Commercial leases usually contain provisions granting a lessee an option to renew a term of the lease upon the fulfillment of certain conditions. Lessors can refuse to grant those options in certain circumstances.
Will a Court exercise its discretion to grant equitable relief against forfeiture arises in circumstances where, after giving written notice of exercise of an option to renew a lease, a lessee has not complied with conditions for the exercise of the option, and the lease has then expired?
In Replay Australia Pty Ltd v NightOwl Properties Pty Ltd  QCA 76, this question arose.
At trial, NightOwl sought both a declaration that it had validly exercised the first option for renewal and an order for specific performance of the Lease. Further or in the alternative, it sought relief against forfeiture under s 124(2) of the Property Law Act 1974 (Qld) (PLA) or as an equitable remedy. Replay’s position was that the Lease had expired in circumstances where it was not obliged to grant a further lease because NightOwl was in breach of the conditions in cl 7.2(A)(c) and (d). NightOwl asserted that Replay had waived the breaches with respect to those conditions
The relevant terms of the Lease were:
7.2(A) Conditions of Exercise of First Option
If the Lessee desires a further lease of the Demised Premises for the First Option Term, clause 7.2(B) and 7.2(C) shall apply if:
(a) the Lessee gives written notice of exercise of option to the Lessor during the Option Exercise Period;
(b) this Lease has not been terminated or surrendered;
(c) there is not at the time of giving the notice under clause 7.2(A)(a) or thereafter prior to the Expiry Date any unremedied beach of the provisions of the Lease on the Lessee’s part which has not been waived by the Lessor; and
(d) the Lessee has at all times during the term strictly observed and performed the provisions of the Lease on the Lessee’s part.
The sole question on appeal by the Lessor was whether the trial judge erred in deciding that equitable relief against forfeiture was available to the lessee NightOwl. In essence, the Lessor, Replay’s submission is that, because the option to renew was not validly exercised, cl 7.2 did not confer on NightOwl, prior to (or after) the expiry of the Lease, any right to call on Replay for the grant of a further lease. Replay submitted that, in the absence of any such right or interest, relief against forfeiture cannot be available following the expiry of the Lease.
The Appeal Court found that the granting of equitable relief from forfeiture of the option was not available to the lessee Nightowl.
There was no obligation under cl 7.2(B) for Replay to grant a further lease.
In reviewing the caselaw, on the circumstances in which an option for renewal will have been validly exercised by a lessee the court considered Grepo & Anor v Jam-Cal Bundaberg Pty Ltd (Grepo) and Tripple A Pty Limited v WIN Television Qld Pty Ltd (Tripple A).
The Court in applying those decisions found:
- On a proper construction of cl 7.2 and having regard to this Court’s decision in Grepo and Tripple A, an obligation under cl 7.2(B) for Replay to grant a further lease could only arise if each of the conditions set out in cl 7.2(A) were satisfied by NightOwl. It is not disputed that, at the expiry of the Lease, NightOwl was in arrears of rent. Nor is it disputed that Replay’s conduct did not amount to waiver. In these circumstances, no obligation arose under cl 7.2(B) for Replay to grant a further lease because NightOwl had failed to validly exercise the option in the manner prescribed by cl 7.2(A).
- The trial judge sought to distinguish Grepo on the basis that it related to a claim for statutory, as opposed to equitable, relief against forfeiture. However, once statutory relief is found to be unavailable, the legal position of the lessee in Grepo is no different to the position of NightOwl in the present case. In other words, once it is accepted that the option was not validly exercised by NightOwl and the Lease has, as a result, expired without creating any other rights, there is no action of Replay against which to relieve.
Later, the Court said:
- Properly understood, NightOwl’s interest in the leased premises under the option to renew depends for its existence on the availability of specific performance.
- The difficulty for NightOwl in the present case arises from the fact that the Lease expired in circumstances where the option was not validly exercised. At the expiry of the Lease, NightOwl remained in arrears of rent. This was not paid until 10 December 2020. It was therefore not by any act of Replay that the Lease came to an end but simply from the effluxion of the time. This was merely a consequence of the parties’ bargain.
The decision is a timely and practical reminder to Lessees that in exercising an option under a lease, it is a matter of contractual terms to be met and fulfilled before a lessor can be forced to grant the option. If there is an unremedied default, then the prospects of obtaining equitable relief from forfeiture will be poor.
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