The Highlands on a Plate Pty Ltd v Roloz Pty Ltd

This case concerns the exercise of an option to renew a retail shop lease. The premises are located at Shop 6, 210-224 Bong Bong Street, Bowral. The lease, entered into between the plaintiff as lessee and the defendant as lessor, provided for a 5 year term ending on 13 December 2020, with an option to renew for a further period of 5 years (see cl 4.2). The plaintiff operates a café and licensed restaurant at the premises known as “The Mill Café”. The premises are located within a larger commercial, food and retail centre known as “The Mill Bowral”.

Clause 4.4 of the lease governs the manner of exercise of the option. It relevantly provides:

On 31 August 2020 the plaintiff served a Notice of Exercise of Option upon the defendant. The notice (which was dated 25 August 2020) was in the following terms:

On 10 September 2020 the defendant served a notice pursuant to s 133E of the Conveyancing Act 1919 (NSW) (“the Act”) upon the plaintiff. The notice was in the following terms:

Sections 133E and 133F of the Act provide:

On 9 October 2020 the plaintiff commenced these proceedings by Summons. A declaration is sought that it validly exercised the option to renew, and an order for specific performance is sought to compel the grant of the renewed lease. The plaintiff also seeks an order that the notice served by the defendant on 10 September 2020 is invalid and of no effect. The plaintiff further seeks relief in the alternative pursuant to s 133F of the Act so as to overcome the effect that any breaches may have upon its entitlement to exercise the option to renew.

It is common ground that s 133E of the Act applies to the option to renew contained in the lease. Clause 4.4 is plainly a condition that falls within s 133E(1)(b). It follows that s 133E(2) operates so that, despite cl 4.4, no breach by the plaintiff of an obligation specified in cl 4.4 precludes its entitlement to the option unless:

The breaches of the lease that are the subject of the notice the defendant served on 10 September 2020 concern the plaintiff’s obligations to pay rent (pursuant to cl 5) and to pay electricity charges (pursuant to Item 28). The defendant thus relies upon cl 4.4.2, which is concerned with rent or outgoings that are overdue for payment at the time the notice of exercise of option is served (i.e. 31 August 2020).

Clause 5 of the lease relevantly provides:

Item 28 provides:

Mr Garry Lomas, a director of the plaintiff, gave evidence that in the negotiations for the lease it was agreed with Mr Matthew Holt, the sole director of the defendant, that a separate meter would be installed for the electricity to be supplied to the leased premises. The installation of a separately metered electrical sub-board was included as part of the Lessor’s Works (see Item 40(b) of the lease). Mr Holt gave evidence that a sub-meter that recorded the electricity usage of The Mill Café was installed around the end of 2015 or early 2016. The plaintiff did not in fact commence trading until about July 2016, following the completion of its fit-out, which cost the plaintiff approximately $350,000.

As the electricity supplied to the premises was separately metered it falls within the first sentence of Item 28. Accordingly, it is not in the nature of a shared outgoing that might be included as an outgoing for the purposes of cl 5. However, it seems to me that it is nonetheless in the nature of an outgoing such that if there was an amount overdue for payment pursuant to Item 28 as at 31 August 2020, it too would fall within cl 4.4.

I turn then to consider the evidence as to whether, as at 31 August 2020, there were amounts of rent or outgoing overdue for payment for the purposes of cl 4.4.

There was no agreed position as to the state of the rent account, each party taking its own approach to the question.

The plaintiff relied upon a table prepared by its solicitor, Ms Jacquet, by reference to documents in evidence which show the amounts of rent payable under the lease from time to time and the payments of rent made by the plaintiff. The table includes an adjustment of $10,175 made in December 2017 in respect of overpayments of rent prior to that time. In respect of the period from 1 April 2020 to 30 June 2020, the table proceeds on the basis that rent of only $9,247.10 was payable, being approximately 27.4% of the rent calculated in accordance with the lease. The reduced amount is said to accord with the arrangements put in place between the parties following the outbreak of the COVID-19 pandemic. The table includes a running balance on the rent account. According to the table, the plaintiff was in arrears as at 31 August 2020 in the amount of $17,603.37. As noted earlier, the defendant claimed in its s 133E notice that the amount was $43,264.76.

The defendant’s approach to this issue apparently relied upon the invoices that were issued by its agent, CIPS Real Estate Agents of Bowral (“CIPS”), and the trust account statements maintained by CIPS. It appears that the agents continued to issue invoices from April 2020 that were based on the terms of the lease even though the arrangements between the parties allowed for lower amounts of rent to be paid.

In that regard, reference should be made to the email sent by CIPS to the plaintiff on 8 April 2020. The email was in the following terms:

The table prepared by Ms Jacquet evidently seeks to incorporate the arrangements as set out in the above email. The rent of $9,247.10 for the period from 1 April 2020 to 30 June 2020, being approximately 27.4% of the normal rent, is based upon Mr Lomas’ evidence that in that period the plaintiff experienced a 72.59% reduction in revenue. Based on the 8 April 2020 email, the amount of $9,247.10 would thus represent the minimum amount that should be paid in that period.

I have examined the evidence concerning the rent account, including the evidence referred to above and also some of the communications between the parties that touch upon the state of the account, in an attempt to reconcile the positions of the parties. I have been able to ascertain that at various points when it seems to have been accepted by the defendant that the rent was up-to-date, the running balance in Ms Jacquet’s table showed the account to be in credit for $1,162.87. This is the case, for example, on or about 26 February 2018 and 22 March 2019. Aside from that relatively small amount, the difference between the parties seems to be explained by their different approaches to the 1 April 2020 to 30 June 2020 period.

In that respect, the plaintiff’s position is to be preferred. It accords with the tenor of the 8 April 2020 email sent by CIPS. As submitted by the plaintiff, the terms of the email amount to a waiver for the time being of the requirement to pay rent as and when required by the lease. It was envisaged that in “several months” time the questions of rental waivers and payment of arrears would be dealt with in accordance with the National Cabinet Mandatory Code of Conduct (“the Code of Conduct”).

On that basis, and ignoring the $1,162.87 credit referred to above, the plaintiff would have been in arrears on the rent account as at 31 August 2020 in the amount of $18,766.24. I note that the defendant did not suggest that Ms Jacquet’s table was in any respect arithmetically incorrect. Accordingly, I have concluded that, as at 31 August 2020, the amount of rent overdue for payment for the purposes of cl 4.4 of the lease did not exceed $18,766.24.

The defendant claimed in its s 133E notice that the plaintiff was in arrears as at 31 August 2020 for outgoings for electricity charges in the sum of $38,948.82. However, the attached invoice that is referred to in the notice indicated that the amount was $38,436.34. The precise basis of this calculation was not explained by the defendant, but it seems to be accepted that the claimed amount is intended to be the amount for what has been at times referred to as the “historical electricity”.

The “historical electricity” is the electricity supplied to the leased premises in the period between 24 June 2017 and 26 April 2019, a period of about 22 months. An amount in respect of that electricity was first claimed from the plaintiff on 17 June 2019, by email from Mr Holt to Mr Lomas and his wife Ms Gale Lomas (also a director of the plaintiff). Attached to the email was a “reconciliation” prepared by Mr Holt which showed that the cost of the meterd power in the period (at $0.28 per kWh) was a total of $39,025.97. Against that total, an allowance of $3,000 was made in respect of what Mr Holt assumed was the total of amounts already paid by the plaintiff. In cross-examination, Mr Holt seemed to accept that the allowance should have been $5,283.50, to take into account payments made by the plaintiff in the sums of $4,283.50 and $1,000. If that is correct, and otherwise assuming the accuracy of the meter readings and the price, the amount for “historical electricity” would be $33,742.47. Mr Holt suggested that the amount outstanding be paid by the plaintiff making 12 monthly payments of about $3,000 each.

It should be noted that the defendant did not issue invoices to the plaintiff in respect of electricity on a regular basis in respect of the period 24 June 2017 to 26 April 2019. There is evidence that the defendant made two ad hoc requests for payments on 30 November 2017 (for $4,283.50) and 2 January 2019 (for $3,000), and in response the plaintiff made the two payments referred to earlier.

On 23 July 2019 Mr and Mrs Lomas sent an email to Mr Holt about the historical electricity which included the following:

Mr Holt agreed to provide hard copies of the meter readings and “screenshots of when they were taken”. However, the parties soon fell into dispute concerning the historical electricity. The plaintiff questioned whether the defendant’s handling of the matter complied with the regulatory requirements for the sale of electricity. In that regard, the defendant maintained that it had the benefit of a relevant exemption. It appears that the defendant was indeed within deemed exemption class D1 for the purposes of the National Energy Retail Law 2012 (NSW), the National Energy Retail Rules (NSW), and the Australian Energy Regulator Guideline. Class D1 includes persons selling metered electricity to fewer than ten small commercial/retail customers within a site that they own, occupy or operate. On that basis, the defendant was permitted to sell electricity to the plaintiff (for example, pursuant to Item 28 of the lease), but it was also bound to comply with the applicable legislative and regulatory regime including the conditions that operate in respect of such sales.

One such condition (condition 3) requires an “exempt person” (such as the defendant) to ensure that bills are issued to each “exempt customer” (such as the plaintiff) at least once every three months. Another condition (condition 8) operates where an “exempt customer” is undercharged by an “exempt person”. Where the undercharging is not the fault of the exempt customer, the exempt person is limited to recovering the amount undercharged in the 9 months before the date on which the exempt customer is notified of the undercharging. Condition 8 further provides that no interest can be charged on the undercharged amount.

The dispute concerning the historical electricity remained unresolved, although on 2 September 2019 the plaintiff made a payment of $1,671.15. CIPS had earlier requested the plaintiff to pay a total of $40,107.49 by 24 monthly instalments of $1,671.15. No further payments were made by the plaintiff in respect of the historical electricity.

On 17 February 2020, CIPS sent an email to Mr Holt in which it was stated that $38,436.34 remained outstanding for historical electricity. This is the amount referred to in the invoice that accompanied the s 133E notice in September 2020. Solicitors for the defendant made a demand upon the plaintiff for payment of that amount on 6 March 2020. (I note in passing that this amount seems to be derived from the $40,107.49 earlier requested by CIPS, less the $1,671.15 paid on 2 September 2019).

On 26 March 2020 solicitors for the plaintiff sent a letter in response. It was stated in the letter, in relation to historical electricity:

The plaintiff’s solicitors made another request for further information in relation to the historical electricity on 3 June 2020. I note that the plaintiff re-opened its café for business on that day. It had been closed since 26 March 2020 due to the COVID-19 pandemic and the associated regulatory restrictions. Another request for further information was made by the plaintiff’s solicitors on 5 June 2020.

On 29 June 2020 the defendant’s solicitors sent a letter to the plaintiff’s solicitors. It was stated in the letter, in relation to the historical electricity, that the details could be found in the attachment to the email that had been sent to the plaintiff on 17 June 2019. That attachment was forwarded again.

The historical electricity was the main subject of a “without prejudice” letter sent by the plaintiff’s solicitors to the defendant’s solicitors on 7 July 2020. The defendant’s solicitors sent a “without prejudice” letter in response on 12 August 2020. On the topic of historical electricity it was stated:

The electricity supplied to the leased premises is separately metered, such that it is possible to measure the amount of electricity so supplied. Nevertheless, it appears that throughout the term of the lease the defendant rather than the plaintiff has been the party that has contracted with the relevant energy supplier (initially Origin Energy, and from about July 2017 Alinta Energy). This situation was accepted by the plaintiff, or at least acquiesced in, even though Mr Lomas had earlier stated a preference for the plaintiff having its own energy provider. In these circumstances, Item 28 of the lease, read with cl 11.2 which requires the defendant to pay all outgoings for the land or the building of which the leased property is part when they fall due, should be understood as entitling the defendant to require the plaintiff to reimburse it for charges incurred for electricity supplied to the leased premises.

However, as an arrangement of that character falls within the regulatory regime referred to earlier, it is in my view implicit that any reimbursement under Item 28 conform with the requirements of that regime. The parties should not be taken to have agreed upon a reimbursement regime that is contrary to law. (I note that cl 14.3 of the lease provides that the lease is subject to any legislation that cannot be excluded).

The evidence is clear that the defendant failed to comply with the requirements of the regulatory regime in relation to its claim for historical electricity. It failed to issue bills to the plaintiff at least once every three months in respect of the relevant period. Aside from the requests for payment made on 30 November 2017 and 2 January 2019, the defendant made only the request for payment on 17 June 2019 in respect of the 22 month period from 24 June 2017 to 26 April 2019. Moreover, it is clear that throughout much of that period the defendant was in breach of cl 11.2 of the lease by failing to pay the electricity supplier. Invoices issued by Alinta Energy show that the relevant account was approximately $60,000 in arrears in March and April 2019, and almost $40,000 in arrears in June 2019. Finally, to the extent that the defendant’s management of the electricity can be said to have resulted in an undercharging of the plaintiff, the defendant would only be permitted to recover the amount undercharged in the 9 month period before the plaintiff was notified of the undercharging. The defendant has never made a demand that was so limited.

In my opinion, the failure of the defendant to comply with the implicit requirements of Item 28 has the consequence that the defendant was not entitled on 17 June 2019 to demand payment of $36,025.97 in respect of historical electricity. Item 28 of the lease does not in my view oblige the plaintiff to reimburse the defendant for the cost of electricity where the defendant is in breach of its obligations under the regulatory regime in respect of that electricity. That is so even if, as here, the defendant expressed a willingness to allow the claimed amount to be paid off over a period of 12 months or more.

It follows from the above that as at 31 August 2020 the plaintiff was not obliged to pay the defendant the claimed amount for historical electricity. I have therefore concluded that, as at 31 August 2020, no amount of outgoing was overdue for payment for the purposes of cl 4.4 of the lease.

In summary, I am satisfied that the only amount of rent or outgoing that was overdue for payment as at 31 August 2020 was an amount of rent no greater than $18,770.24.

Apart from statute, cl 4.4 would in those circumstances operate to preclude the plaintiff from exercising the option to renew. However, as already stated, s 133E(2) of the Act operates so that despite the breach of the obligation to pay rent, the plaintiff’s entitlement to the option is not precluded by the breach unless:

The next question to consider is whether the prescribed notice has been served on the plaintiff in respect of the breach for the purposes of s 133E(2)(b).

Prescribed notice is defined in s 133E(3) to mean a notice in writing –

The notice referred to continuing breaches of, inter alia, cl 5 of the lease, and went on to state that as at the date the Notice of Exercise of Option was served, the plaintiff was in rental arrears in the amount of $43,264.76 “with rent paid to 13 May 2020 (see attached tax invoice marked A)”.

In Allsvelte Pty Ltd v Cassegrain Wines Pty Ltd [2015] NSWSC 1370, Ball J stated at [58]-[59]:

In Dee-Tech Pty Ltd v Neddam Holdings Pty Ltd [2012] NSWSC 251 White J (as his Honour then was) had to deal with several s 133E notices. The first of such notices itself alleged that the lessee had breached the lease in numerous respects (see at [105]). One of the breaches alleged was that the lessee had not paid outgoings “particularised at $62,190.56”. At [140] his Honour said:

His Honour summarised his conclusions with respect to the s 133E notices at [176]. His Honour evidently considered that insofar as the first notice alleged a breach in relation to the payment of outgoings, the lessor was not entitled to give the notice. The fact that the lessee was in breach of the obligation to pay outgoings (in an amount less than that particularised in the notice) was taken into account as a breach other than a breach that was the subject of a s 133E notice (see at [217]-[221]).

I take from this that in order for a s 133E notice to have effect in respect of an actual breach of a lease it must accurately specify the breach. Whether a breach can be said to have been accurately specified depends upon the terms of the notice and the particular circumstances of the breach, including the nature of the relevant obligation. A breach of an obligation to pay a sum of money is capable of being precisely specified. Nonetheless, I do not think that a s 133E notice would be ineffective merely because of a minor misstatement of the monetary amount of such a breach. The notice would be effective provided the specification of the breach is sufficiently accurate to enable the conclusion that the actual breach has been specified.

The notice served in the present case specifies a breach of the obligation to pay rent consisting of failures to pay rent in the amount of $43,264.76. It was further stated in the notice that the rent was only paid up to 13 May 2020. I do not consider that the notice accurately specifies the actual breach of the obligation. The actual breach was a failure to pay rent in an amount no greater than $18,766.24. That is well under half of the amount specified in the notice. The difference between the two figures is more than 2 months rent under the lease. The notice does not merely misstate the extent of the breach in a minor way. It seems to me that it specifies a breach of an order that differs from the actual breach. The notice is thus of no effect in respect of that breach. Put another way, the notice fails to specify the lessee’s breach of the relevant obligation for the purposes of paragraph (a) of the definition of prescribed notice. It follows that the prescribed notice has not been served on the plaintiff in respect of its breach of the obligation to pay rent. In these circumstances s 133E(2) operates so that, despite that breach, the plaintiff’s entitlement to the option is not precluded.

It follows, in my opinion, that the plaintiff validly exercised the option to renew by its service of the required Notice of Exercise of Option on 31 August 2020. The defendant is obliged to grant a new lease to the plaintiff in accordance with the option for a 5 year term commencing on 14 December 2020.

The above conclusion renders it strictly unnecessary to consider the further argument raised by the plaintiff that the service of the s 133E notice was in any event prohibited by the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) (“the Regulation”). However, I will briefly express my opinion on that matter in case my conclusion concerning the s 133E notice is incorrect.

The Regulation came into force on 24 April 2020 and remained in force until its repeal on 25 October 2020. It was thus in force at all times relevant to the present case. The lease between the plaintiff and the defendant is a commercial lease for the purposes of the Regulation. There was no dispute that the plaintiff was an “impacted lessee” for the purposes of the Regulation. Clause 6(1) of the Regulation provides:

The plaintiff submitted that the conduct of the defendant in relying upon cl 4.4.2 of the lease and serving the s 133E notice amounted to prescribed action that was prohibited by cl 6(1) of the Regulation. The plaintiff primarily submitted that it was prescribed action because it was taking action under the provisions of the lease or seeking orders for “forfeiture” or “any other remedy otherwise available to a lessor against a lessee at common law or under the law of this State”.

In my view, the defendant’s conduct was prescribed action because it was taking action under the provisions of the lease, namely cl 4.4, to bring about a forfeiture of the plaintiff’s entitlement to the option to renew. That entitlement is a proprietary right which at common law is susceptible to forfeiture by the operation of provisions such as cl 4.4. The common law position has been modified by the introduction of Division 4 Part 8 of the Act (which includes ss 133E and 133F). Provisions such as cl 4.4 may still operate, but only where an effective s 133E notice is served and the lessee’s rights are extinguished in relation to the notice. If an effective s 133E notice is served, the lessee may seek relief pursuant to s 133F. The principles that are applied in relation to relief under s 133F are akin to those that apply in relation to forfeiture of leases (see Evanel Pty Ltd v Stellar Mining NL [1982] 1 NSWLR 380 at 388-390; Stellar Mining NL v Evanel Pty Ltd (1983) NSW ConvR ¶55-118 at 56,869), and relief under s 133F is commonly described as the grant of relief against forfeiture of the option (see, for example, Dee-Tech Pty Ltd v Neddam Holdings Pty Ltd (supra) at [206]). The service of a s 133E notice can be seen as an essential step in the enforcement of a provision such as cl 4.4. In my view it should be regarded as the taking of action under the lease for forfeiture, and thus prescribed action, within the meaning of the Regulation.

Further, as the only amount of rent overdue for payment on 31 August 2020 was an amount of rent no greater than $18,766.24, the prescribed action would be on the grounds of a breach of the lease during the prescribed period consisting of a failure to pay rent. The service of a s 133E notice in respect of that breach would thus fall within the prohibition contained in cl 6(1) of the Regulation.

It follows that even of the defendant had served an otherwise effective s 133E notice in respect of that breach, it would not be able to rely upon the notice because to do so would be contrary to cl 6(1) of the Regulation.

Finally, in case my conclusions in relation to the s 133E notice and cl 6(1) of the Regulation are incorrect, I will state briefly why I would in any event have granted relief to the plaintiff under s 133F of the Act.

The breach that could have formed the basis of an effective s 133E notice is the breach of the obligation to pay rent by having an amount, no greater than $18,766.24, overdue for payment as at 31 August 2020.

The claimed arrears of rent relate to a period after the onset of the COVID-19 pandemic. The s 133E notice (which claimed that a substantially greater amount was overdue) stated that the rent was paid to 13 May 2020. It is clear that the pandemic had a serious negative effect upon the plaintiff’s business. Indeed, the evidence shows that the plaintiff’s business had already been adversely affected by the major bushfires that occurred over the Summer of 2019-2020.

Ms Jacquet’s table indicates that in the period from 1 April 2020 to 31 August 2020 the plaintiff made payments of rent totalling $28,917.75. I do not accept that the arrears as at 31 August 2020 represent any wilful breaches on the part of the plaintiff. Rather, I accept that the plaintiff was making genuine efforts to pay rent. It should not be overlooked that the rights of the parties in relation to rent were in an unusual situation by reason of the introduction of the Code of Conduct and the Regulation. In that regard, the plaintiff put a proposal to the defendant on 30 June 2020, and the plaintiff’s solicitors sent a letter to the defendant’s solicitors on 7 July 2020. The defendant’s solicitors responded on 12 August 2020, stating that the defendant would be in a position to respond to the plaintiff’s proposal once it produced its Business Activity Statements. Following the provision of that information on about 18 September 2020, the parties held a round table conference on 30 September 2020. According to a letter sent by the plaintiff’s solicitors on 6 October 2020, agreement was reached in relation to rental arrears, and on that basis the plaintiff made a payment of $32,227.40 “addressing the rental arrears”. This does not appear to have been disputed by the defendant’s solicitors in their letter of 9 October 2020.

It therefore seems that the rent account was brought up to date on 6 October 2020, subject to resolution of the issues of rental waivers and deferrals in accordance with the Code of Conduct. The evidence shows that the rent has been paid in accordance with the lease since that time.

In considering relief under s 133F, the Court is not confined to breaches the subject of the relevant s 133E notice. In the present case, the defendant points to defaults in the payment of rent occurring in the period from about May 2018 to March 2019. According to Ms Jacquet’s table, the amount of arrears often exceeded $10,000 throughout that period, and on occasions exceeded $20,000. These breaches, which are substantial, seem to have been caused by the plaintiff’s cashflow problems. It was suggested that the plaintiff was simply choosing when it would pay rent and how much it paid, but I accept the evidence given by Mr Lomas to the effect that the defaults were due to an inability to pay, not a choice to not pay. I do not think that these defaults show that the plaintiff does not take seriously its obligations under the lease, or has a cavalier attitude to those obligations.

It is also relevant to consider any prejudice that would be suffered by the plaintiff if relief is refused, and any prejudice that would be suffered by the defendant if relief is granted. On that score, the prejudice that would be suffered by the plaintiff significantly outweighs any prejudice that would be suffered by the defendant. The plaintiff would no longer be able to operate The Mill Café from the premises (which is part of “The Mill Bowral”). The plaintiff made a substantial capital investment in the fit-out of the premises in circumstances where a five year lease with a five year option had been negotiated. The loss of the opportunity to trade at the premises throughout the balance of that second period would seem to me to amount to considerable prejudice. On the other hand, the breaches by the plaintiff in respect of rent have now been rectified, and the plaintiff’s recent track record in that regard has been good. (So, too, is its record in relation to the payment of the electricity accounts that have been issued monthly since about August 2019.) The defendant has some protection against the risk of future breaches, in the form of a bank guarantee equivalent to three months’ rent, as well as the provisions of the lease that allow for forfeiture if amounts of money are overdue (see cl 12.2.2).

Taking into account all of the circumstances, in particular the matters referred to above, had it been necessary to consider the question of relief under s 133F I would have considered it appropriate to grant relief to the plaintiff so as to enable the plaintiff to have the benefit of the renewed term the subject of the option to renew.

The plaintiff has succeeded in establishing that it validly exercised the option to renew. A declaration to that effect will be made. The defendant is thus obliged to grant a new lease to the plaintiff in accordance with the terms of the option to renew. An order in the nature of specific performance to compel the grant of such lease will also be made.

There does not seem to be any reason why costs should not follow the event. Accordingly, the Court will also order that the defendant pay the plaintiff’s costs of the proceedings.