule 5 to the Conveyancing Regulation needs to be considered.

56. Schedule 5 to the Conveyancing Regulation, which contains what are described as COVID-19 pandemic special provisions, commenced on 24 April 2020. It was amended on 3 July 2020 by Schedule 2 to the Retail and Other Commercial Leases (COVID-19) Amendment Regulation 2020 (NSW), and a new Schedule 5 was inserted in its place on 24 October 2020 by Schedule 1 to the Retail and Other Commercial Leases (COVID-19) Regulation (No 2) 2020 (NSW). Schedule 5 was in the form of the new schedule when the plaintiff purported to terminate the lease.

57. The new schedule applied to the exercise or enforcement of rights under an impacted lease in relation to circumstances occurring during the prescribed period (see cl 3). “Impacted lease” was defined to mean a commercial lease to which an impacted lessee is a party. There is no doubt that the new lease to which the defendant is entitled is a “commercial lease” as defined in the schedule. The concept of “impacted lessee” was defined in cl 2 by reference to whether the lessee qualified for the Jobkeeper scheme, and the lessee’s turnover in the 2018-2019 financial year. However, by the savings provisions of cl 12, “impacted lessee” extends to a person who was an impacted lessee under the “substituted Schedule” in relation to a breach of the impacted lease that occurred at any time during the “first prescribed period”. The “first prescribed period” was defined to mean the period from 24 April 2020 to 23 October 2020. A person who was an impacted lessee within the meaning of the substituted Schedule at any time during the first prescribed period is taken to be an impacted lessee for the whole of that period.

58. The plaintiff initially took the position that the defendant was not relevantly an impacted lessee because it had not demonstrated that it qualified for the Jobkeeper scheme. Later, after the defendant served further evidence from its accountant, Mr Shah, the plaintiff accepted that the defendant qualified for the Jobkeeper scheme for the month of April 2020. The further evidence given by Mr Shah established that the defendant on its own, or together with a company that might be a member of the same group, had a turnover that was less than $50 million in the 2018-2019 financial year. In these circumstances, it seems to me that the defendant was an impacted lessee for the purposes of the new schedule, by virtue of the savings provisions of cl 12. As it was an impacted lessee within the meaning of the substituted Schedule for at least part of the first prescribed period, it is taken by cl 12(2) to be an impacted lessee for the whole of the period from 24 April 2020 to 23 October 2020. The defendant was thus, for the purposes of cl 12(1), a person who was an impacted lessee under the substituted Schedule in relation to a breach of the impacted lease that occurred at any time during that period. The defendant is thereby an impacted lessee for the purposes of the new schedule.

59. Clauses 4(1) and 4(2) of the new schedule provided:

4   Prohibitions and restrictions relating to impacted leases

(1)   This clause applies if, during the prescribed period, a lessee is an impacted lessee.

(2)   During the prescribed period, a lessor must not take prescribed action against the impacted lessee on the grounds of a breach of the impacted lease occurring during the prescribed period consisting of–

(a)   a failure to pay rent, or

(b)   a failure to pay outgoings, or

(c)   the business operating under the lease not being open for business during the hours specified in the lease.

“Prescribed action” is defined to include taking action under the provisions of a commercial lease for any of the following:

(i)   eviction of the lessee from premises or land the subject of the commercial lease,

(ii)   exercising a right of re-entry to premises or land the subject of the commercial lease,

(iii)   recovery of the premises or land,

(iv)   distraint of goods,

(v)   forfeiture,

(vi)   damages,

(vii)   requiring a payment of interest on, or a fee or charge related to, unpaid rent otherwise payable by a lessee,

(viii)   recovery of the whole or part of a security bond under the commercial lease,

(ix)   performance of obligations by the lessee or any other person pursuant to a guarantee under the commercial lease,

(x)   possession,

(xi)   termination of the commercial lease,

(xii)   any other remedy otherwise available to a lessor against a lessee at common law or under the law of this State.

“Prescribed period” was at that time defined to mean a period beginning on 24 April 2020 and ending at the end of 31 December 2020.

60. Clause 5 of the new schedule provided:

(1)   A lessor under an impacted lease must not take or continue prescribed action against the impacted lessee on grounds of a breach of the impacted lease consisting of a failure to pay rent during the prescribed period unless the lessor has complied with this clause.

(2)   A party to an impacted lease may request the other parties to renegotiate the rent payable under, and other terms of, the impacted lease.

(3)   A party to the impacted lease may make a second or subsequent request under subclause (2) but, unless the parties otherwise agree, an impacted lessee may make a second or subsequent request only if the request–

(a)   is made during the prescribed period, and

(b)   does not relate to rent for a period for which rent has been reduced, waived or deferred following a renegotiation under this clause.

(4)   A party to an impacted lease must, if requested under this clause–

(a)   renegotiate in good faith the rent payable under, and other terms of, the impacted lease, and

(b)   commence renegotiations within–

(i)   14 days of receiving the request, or

(ii)   another period agreed to by the parties.

(5)   An impacted lessee must give the lessor the following in respect of the impacted lease–

(a)   a statement to the effect that the lessee is an impacted lessee,

(b)   evidence that the lessee is an impacted lessee.

(6)   The parties are to renegotiate the rent payable under, and other terms of, the impacted lease having regard to–

(a)   the economic impacts of the COVID-19 pandemic, and

(b)   the leasing principles set out in the National Code of Conduct.

(7)   If the impacted lessee does not comply with subclauses (4)-(6), the lessor is taken to have complied with this clause.

(8)   To avoid doubt, a renegotiation commenced but not concluded before the expiry of the prescribed period may be continued and concluded after that expiry.

61. Clause 6 of the new schedule provided:

A lessor must not do any one or more of the following unless and until the Small Business Commissioner has certified in writing that mediation offered to be conducted by the Small Business Commissioner has failed to resolve the dispute and given reasons for the failure–

(a)   seek to recover possession of premises or land under the impacted lease,

(b)   terminate the impacted lease,

(c)   exercise or enforce any other right of the lessor under the impacted lease.

62. Clause 7 of the new schedule provided:

A court, when considering whether to make a decision or order relating to any of the following, is to have regard to the leasing principles set out in the National Code of Conduct–

(a)   the recovery of possession of premises or land from an impacted lessee,

(b)   the termination of an impacted lease by a lessor,

(c)   the exercise or enforcement of another right of a lessor under an impacted lease.

63. Clause 8 of the new schedule provided:

Nothing in this Schedule prevents a lessor taking prescribed action on grounds not related to the economic impacts of the COVID-19 pandemic.

64. The defendant submitted that the purported termination of the lease on 26 October 2020 was ineffective because it was conduct that was prohibited under cl 5(1) of the new schedule. It was submitted that the plaintiff’s conduct amounted to the taking of prescribed action against the impacted lessee, on grounds of a breach of the impacted lease consisting of a failure to pay rent during the prescribed period, without the plaintiff having complied with cl 5. It was submitted that even though the defendant had requested a renegotiation of the rent, the plaintiff had failed to renegotiate in good faith the rent payable under the lease as required by cl 5.

65. In response to those submissions, the plaintiff contended that it should be taken to have complied with the clause due to the defendant’s failure to provide evidence that it was an impacted lessee (see cll 5(5) and 5(7)).

66. In considering these arguments it is necessary to consider cl 5 not only in the form it was in at the date of the purported termination (under the new schedule), but also at earlier relevant times (under the substituted Schedule).

67. In the period from 24 April 2020 until 3 July 2020 cl 5 was in the following terms:

(1)   A lessor under a commercial lease must not take or continue any prescribed action against an impacted lessee on grounds of a breach of the commercial lease consisting of a failure to pay rent during the prescribed period unless the lessor has complied with this clause.

(2)   If an impacted lessee is a party to a commercial lease, any party to the lease may request the other parties to renegotiate the rent payable under, and other terms of, the commercial lease.

(3)   A party to a commercial lease must, if requested, renegotiate in good faith the rent payable under, and other terms of, the commercial lease.

(4)   The parties are to renegotiate the rent payable under, and other terms of, the commercial lease having regard to–

(a)   the economic impacts of the COVID-19 pandemic, and

(b)   the leasing principles set out in the National Code of Conduct.

68. On 3 July 2020 new sub-clauses (3A) and (3B) were added by Schedule 2 to the Retail and Other Commercial Leases (COVID-19) Amendment Regulation 2020 as follows:

(3A)   An impacted lessee must give the lessor the following in respect of the impacted lease–

(a)   a statement to the effect that the lessee is an impacted lessee,

(b)   evidence that the lessee is an impacted lessee.

(3B)   If the impacted lessee does not comply with subclause (3A), the lessor is taken to have complied with this clause.

These amendments to cl 5 extend to renegotiations commenced but not completed before the commencement of the amendments (see cl 11 of Schedule 2). Clause 5, as so amended, remained in that form until the new schedule came into force on 24 October 2020.

69. The letter sent by the defendant’s solicitors to the plaintiff’s managing agents on 6 April 2020 was a request to renegotiate the rent payable under the lease. The request remained unanswered at the time Schedule 5 commenced. In my view it was extant at that time, and should be taken to be a request for the purposes of cl 5(2) as it then stood. The plaintiff did not suggest to the contrary. The substance of the letter is a request for a rent free period for six months and the seeking of an urgent response to the request. In these circumstances the plaintiff came under an obligation to renegotiate in good faith the rent payable under the lease.

70. It appears that the plaintiff did not respond to the 6 April 2020 letter until 9 June 2020, when a request was made for the defendant to provide certain documents “to assist in determining what rent relief may be given”. A further request, in similar terms, was made by the plaintiff on 13 June 2020. At those times, cl 5 did not include any express obligation upon the lessee to provide evidence to the lessor that it was an impacted lessee, although both parties were obliged by cl 5(4) to renegotiate the rent payable under the lease and the lessee’s obligation in that regard could extend to the provision of information.

71. It may be debateable whether the renegotiation of rent that was required following the defendant’s request on 6 April 2020 had actually commenced by 3 July 2020 such that cll 5(3A) and 5(3B) would apply to the incomplete renegotiation. Assuming that those provisions did apply, I do not think that cl 5(3A) would operate to impose any obligation upon the defendant unless the lessor called for the giving of the information. The clause is intended to operate in a variety of situations, including a renegotiation that had commenced but not concluded. It would operate even if the negotiation was in practical terms almost finished. I would construe cl 5(3A) as requiring the lessee to give the specified information to the lessor if the lessor requests that it be given. Here, the plaintiff did not do so, even after the defendant provided the information it did on 31 July 2020 in answer to the plaintiff’s request made on 13 June 2020. The information so provided was in any event evidence that the defendant was an impacted lessee insofar as it showed that the defendant was claiming wage subsidies under the Jobkeeper scheme, and had suffered a more than 30% reduction in revenue since 1 April 2020. In my view that is some evidence that the defendant qualified for the Jobkeeper scheme and is hence some evidence that the defendant was an impacted lessee. The plaintiff could have asked the defendant for more evidence that it was an impacted lessee, but it did not do so. I note that the plaintiff did not thereafter suggest (until the Notice of Termination was served) that the defendant had failed to provide evidence that it was an impacted lessee.

72. In these circumstances, I am not satisfied that the defendant failed to comply with cl 5(3A). I therefore do not think that cl 5(3B) of the substituted Schedule, or cl 5(7) of the new schedule, operated so that the plaintiff is taken to have complied with cl 5, which required it to negotiate in good faith the rent payable under the lease. In fact, following the provision of the information by the defendant on 31 July 2020, the plaintiff did not engage in any negotiations with the defendant concerning the rent. The fact that the defendant was not paying the full amount of rent under the lease at that time did not relieve the plaintiff of its obligation to negotiate in good faith the rent payable under the lease. In my opinion, the plaintiff cannot be said to have complied with cl 5 (under either the substituted Schedule or the new schedule) before it proceeded to serve the breach notice on 25 August 2020 and the Notice of Termination on 26 October 2020.

73. The plaintiff was thus not entitled to take or continue prescribed action against the defendant on grounds of a breach of the lease “consisting of a failure to pay rent during the prescribed period”. There is no doubt that taking action under the lease to terminate the lease is prescribed action as defined. It is also clear that the grounds relied upon for the termination included breaches of the lease consisting of failures to pay rent during the prescribed period. In claiming in the Notice of Termination that the amount outstanding under the lease was $117,702.94 the plaintiff was plainly relying upon failures to pay rent that fell due in the months of April-August 2020 and October 2020.

74. The plaintiff did not contend otherwise. It submitted, however, that despite cl 5 it was able to terminate the lease relying upon breaches of the lease that had occurred prior to the commencement of the prescribed period and remained outstanding. In that regard, the plaintiff pointed in particular to amounts of management fees the defendant failed to pay prior to 24 April 2020.

75. I am satisfied, based on the ledgers in evidence, that amounts of management fees (as claimed by the plaintiff in the period from July 2019 to April 2020) were in arrears as at 24 April 2020. Those amounts appear to make up the majority of the total arrears of $17,530.44 that stood in the account at the end of March 2020. It might have been open to the plaintiff in October 2020 to seek to terminate the lease on the grounds of breaches of the lease that had occurred before 24 April 2020 and remained un-remedied. Clause 8 makes it clear that nothing in Schedule 5 prevents a lessor from taking prescribed action on grounds not related to the economic impacts of the COVID-19 pandemic.

76. However, the plaintiff did not pursue such a course. Its purported termination was expressly based, in at least substantial part, upon breaches consisting of failures to pay rent during the prescribed period. In circumstances where the plaintiff had not complied with cl 5, that action was prohibited by Schedule 5 to the Conveyancing Regulation. That the plaintiff may have been able to effect a termination of the lease in another way does not detract from the fact that the termination was effected contrary to a legislative prohibition. In my opinion, the purported termination was thereby invalid and of no effect.

69. It is not necessary to consider whether the purported termination was invalid for other reasons, including that it was contrary to cl 6 of Schedule 5. I should add that in reaching my conclusions concerning the purported termination of the lease I have had regard to the leasing principles set out in the National Code of Conduct.

Relief against forfeiture

78. My conclusion concerning the purported termination of the lease means that it is also unnecessary to consider whether the defendant should be given relief against a forfeiture of the lease. However, in case my conclusion is incorrect, I will briefly state why I would have been prepared to grant such relief to the defendant had the lease been validly terminated.

79. As at the date of the termination, the plaintiff claimed that the defendant owed arrears under the lease totalling $117,702.94. That figure was disputed by the defendant, largely on the basis that it did not take into account the outcome of a renegotiation of rent payable under the lease as contemplated by the COVID-19 pandemic special provisions. However, at the commencement of the hearing in June 2021, the defendant paid the amount of $117,702.94 into Court. Further, as already mentioned, the parties recently entered into an agreement following a mediation. That agreement involved the waiver of about $39,000 of the rent otherwise payable in the period from April 2020 to September 2021, and a deferral of a further amount of about $39,000 which is to be paid over a period of 24 months. The agreement is to the effect that as at 5 October 2021 an amount of $124,109.44 was due and payable, with a further $39,330.19 payable over the following 24 months in addition to amounts that would otherwise become payable under the lease.

80. The money paid into Court means that almost all of the amount that is agreed was outstanding as at 5 October 2021 can be readily met by an order for payment out. Further, I do not think that there is any reason to doubt that the defendant would be able to promptly pay the small remaining balance of the amount if ordered to do so. It follows that the prejudice sustained by the plaintiff as a result of the monetary breaches of the lease could be readily cured.

81. Against that, the plaintiff referred to a history of rental arrears, including in the period prior to the pandemic, and the defendant’s seemingly deliberate refusal to pay management expenses (a component of operating expenses) which it disputed. The plaintiff also referred to what was said to be the defendant’s unilateral decision to pay only part of the rent due between April 2020 and August 2020.

82. Aside from the last mentioned matter, which can I think be understood as a not unreasonable response to the difficult and uncertain economic conditions then being experienced, these matters do raise a concern about the defendant’s willingness to abide by the terms of the lease. However, whilst this concern is a significant factor to be weighed on a question of relief against forfeiture, I think that on balance it would have been appropriate to give the defendant an opportunity to continue to enjoy the benefits of the lease on condition that the full amount of the agreed arrears was paid promptly. The lease term still has more than three years left to run, and there are two more options to renew for further terms of five years each. The opportunity would have been given to the defendant in the expectation that it would understand that such relief may not be forthcoming a second time if the lease was terminated due to a failure on the part of the defendant to make payments as required by the terms of the lease.

Recovery of arrears under the lease

83. The plaintiff seeks to recover the amount of arrears owed to it under the lease. The agreement reached by the parties is to the effect that as at 5 October 2021 an amount of $124,109.44 was due and payable, with a further $39,330.19 payable over the following 24 months in addition to amounts that would otherwise become payable under the lease. As pointed out by the defendant, the amount of arrears at the present time is in a sense uncertain as it is conceivable that rent for the months October 2021 to December 2021 could be the subject of a renegotiation in accordance with the Retail and Other Commercial Leases (COVID-19) Amendment Regulation 2021 (NSW). In these circumstances, I think that the most appropriate course would be to enter judgment for the plaintiff against the defendant in the sum of $124,109.44. That judgment will be taken to have effect as from 5 October 2021, and subject to a notation that the plaintiff is not precluded from later taking proceedings if necessary to recover amounts that become payable under the lease after 5 October 2021. In light of that judgment, it would be appropriate to order that the money paid into Court by the defendant be paid out forthwith to the plaintiff.

Conclusion

84. The defendant has succeeded in establishing that it validly exercised the option to renew under the lease and is thus entitled to a new lease, in accordance with cl 3.3, for a term commencing on 18 January 2020 and terminating on 17 January 2025. A declaration to that effect should be made.

85. The plaintiff has failed to establish that it validly terminated the lease by the Notice of Termination it served on 26 October 2020. A declaration should also be made that the purported termination was invalid and of no effect.

86. The plaintiff has established that there is an amount of arrears under the lease of $124,109.44 as at 5 October 2021. A judgment in that sum will be given, to take effect from that date. The judgment will be subject to a notation to the effect that it does not preclude the plaintiff from later taking proceedings to recover amounts that become due under the lease after 5 October 2021.

87. Finally, it is appropriate for an order to be made that the money paid into Court by the defendant, in the sum of $117,702.94, be paid out forthwith to the plaintiff. The Summons and the Cross-Summons will otherwise be dismissed.

88. In view of the overall outcome of the proceedings, there is something to be said for the view that there be no order as to costs, to the intent that each party bear its own costs of the proceedings. However, if the parties do not agree that this is the appropriate outcome in respect of costs, directions will be made for the question of costs to be the subject of further submissions with a view to the question being determined on the papers.

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Decision last updated: 20 December 2021