Relief Against Forfeiture of Lease

Relief Against Forfeiture of Lease

By Paul Anderson | November 2008 Area of Expertise | Business & Property

Summary A recent Supreme Court Decision of Byron Bay Retirement Villages Pty Limited v Zandata Pty Limited looks at the alternatives available to a tenant when a landlord purports to terminate his commercial lease.

Who Does This Impact?

Commercial landlords and tenants.

What Action Should Be Taken?

Landlords should be aware before purporting to terminate a lease that the Court may intervene on behalf of a tenant to relieve against forfeiture.

On 23 October 2008 the Supreme Court handed down its decision in the case of Byron Bay Retirement Villages Pty Limited (‘BBRV’) v Zandata Pty Limited.

Although the case does not establish any new legal principles, it is very instructive on how the law operates in this area.

Facts BBRV carried on the business of a caravan park on land in Byron Bay. The land had been leased since 1998 from the owner, Zandata, pursuant to a lease for five years which contained nine options to renew. If all of the options were exercised, BBRV’s tenancy would be extended until 2048.

Zandata was also the previous owner of the business and sold it to BBRV on 30 June 1998 for $675,000. Included in the sale were all plant, fittings and chattels listed in the Agreement including sixty two caravans, cabins and mobile homes (‘the dwellings’).

The lease contained a covenant that BBRV could not make alterations and additions to the caravan park without the prior written consent of Zandata, such consent not to be unreasonably withheld.

Since 1998, BBRV had gradually removed all of the old and dilapidated dwellings and replaced them with new dwellings.

It was common ground that: •

BBRV had not obtained Zandata’s written consent before removing and replacing the dwellings.

•

BBRV carried out the replacement to comply with another requirement in the lease that it keep the dwellings in good repair and that it maintain a three star rating for the caravan park.

•

The replacements improved the quality of the dwellings (and maintained a three star rating) and also improved the holiday rentals which could be charged to tourists.

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Relief Against Forfeiture of Lease by Paul Anderson

•

Zandata benefited because under the lease Zandata received as part of its rent a share of the holiday rentals pursuant to a stated formula.

•

BBRV had always paid the rent to Zandata on time.

On 8 May 2008 Zandata served on BBRV a notice under Section 129 of the Conveyancing Act 1919 which purported to terminate the lease as from 30 June 2008 on the grounds that Zandata was in breach of the covenant not to make alterations or additions to the caravan park without Zandata’s consent.

Section 129 Section 129 of the Conveyancing Act 1919 provides in summary that a right of re-entry or forfeiture in a lease for breach of a covenant is not enforceable unless the lessor first serves on the lessee a notice: •

specifying the breach complained of;

•

if the breach is capable of remedy, requiring the lessee to remedy the breach; and

•

in cases where the lessor claims compensation in money for the breach, requiring the lessee to pay same;

and the lessee fails within a reasonable time to remedy the breach, if it is capable of remedy, and to pay reasonable compensation, if compensation is claimed.

Section 129 (2) gives the Court a broad discretion to grant relief against forfeiture if appropriate in all the circumstances. In particular, the Court may grant relief on terms as to ‘costs, expenses, damages, compensation, penalty or otherwise’.

In this case, the breach could not be remedied and the notice served pursuant to Section 129 did not claim compensation.

Terms of the Lease Clause 12.6 was the clause that prohibited any additions or alterations to the ‘caravan park’ without consent. ‘Caravan park’ was defined as the premises described in the schedule including the Land and the Building.

‘Land’ was defined as ‘the property leased herein and includes any part of the lot’.

‘Building’ was defined as ‘the fixed improvements, other structures and improvements from time to time erected or existing on the Land and includes the Landlord’s Property and any modifications, extensions or alterations from time to time of the Building or the Landlord’s Property’.

There were also definitions of ‘Tenant’s Property’ and ‘Landlord’s Property’. The definition of ‘Landlord’s Property’ expressly excluded Tenant’s Property.

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Construction of Clause 12.6 The first point taken by BBRV was that clause 12.6 did not require it to seek Zandata’s consent because BBRV was the undisputed owner of the dwellings. It would produce an absurdity if a lessee had to seek the lessor’s consent to any alteration to its own chattels.

Zandata’s response was that while the dwellings were ‘Tenant’s Property’ they were still structures or improvements erected or existing on the Land within the first limb of the definition of ‘Building’.

Zandata had a financial interest in the profitability of the caravan park. Alterations and additions to the dwellings carried out by BBRV had the potential to decrease the profitability of the caravan park to Zandata’s detriment. There was some purpose in Zandata having a right to refuse consent to alterations to the dwellings.

Palmer, J. reached the following conclusion on the point – ‘while the construction of clause 12.6 is highly arguable and is one upon which minds may differ, I accept (Zandata’s) submission as to its construction: the dwellings are unquestionably an “improvement” or “structure” erected or existing upon the Land’

i.e. BBRV is required by clause 12.6 to obtain Zandata’s written consent and in failing to do so committed a breach of the lease.

Election BBRV’s next point was that Zandata had irrevocably elected to affirm the lease by accepting rent after becoming aware of the facts constituting the breaches.

There was clear evidence that the managing agent and Mr D’Agostino, the controlling director of Zandata, had inspected the caravan park on several occasions starting in 1999 and increasing after 2002.

On these occasions, it was clear that alterations had been made.

Correspondence also indicated that Zandata was aware of the replacements. A director of BBRV gave evidence of subsequent meetings with Mr D’Agostino during which Mr D’Agostino was made aware of various plans and proposals for re-arrangement of dwellings on the site.

Finally, in late February and early March 2008 Mr D’Agostino again inspected the caravan park and would unquestionably have been aware that nearly all of the sixty two dwellings had been replaced. However, Zandata continued to accept rent up to 8 June 2008, even after the Section 129 notice had been served.

The legal principle involved is well established. Continuing to accept rent under a lease after knowledge of a fact constituting a breach which would entitle termination, constitutes an irrevocable election to affirm the lease. His Honour had little difficulty in finding that Zandata had elected to affirm the lease and that the lease was not validly terminated by the Section 129 notice.

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Relief Against Forfeiture Notwithstanding the above finding which in itself disposed of the case, His Honour proceeded to consider the application of the principles involving relief against forfeiture.

His Honour summarised these principles as follows – ‘The Court has regard to the nature and circumstances of the breach of lease committed, together with such damages the lessor may suffer as a consequence of such breach and also has regard to what the lessee stands to lose if the lease is forfeited. Where the forfeiture is excessively punitive as far as the lessee’s breach is concerned, i.e. where the damage suffered by the lessor in consequence of the breach is far less in consequence than that which would be occasioned to the lessee if the lease were forfeited, or where the lessor would, if forfeiture were allowed, obtain a windfall or an unmerited benefit, then the Court usually grants relief against forfeiture.’

BBRV had expended approximately $2.46 million in improving the dwellings to a higher standard since 1999, thereby increasing the revenue of the business to the overall considerable benefit of Zandata. It was difficult to see how Zandata could have refused consent if BBRV had applied for it.

His Honour concluded that Zandata’s real grievance was that BBRV stood to make a great deal of money from the site and, although Zandata stood to share in the gain, Mr D’Agostino did not regard that share as sufficient.

There was evidence that Zandata had received an offer to purchase the site for at least $26 million. As a result, Zandata was prepared to take any step possible to bring the lease to an end so that it could either develop the site itself or sell it to a third party at a considerable profit. This was precisely the sort of unmerited windfall to which the Courts have regard in forfeiture cases.

His Honour concluded that no damage had been demonstrated as flowing to Zandata by the continuation of the lease.

‘Considerable loss and damage would be occasioned to BBRV if the lease were forfeited – a loss quite disproportionate to the lack of gravity of the breaches of clause 12.6 which it has committed. Further, Zandata seeks to obtain an unmerited windfall by termination founded on those breaches.’

His Honour concluded that he would have had no hesitation in granting relief against forfeiture had he not come to the conclusion that Zandata had elected to affirm the lease.

Conclusion The clear lesson from this case for a landlord is that if a tenant commits a breach of a lease, the landlord must: •

promptly elect to terminate and not affirm the lease by accepting rent after becoming aware of the breach; and

•

not be motivated by an ulterior motive because the Court will not hesitate to exercise its power to relieve against forfeiture, where appropriate.

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For more information, please contact:

Paul Anderson Partner T: 02 8257 5742 paul.anderson@turkslegal.com.au

Sydney | Level 29, Angel Place, 123 Pitt Street, Sydney, NSW 2000 | T: 02 8257 5700 | F: 02 9239 0922 Melbourne | Level 10 (North Tower) 459 Collins Street , Melbourne, VIC 3000 | T: 03 8600 5000 | F: 03 8600 5099 Insurance & Financial Services | Commercial Disputes | Workers Compensation | Business & Property

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