Sneakerboy Retail Pty Ltd trading as Sneakerboy v Georges Properties Pty Ltd

1. [1]

   The plaintiff is Sneakerboy Retail Pty Ltd (Sneakerboy). Until 25 March 2020, Sneakerboy was the lessee of retail premises at Temperance Lane, at the rear of 56-58 York Street, Sydney (the Premises). Sneakerboy engaged in the business of selling luxury sneakers and streetwear from the Premises.

2. [2]

   Sneakerboy operated its business from five stores in three states of Australia as well as conducting an online business.

3. [3]

   The owners and lessors of the Premises were the defendants, Georges Properties Pty Ltd and Georges Investments Pty Ltd (collectively the Lessors).

4. [4]

   The lease, which was for a term of 10 years commencing on 1 August 2013 (the Lease), was originally granted by the Lessors to a different lessee, and on 19 March 2015, the Lessors executed a deed of consent to assignment of lease whereby the Lease was assigned to Sneakerboy (the Assignment).

Relief claimed

1. [5]

   Sneakerboy commenced these proceedings by summons filed in the Duty List on 20 July 2020. Sneakerboy’s claim for interlocutory relief was listed for hearing on 27 July 2020.

2. [6]

   The interlocutory prayers were in the following terms:

3. [7]

   The parties agreed at the hearing that the Court should decide the question of Sneakerboy’s right to an order granting relief against forfeiture of the Lease on a final basis.

4. [8]

   Sneakerboy originally sought the relief in prayer 6 because it was of the understanding that it was in default of rent payments in the amount set out in the prayer, and accepted that the Court would not make an order relieving it of forfeiture of the Lease, except on condition that it paid to the Lessors all outstanding rent. Sneakerboy no longer seeks an order in terms of prayer 6, because the Lessors have already received the amount by calling on a bank guarantee given to the Lessors by Sneakerboy.

Background

1. [9]

   It will be convenient to explain the circumstances that are relevant to the determination of the present dispute by setting out the relevant events historically.

The Lease terms

1. [10]

   As mentioned, the Lease commenced on 1 August 2013. At the time of its termination, the Lease had a further three years to run, as there was no option to renew.

2. [11]

   Clause 3.1 obliged Sneakerboy to pay the Rent to the Lessors until the end of the Term without deduction by equal monthly instalments in advance. The effect of the rent review provisions in the Lease was that, for the year commencing 1 August 2019, the rent was $328,982.95 per annum, or $27,415.24 per month. By clause 3.8, Sneakerboy was required to pay interest on any amounts not paid within 14 days after the due date for payment.

3. [12]

   Clause 12.1(a) gave the Lessors a right of re-entry if the Rent, or any other money payable under the Lease, was in arrears for more than 14 days after the due date for payment and authorised the Lessors to re-enter the Premises and determine the Lease, but without relieving Sneakerboy from liability for any breach or non-observance of any of its covenants.

4. [13]

   Under clause 15.2, Sneakerboy was required, at its own expense, to reinstate the Premises to their original condition prior to the expiration or earlier termination of the Lease. Sneakerboy was required to effect the reinstatement of the Premises in a reasonable time and was required to pay an occupation fee equivalent to the Rent until the reinstatement was completed.

Terms of the Assignment

1. [14]

   Clause 7.1 of the Assignment obliged Sneakerboy to give to the Lessors a bank guarantee to secure unconditional payment to the Lessors of the amount of $253,668.90, which was equal to 10 months’ rent plus GST. The amount of the bank guarantee or part thereof became payable to the Lessors on breach, non-observance or non-performance of any of the terms of the Lease.

2. [15]

   By clause 7.4 of the Assignment, Sneakerboy was required on demand by the Lessors to give to the Lessors a further bank guarantee in the amount called on in order to reinstate the bank guarantee if it or any part of it was called on by the Lessors.

3. [16]

   By a variation of lease, the Lease was varied with the effect that the original provisions in the Lease that governed the provision by the lessee of a bank guarantee were changed to make the amount of the bank guarantee $253,668.90.

Historical delinquency by Sneakerboy

1. [17]

   Sneakerboy did not challenge the evidence tendered by the Lessors at the hearing of historical delinquency by Sneakerboy in the payment of rent. There were 52 communications, between 15 March 2016 and 17 March 2020, between the Lessors and Sneakerboy concerning actions by the Lessors to require Sneakerboy to pay overdue rent and to make future rent payments in a timely way. It is difficult to summarise the effect of this correspondence, but it is fair to say that Sneakerboy was frequently, if not constantly, a month or two behind in its rent; it regularly made promises that it did not keep; it frequently asked for brief indulgences; the Lessors regularly demanded that Sneakerboy comply with the terms of the Lease – with perfectly understandable exasperation – and Sneakerboy was frequently warned that non-compliance with the Lease risked re-entry by the Lessors and termination of the Lease.

2. [18]

   The Lessors served formal notices to remedy breaches on five occasions between 3 May 2017 and 2 October 2019. The last notice was for the amount of $95,387.45 for the months July to September 2019.

3. [19]

   Sneakerboy did not provide any explanation for this conduct. I infer, as a matter of probability, from my reading of the communications – and particularly Sneakerboy’s promises and excuses – that Sneakerboy had constant cash flow difficulties, which it was required to manage on a day-to-day basis, and while it was able eventually to meet its rent obligations to the Lessors, it was not financially capable of doing so in accordance with the payment terms of the Lease.

Effects of the COVID-19 pandemic

1. [20]

   Commencing in February 2020, Sneakerboy experienced a sudden decline in revenue, which it attributed to the worldwide escalation of what is now called the COVID-19 pandemic.

2. [21]

   On 11 March 2020, the World Health Organisation declared the COVID-19 outbreak a pandemic.

3. [22]

   Sneakerboy sent an email to the Lessors on 12 March 2020, which included the following:

4. [23]

   The email then set out a table that required an amount of $33,420.89 for February to be paid in equal instalments of $11,140.30 on 12, 19 and 26 March 2020. An amount of $32,218.31 for March 2020 was to be paid in equal instalments of $10,739.44 on 2, 9 and 16 April 2020.

5. [24]

   The Lessors sent a reply email on 17 March 2020, which said: “Today is the 17th and the first installment (sic) was not paid. The 19th is coming up in 2 days Make sure it’s paid today”.

6. [25]

   On 20 March 2020, the Federal Government placed mandatory restrictions upon “non-essential indoor gatherings”, which included Sneakerboy’s stores. Restrictions limited the number of people who could be in the stores at the one time by the requirement that there should be no more than one person per 4 m².

7. [26]

   On 25 March 2020, at around 9:30 AM, a director of a company related to the Lessors noticed Sneakerboy employees removing “stock, registers, equipment, eftpos terminals, and furniture from [the Premises]”, according to his affidavit evidence. He said: “The store looked almost completely empty and packed into boxes”. The witness had a conversation with an employee of Sneakerboy, and then, by telephone, a further conversation with a more senior representative of Sneakerboy. The employee said that he was the Sneakerboy warehouse manager from Melbourne, and that he had been told to pack up the shop and send it to Melbourne. The more senior employee told the witness: “They have authority to take the stock back to Melbourne”. The witness also said that the more senior employee said: “We’re getting our stuff and going”.

8. [27]

   Sneakerboy’s financial controller explained this event in his affidavit in the following way. When he became aware from a press release that the number of people who could be in retail shops was limited to one person for every 4 m², he calculated that the maximum number of people allowed in the Premises at any one time was 10. As Sneakerboy had three staff members in the store, that would mean that there could only be a maximum of seven customers in the store at any one time. Additionally, the financial controller understood that the directive of the Prime Minister was that all people should avoid non-essential activities and should remain isolated at home. He understood that the directive included retail shopping of the type that was conducted by Sneakerboy.

9. [28]

   On or about 23 March 2020, as a result of this information, as well as the risk to staff and the decline in trade, which he said at that point was approximately 85% less than the same time in the previous year, the director of Sneakerboy decided to temporarily cease trading from the Premises from 25 March 2020. The financial controller gave examples of a number of other comparable retailers who, he said, also made the decision to temporarily cease trading. The director instructed the store manager to remove all items of stock and relocate them from the Premises to Sneakerboy’s warehousing facility located at Port Melbourne in Victoria. The objective was to attempt to mitigate the potential loss caused by the temporary closure of the Premises by focusing on online sales, and for security purposes. The financial controller estimated that the value of the stock that was removed from the Premises was approximately $500,000.

10. [29]

    The director of Sneakerboy also decided to remove the IT equipment to enable Sneakerboy to undertake a technology refresh so that it could minimise downtime later on as that activity was usually undertaken whilst the stores were trading.

11. [30]

    According to the financial controller, all furniture and all fixtures remained at the Premises.

12. [31]

    The financial controller said that, on 25 March 2020, Sneakerboy’s staff were precluded from accessing the Premises by the Lessors who had arranged for security to be present.

13. [32]

    At 11:34 AM on 25 March 2020, the financial controller sent a text to his contact at the Lessors, which said: “Can you please let the guys take our stock back. We are not going to vacate store – only getting ready for the lockdown”.

14. [33]

    The lessors responded by sending by text a copy of a letter dated 25 March 2020 addressed by their solicitors to Sneakerboy. The letter was headed: “NOTICE OF RE-ENTRY AND TERMINATION”. The operative part of the letter was:

15. [34]

    The financial controller responded by sending a text in the following terms to the Lessors:

16. [35]

    On 26 March 2020, the Lessors wrote to the Commonwealth Bank of Australia, to demand payment of the $253,668.90 value of the bank guarantee. The letter said: “This is to repay the outstanding debt to [the Lessors]”.

The COVID-19 regime

1. [36]

   On 25 March 2020, the COVID-19 Legislation Amendment (Emergency Measures) Act 2020 (NSW) came into force. Relevantly, it amended the Retail Leases Act 1994 (NSW) by inserting a new s 87 into that Act. Section 87(1) relevantly provides:

2. [37]

   On 7 April 2020, the National Cabinet adopted the National Cabinet Mandatory Code of Conduct: SME Commercial Leasing Principles during COVID-19 (the Code). For convenience, I propose to refer to the Code and the New South Wales regulation that implements it as the COVID-19 regime.

3. [38]

   It is not necessary to set out or analyse the terms of the Code in detail. The Court is not required by this judgment to implement the Code. The existence of the Code and its potential operation in relation to the Lease, if an order is made for relief against forfeiture of the Lease, may have significance in a general way to whether the relief sought by Sneakerboy should be granted.

4. [39]

   The stated purpose of the Code is to impose “a set of good faith leasing principles for application to commercial tenancies” between landlords and eligible tenants.

5. [40]

   The Code applies where “the tenant is an eligible business for the purpose of the Commonwealth Government’s JobKeeper programme”. Sneakerboy enrolled for the JobKeeper Wage subsidy for its employees on 21 April 2020.

6. [41]

   The principles in the Code are stated to apply to negotiating amendments in good faith to existing leasing arrangements to aid the management of cash flow for SME tenants. The expression “SME tenant” refers to tenants that are suffering financial stress or hardship as a result of the COVID-19 pandemic as defined by their eligibility to participate in the JobKeeper programme, with an annual turnover of up to $50 million.

7. [42]

   The Code provides that it will be given effect through relevant State and Territory legislation or regulation as appropriate. The Code was to come into effect from a date following 3 April 2020 defined by each state or territory.

8. [43]

   The Code sets out overarching principles to govern negotiations for the agreement of “tailored, bespoke and appropriate temporary arrangements for each SME tenant, taking into account their particular circumstances on a case-by case basis”.

9. [44]

   The leasing principles contained in the Code include the following:

10. [45]

    The Code provides that disagreements between landlords and tenants should be mediated under applicable leasing dispute resolution processes.

11. [46]

    On 24 April 2020, the New South Wales Government promulgated the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (the COVID-19 Regulation), which gave legal effect to the Code.

12. [47]

    The COVID-19 Regulation contains the following material provisions:

13. [48]

    The COVID-19 Regulation, by Reg 2, commenced on the day on which it was published on the NSW legislation website, which appears to be 24 April 2020

14. [49]

    It is sufficient to note that the COVID-19 Regulation gives effect in substance to the principles of the Code. That is made clear by the terms of a number of notes contained in the COVID-19 Regulation that I have not extracted.

15. [50]

    The parties did not in their evidence or submissions attempt to demonstrate what the effect of the application of the COVID-19 Regulation would be to the terms of the Lease. That would have been a complex and probably futile exercise, as the process required to be undertaken involves good faith negotiation and mediation if the parties are unable to come to an agreement.

16. [51]

    However, it can be said that, if relief against forfeiture of the Lease is granted, so that the Lease is retrospectively continued from 25 March 2020, both the Code and the COVID-19 Regulation will apply. It seems very probable that substantial waivers and deferrals of Rent would be agreed or imposed by mediation. The Lessors would be precluded from taking action against Sneakerboy for any closure of the retail shop due to the COVID-19 pandemic. The lessors would be prohibited from terminating the Lease, provided Sneakerboy complied with any revised terms determined by the application of the Code and the COVID-19 Regulation, and would be prohibited from calling upon any renewed bank guarantee in the same circumstances.

Attempts to resolve dispute

1. [52]

   Commencing on 5 May 2020, the parties, through their representatives, unsuccessfully attempted to resolve the dispute with a view to Sneakerboy recommencing trading from the Premises.

2. [53]

   On 15 May 2020, the solicitors who were then acting for Sneakerboy wrote a letter to the Lessors. The letter asserted that the notice and termination of the Lease by the Lessors was invalid and of no effect. The letter stated that Sneakerboy’s “business has been critically impacted by the pandemic and that it has suffered a downturn of at least 43% compared to the same trading period last year”. The letter purported to trigger Sneakerboy’s rights under the COVID-19 Regulation, and requested rent relief under the Lease.

3. [54]

   On 15 June 2020, the Commonwealth Bank of Australia paid the amount of $253,668.90 to the Lessors.

Sneakerboy’s agreement to lease additional premises

1. [55]

   The Lessors tendered evidence that Sneakerboy had entered into an agreement for lease and a lease in respect of retail premises at 388 George Street, Sydney. Those premises are apparently a straight line distance of approximately 123m from the Premises.

2. [56]

   The Lessors submitted that the Court should find that it was Sneakerboy’s intention to seek relief against forfeiture of the Lease so that it could continue its retail operation until it was ready to establish the proposed retail operation at 388 George Street, Sydney. The Lessors suggested that, as the two premises were so close together, it was commercially improbable that Sneakerboy would in fact wish to operate the two retail businesses concurrently. The lessors submitted that the Court should find that the probability is that Sneakerboy will abandon the Lease when its new retail business is established.

3. [57]

   The agreement for lease and the lease concerning the 388 George Street premises were admitted into evidence on a confidential basis, and access to the documents was limited to senior counsel for the Lessors. Senior counsel accepted that restriction without the documents being provided to his instructing solicitor who, it was suggested, may have been related to the principals of the Lessors. It is sufficient to note that the rental and other obligations imposed upon Sneakerboy in respect of the lease of the premises at 388 George Street, Sydney will be many multiples greater than those created by the Lease. This factor led the Lessors to suggest that it was improbable that Sneakerboy would be able to satisfy its rental obligations under both leases concurrently, given its history of default under the Lease. The date of commencement of the new lease is not apparent from the documents.

4. [58]

   Sneakerboy responded to this evidence by tendering the evidence of a witness who was a director of a company that provided site procurement and commercial negotiation services to Sneakerboy in respect of the acquisition of retail sites.

5. [59]

   The witness explained that Sneakerboy’s existing business model is to open both a ‘flagship store’ and an ‘outlet store’ in each location where it does business. Sneakerboy has existing businesses of that nature in Melbourne. That business model allows product differentiation between the stores.

6. [60]

   The evidence is that Sneakerboy has been pursuing a retail site for a ‘flagship store’ in the Sydney CBD since about March 2019. The Premises, which are situated in Temperance Lane, would be used as the ‘outlet store’, given their peculiar location and the fact that they do not have any street frontage. The witness has been negotiating the granting of the lease at 388 George Street, Sydney since 9 May 2019.

Relevance of the COVID-19 regime

1. [61]

   A question arises concerning the relevance of the advent of the COVID-19 regime to Sneakerboy’s claim for relief against forfeiture of the Lease.

2. [62]

   I have taken the view that, because the Lease was terminated on 25 March 2020, which occurred before the National Cabinet adopted the Code on 7 April 2020, and the COVID-19 Regulation commenced on 24 April 2020, the subsequent advent of the COVID-19 regime would be immaterial if the evidence of the circumstances, as they existed at 25 March 2020, established that Sneakerboy was not then entitled to relief against forfeiture of the Lease. That is, if the act of forfeiture was effective in equity to terminate the Lease, the subsequent establishment of the COVID-19 regime should not give Sneakerboy a right to relief against forfeiture that it did not have on the date when forfeiture occurred.

3. [63]

   The position may have been different, for example, if the Lessors had terminated the Lease between the date of the adoption of the Code and the date of commencement of the COVID-19 Regulation.

4. [64]

   I will discuss below, when considering the effect of the evidence, whether the Court should act on the basis that the Lessors terminated the Lease when they did in order to forestall the availability to Sneakerboy of then anticipated relief from the consequences of the COVID-19 pandemic.

5. [65]

   I will also refer to the possible relevance to the entitlement to relief against forfeiture of the appearance that Sneakerboy’s turnover from the Premises was materially reduced by the initial consequences of the COVID-19 pandemic, irrespective of the subsequent effect of the application of the COVID-19 regime.

6. [66]

   Relief against forfeiture of the Lease will probably subject the Lessors to disadvantages that will flow from the operation of the COVID-19 regime. That regime is the product of a national agreement to deal with a once-in-a-century public health crisis, with the result that the Court should simply treat the consequences of the application of the COVID-19 regime as being a neutral factor in respect of how it may impact on one party or the other to a lease.

Equitable principles governing relief against forfeiture

1. [67]

   It will therefore be appropriate to begin by considering the conventional principles of equity that govern the circumstances in which relief against forfeiture of a lease for non-payment of rent will be granted.

2. [68]

   In the interests of expedition, I propose to restate the relevant legal principles, as I understand them to be, in substantially the same terms as I have explained those principles in Baby Zone (Aust) Pty Ltd (Administrators Appointed) v Keira Street Ventures Pty Ltd [2016] NSWSC 528 at [79]-[81], which in turn set out an extract from my decision in Kofoo Sussex Pty Ltd v Commerce Building Pty Ltd [2014] NSWSC 1079; (2014) 17 BPR 33,147.

3. [69]

   In Wilkinson v S & S Gikas Pty Ltd [2006] NSWSC 1314; (2006) 12 BPR 23,685, Campbell J (as his Honour then was) said at [23] and [24]:

4. [70]

   Further, in P Butt, Land Law (6th edition, 2010, Thomson Reuters) the learned author said (omitting reference to the authorities referred to in the footnotes upon which the principles were based):

5. [71]

   In Direct Food Supplies (Vic) v DLV Pty Ltd [1975] VR 358, one of the cases upon which Campbell J relied at [24], Starke J noted, at 360, that counsel for the lessor submitted that it was clear on the evidence that it was improbable that any future rent would be paid and that, if payments were made, they may turn out to be preferences. His Honour, at 361, declined to grant relief against forfeiture on the grounds that the lessee had conceded that it could not pay all of its debts as they fell due, the lessee could only trade its way out of its financial difficulties if it was entitled to use receipts that may in fact have been payable to a related company, and a creditors’ petition for winding up had already been issued against the lessee. Thus, Starke J rejected the application for relief against forfeiture on grounds that were more extreme than the submission made by counsel, and which went much further than an improbability that rent would be paid if relief against forfeiture was given.

6. [72]

   In Tannous v Cipolla [2001] NSWSC 236, Barrett J (as his Honour then was) at [38] accepted that “if it is shown that the tenant is unable to pay future rent (or may reasonably be expected to become so), the Court will in all probability find that it is not just and equitable to grant relief against forfeiture”. But his Honour had earlier noted that “very special circumstances” were required before relief against forfeiture would be denied. Barrett J also quoted, at [27], the dictum of Young J (as his Honour then was) in Courtney Creche Pty Ltd v Okko’s Fine Art and Custom Framing Pty Ltd (1995) 7 BPR 14,337: “The current state of the authorities is that before a tenant is refused the remedy of relief against forfeiture, the tenant’s attitude to the lease must be such that no reasonable landlord could expect the tenant to honour its obligations…”.

7. [73]

   In Twinside Pty Ltd v Venetian Nominees Pty Ltd [2008] WASC 110 at [36] and [37], Beech J accepted the views of Professor Butt from the fifth edition of his book, equivalent to [15225] and [15225] set out above, and continued:

8. [74]

   In Wynsix Hotels (Oxford St) Pty Ltd v Toomey [2004] NSWSC 236, Young CJ in Eq, at [33], focused on the significance of any rental guarantee available to the lessor, which may be available to protect it against future failures by the lessee to pay rent. In addition, his Honour said that the court should be ready to grant relief against forfeiture on the lessee’s first application, because the lessor should be able to protect itself from future breaches by a further termination of the lease, whereupon the court’s sympathy to the lessee may expire.

9. [75]

   For the purpose of the determination of the present case, the following propositions emerge from the above consideration of the applicable principles:

   1. (1)

      Where a lease is terminated for non-payment of rent, the Court will generally grant relief against forfeiture.

   2. (2)

      That is because the power in the landlord to terminate the lease by re-entry is generally regarded as being in substance a security for the rent.

   3. (3)

      The power to relief against forfeiture will generally only be exercised on the condition that the tenant pay the outstanding rent and put the landlord in the position it would have been in if there had been no default in payment of the rent, including that the tenant pay the landlord’s costs of the application.

   4. (4)

      The conditions to the grant of relief may include that the tenant reinstate a bank guarantee or other security to which the landlord is entitled under the lease.

   5. (5)

      Although it is rare for the Court to decline relief against forfeiture where the tenant is able to meet the conditions for the grant of that relief, the remedy is discretionary and not as of right.

   6. (6)

      The circumstances in which the Court may decline relief against forfeiture will depend upon the facts of each case, but they may include where the relief would be futile because the tenant is incapable of meeting rent payments in the future, so that a later termination by re-entry for failure to pay rent is probable.

   7. (7)

      The Court will be disinclined to oblige a landlord to suffer the continuation of the lease to an insolvent tenant.

   8. (8)

      However, the instances in which courts have declined to grant relief against forfeiture show that the courts have a strong predilection towards granting the relief. This has often occurred in cases of relatively extreme doubt about the capacity of the tenant to meet rent payments into the future, where there appears to be some real benefit to the tenant in relieving against forfeiture.

   9. (9)

      It is relevant that the landlord has alternative security such as a bank guarantee that may be required to be renewed as a condition to the grant of relief.

   10. (10)

       The courts can often be liberal in granting relief against forfeiture because, even though inconvenient to the landlord, the relief does not necessarily finally determine the issue, as the landlord will have a further right to terminate the lease by re-entry if there are later failures to pay rent. In that case, the courts may be less sympathetic to a further application for relief against forfeiture than was the case on the initial application.

Consideration

1. [76]

   The practical effect of the request by the parties that the Court decide, on a final basis, whether or not to make an order relieving Sneakerboy from forfeiture of the Lease, is that the decision must be made on the basis of what is essentially interlocutory evidence. That evidence has not been tested by the examination of contemporaneous documents or cross-examination. Consequently, the Court is required to decide factual issues by taking a broad approach to the evidence, having regard to which party has made the relevant allegation.

Sneakerboy’s rental delinquency

1. [77]

   As I have said above, Sneakerboy’s performance of its rental obligation under the Lease was serially delinquent. Sneakerboy has not explained its conduct, or provided any evidence to support a conclusion that, in the absence of the COVID-19 pandemic, it would have been able to pay the rent on time and that the Court could be reasonably confident that it would have done so.

2. [78]

   On the other hand, the Lessors were protected by a substantial bank guarantee in the amount of $253,668.90, which they were permitted to call upon to secure themselves from defaults in rental payments from time to time.

3. [79]

   The effect of Sneakerboy’s delinquency was not that the Lessors were not paid the rent they were owed, but that payments were consistently late, so that the ability of the Lessors to meet their own debts may have been impeded and the Lessors suffered administrative inconvenience.

4. [80]

   The decision of the Lessors finally to terminate the Lease must have been influenced by Sneakerboy’s 12 March 2020 email, which referred to the effect of the pandemic on trading, and unilaterally informed the Lessors that the rent for February and March would be paid by equal instalments on three nominated dates. When the email was sent, Sneakerboy was already in default, in a similar way to that in which it had been many times before.

5. [81]

   It is likely that the fact that Sneakerboy failed to pay the first of its nominated instalments on 12 February 2020 caused the Lessors to conclude that the previously bad performance by Sneakerboy of its rental obligations was likely to worsen.

Possible pre-emption of COVID-19 regime

1. [82]

   The Court should not find, however, as I understand Sneakerboy submitted, that the Lessors terminated the Lease in order to pre-empt the application of government legislative and regulatory changes, which may have been imminent, and intended to protect the position of lessees impacted by the COVID-19 pandemic in respect of their rights under their leases. It is possible that the Lessors’ decision to terminate the Lease was influenced by this consideration, but the evidence does not support a finding to that effect. That finding would have required acceptance that the Lessors were substantially motivated by a desire to deny Sneakerboy impending protections that were expected to be implemented in the general public interest.

2. [83]

   The justification for the Court to make this finding is eroded by Sneakerboy’s repeated defaults in honouring its rental obligations, and the possibility that the Lessors made the decision, not unreasonably, that the initial effects of the pandemic would considerably worsen the situation and cause Sneakerboy’s defaults to be larger and more intractable.

3. [84]

   That said, it is true – if it matters – that the termination of the Lease was in some degree influenced by the initial effects of the COVID-19 pandemic.

Possible abandonment of Lease by Sneakerboy

1. [85]

   The evidence establishes that the Lessors terminated the Lease in part because they acted on the belief that, on 25 March 2020, Sneakerboy had abandoned the Lease by removing all of its stock and equipment from the Premises. That belief was based in part on the observations made by the director of a company related to the Lessors, and the conversations that he had with employees of Sneakerboy.

2. [86]

   That the Lessors terminated the Lease on this basis is established by the second reason given by the Lessors in their 25 March 2020 notice of termination, wherein they alleged that Sneakerboy had “vacated and abandoned the Premises without notice to the Lessor”.

3. [87]

   I find that the Lessors were mistaken in their belief that Sneakerboy had abandoned the Lease. Sneakerboy gave evidence that, in the face of the lockdown that resulted from the COVID-19 pandemic, and the restrictions on the number of customers that could visit the Premises, Sneakerboy made the commercial decision to temporarily cease trading, and to remove its stock and equipment to its Port Melbourne warehouse for security reasons and so that it could continue its business by selling the stock online. With the benefit of hindsight, now that the consequences of the COVID-19 pandemic are more generally known, I find that the explanation given by Sneakerboy for its actions on 25 March 2020 is credible.

4. [88]

   The Lessors gave evidence that they had discovered that Sneakerboy had commenced reopening two stores in Victoria between 21 and 28 May 2020. Although those stores are situated in a different state, this evidence provides some support for Sneakerboy’s stated intention to have also reopened its retail business from the Premises.

5. [89]

   Consequently, there is no factual support for the second basis upon which the Lessors terminated the Lease. Sneakerboy’s entitlement to relief against forfeiture is not to be determined on the basis that it seeks relief from the consequences of it having abandoned the Lease. The entitlement to relief against forfeiture is to be determined on the basis that the Lease was terminated for non-payment of rent.

6. [90]

   The evidence as to the timing of the events that took place on 25 March 2020 is not sufficiently precise to enable findings as to the order of events. In particular, it is not clear whether Sneakerboy’s financial controller’s 11:34 AM text, in which he informed the Lessors that Sneakerboy was not going to vacate the Premises, was received by the Lessors before they acted to terminate the Lease. The Lessors may have done so between 9:30 AM, when the director saw Sneakerboy’s property being removed from the Premises, and 11:34 AM, when the financial controller sent his text to the Lessors.

7. [91]

   However, as the Lessors were mistaken in any event, so that their additional ground for terminating the Lease was not effective, it is immaterial whether or not the Lessors terminated the Lease with knowledge of the information in the financial controller’s text.

Significance of agreement to lease at 388 George Street, Sydney

1. [92]

   There is insufficient evidence for the Court to make any proper finding of fact concerning the significance of Sneakerboy having entered into the agreement to lease and the lease in respect of the premises at 388 George Street, Sydney.

2. [93]

   There is no basis for the Court to reject the evidence by the independent contractor who represented Sneakerboy in negotiating the lease with the owners of that property. The Court should accept the evidence that Sneakerboy operated ‘flagship stores’ and ‘outlet stores’ in each location, and that this was a commercially viable course, because the different retail approaches were aimed at different sectors of the market. The evidence, in any event, establishes that Sneakerboy had been engaged in the exercise of obtaining premises from which to operate a ‘flagship store’ in Sydney from about March 2019. The evidence does not establish that Sneakerboy’s efforts to secure a lease for a ‘flagship store’ had anything to do with the operation of its retail business from the Premises.

3. [94]

   Further, the evidence does not support a finding that Sneakerboy’s claims that it had intended to conduct two different retail activities in close proximity are disingenuous, and that it is really only attempting to regain its rights as lessee of the Premises as a stopgap until it is able to open its ‘flagship store’ at 388 George Street, Sydney, so that it will then finally abandon the Lease when it has no need for the Premises. The evidence shows that, before the impact of the COVID-19 pandemic was known, Sneakerboy was engaged in genuine efforts that would have led to the operation of two stores in close proximity. There is simply no basis for the Court to reject Sneakerboy’s evidence that it maintains its original intentions.

4. [95]

   Of course, the commercial consequences of the continuing COVID-19 pandemic are unknown and unpredictable. The confidential evidence of the terms of the agreement for lease and the lease of the premises at 388 George Street, Sydney establishes that Sneakerboy has entered into a binding agreement that subjects it to financial obligations substantially greater than those created by the Lease. I find this to be a neutral consideration. I would infer that the substantial commercial entity that is constructing the building at 388 George Street, Sydney, and its professional advisers, would not have entered into the transaction with Sneakerboy unless they had satisfied themselves that it had the acumen and financial substance to perform its obligations under the proposed lease. It is improbable that Sneakerboy would have entered into the transaction, if it was not satisfied that it would be a profitable commercial enterprise. The fact that Sneakerboy had continuing financial difficulty in operating its retail store from the Premises, which are in a somewhat out of the way location, says nothing about its ability to perform its obligations under a lease in respect of a different retail enterprise at a ‘flagship store’.

5. [96]

   The consequences of the COVID-19 pandemic for the viable economic future of all retail enterprises are completely unknown. It is likely that, if relief against forfeiture of the Lease is granted, the new COVID-19 regime will need to be implemented in relation to both leases. It is in the hands of fate whether or not the conduct of Sneakerboy’s retail businesses at one or both of the locations will be undermined in the long run. The Court cannot decide the present application on the basis of any forecast concerning the consequences of the COVID-19 pandemic.

Significance of the bank guarantee being called

1. [97]

   The Court’s judgment as to whether or not to grant relief against forfeiture of the Lease must be made in the context that, since 15 June 2020, the Lessors have had the full $253,668.90 value of the bank guarantee provided by Sneakerboy.

2. [98]

   The Lessors claimed in their evidence that, if the Lease had remained on foot, the amount due under the Lease up to 21 July 2020 would have been $197,913.95. Consequently, on any view, the Lessors have $55,754.95 in hand. That is about two months’ rent under the terms of the Lease, putting aside Sneakerboy’s share of outgoings and the cost of cleaning common areas.

3. [99]

   Sneakerboy complained that the calculation made by the Lessors continued to claim interest after the receipt of the money from the bank guarantee on 15 June 2020. That is true, and the addition of interest after that time is unjustifiable, but the amount involved is relatively trivial.

4. [100]

   A more significant consideration is that, if relief against forfeiture is granted, the Lease will in effect retrospectively be reinstated as from 25 March 2020. From that point on, and as a matter of practical effect, Sneakerboy and the Lessors will be required to negotiate the amount of Sneakerboy’s ongoing rental obligations in accordance with the COVID-19 regime. It seems certain that the amount payable by Sneakerboy to the Lessors under the Lease will be substantially reduced. The amount of the reduction cannot be estimated on the basis of the evidence in these proceedings.

5. [101]

   The real relevance of the calling on the bank guarantee by the Lessors is that they have in fact compensated themselves for all of the consequences of Sneakerboy’s default to date, and that they have in their hands all of the rent to which they have become entitled under the Lease, and they still have money in hand. It is almost certain that, when the COVID-19 regime is implemented, the Lessors will have a substantially greater amount in hand than they have accepted is the case to date.

6. [102]

   The Lessors also have a right under the Assignment to a reinstatement by Sneakerboy of the bank guarantee.

7. [103]

   Any order that is made by the Court to give effect to relief against forfeiture of the Lease must include an appropriate order concerning the reinstatement of the bank guarantee.

8. [104]

   I will consider below the issue of the timing of the reinstatement of the guarantee that is appropriate in the circumstances.

Alternative uses of the Premises by the Lessors

1. [105]

   The Lessors gave some evidence of initial attempts to advertise the Premises for the purpose of mitigating their loss by finding a new lessee. The sole director and secretary of the Lessors said that he had one interested party with whom he was currently negotiating new lease terms. No details were given in the evidence.

2. [106]

   Evidence that the Lessors had real prospects of entering into a new lease of the Premises with some lessee who had good prospects of being able to honour the terms of the new lease would have been relevant to the exercise of the Court’s discretion, in deciding whether or not to grant relief against forfeiture to Sneakerboy. However, the evidence provided by the Lessors concerning the prospects of them entering into a new lease was not firm enough to enable the Court to act upon the basis that there was a real possibility that the Lessors would find a new lessee who was commercially preferable to Sneakerboy. This conclusion is reinforced by the evidence that the Lessors are considering renovating the Premises by making them into two smaller shops to increase the likelihood of attracting new lessees.

3. [107]

   The Lessors also provided evidence that they were considering de-fitting the fittings and fixtures in the Premises, for which purpose they had obtained a quote in the amount of $375,000 plus GST. The purpose of this evidence was to support a submission by the Lessors that they would suffer further damage as a consequence of Sneakerboy’s default under the Lease by reason of having to incur the cost of de-fitting the fittings and fixtures in the Premises.

4. [108]

   It is appropriate for the Court to ignore this evidence. The need for the work and the justification for the expense have not yet been contested by the parties. In any event, as noted above, clause 15.2 of the Lease required Sneakerboy at its own expense to reinstate the Premises to their original condition. I consider that this clause imposes the obligation but also grants Sneakerboy the right to do this work at its own cost and for its own benefit.

Conclusion

1. [109]

   I find that Sneakerboy is entitled to an order that it be relieved against forfeiture of the Lease that occurred on 25 March 2020.

2. [110]

   That is primarily because the circumstances in which the application for relief against forfeiture have been made fall comfortably within the general principle that the Court will usually grant the relief where the outstanding rent will be paid and notwithstanding that there has been a history of some delinquency in the timely payment of rent.

3. [111]

   I consider that the decision to grant relief against forfeiture can also be justified to some degree by the fact that the defaults in payment of rent that immediately led to the lessors’ decision to terminate the Lease were, to some degree, caused by the initial consequences of the COVID-19 pandemic for which Sneakerboy was not responsible. The strength of that justification is materially diminished by the fact that Sneakerboy was probably in some level of default, in any event, as a result of a continuation of the historical circumstances that had caused Sneakerboy’s rental delinquency.

4. [112]

   The grant of relief against forfeiture is also justified to some extent by the fact that the actual trigger for the Lessors’ decision to terminate the Lease was in part a misunderstanding by the Lessors that Sneakerboy had vacated the Premises and abandoned the Lease without notice to the Lessors.

5. [113]

   The Court need not be concerned in this case with the need to make an order that the relief against forfeiture be conditional upon Sneakerboy paying all outstanding rent. As explained above, by reason of them calling on the bank guarantee, the Lessors have been paid all rent that would have been payable under the Lease to date, and have money in hand, even though Sneakerboy has been excluded from possession since 25 March 2020, and has not had the ability to earn revenue from reopening its store at the Premises.

6. [114]

   Incidentally, given the parlous circumstances experienced by retail businesses during the term of the COVID-19 pandemic, I would not find Sneakerboy’s delay in making the application for relief against forfeiture to be a valid ground for denying that relief. On the other hand, as Sneakerboy has waited for some four months to bring the application, it cannot complain about not having the benefit of possession for such a long period.

7. [115]

   It should be a condition to the relief against forfeiture that Sneakerboy must reinstate the bank guarantee. That is so even though, during the subsistence of the COVID-19 regime, there may be impediments to the Lessors calling upon the bank guarantee. However, there is a question as to when fair dealing should require Sneakerboy to reinstate the bank guarantee. For the present, as I have explained, the Lessors have money in hand, even assuming the continuation of the Lessors’ entitlement to receive rent in accordance with the Lease. As I have surmised above, there is a real probability that Sneakerboy may be entitled to a substantial reduction in the rent payable, and to a deferral of other parts of the rent. The Lessors may, in fact, have much more in hand as a result of their calling on the bank guarantee than they have accepted. In the present economic climate, it may be an unfair imposition on Sneakerboy – and one that is inconsistent with the underlying principles of the COVID-19 regime – to require Sneakerboy to secure a replacement bank guarantee immediately, rather than to do so at a time closer to the point when the Lessors will have exhausted the money that they have in hand.

8. [116]

   The issue of the timing of the provision of the replacement guarantee may require further consideration, and perhaps even evidence. I propose to give the parties an opportunity to provide further submissions on this issue.

9. [117]

   An order should be made that Sneakerboy pay the Lessors’ costs of the proceedings as a condition to the grant of relief against forfeiture of the Lease. The Lessors have acted reasonably in requiring Sneakerboy to prove its entitlement to the relief. There is a question whether the costs order should be on the indemnity basis: see Home Ideas Centre Sydney Pty Ltd v Alem Pty Ltd [2010] NSWSC 695. I will also permit the parties to make further submissions on this issue.

10. [118]

    One feature of concern that arises out of the exceptional circumstances in which this application for relief against forfeiture has been made is that the immediate effect of the reinstatement of the Lease will be to subject the parties to the COVID-19 regime. Ordinarily, it is clear enough that the effect of relief against forfeiture will be to oblige the tenant to observe the terms of the lease and to pay rent as required by the lease. In the present case, the Court expects that the implementation of the COVID-19 regime will affect the amount and the timing of payment of rent under the Lease. That regime likely will have other effects. The Court cannot quantify or predict those effects, or estimate when the effects will be crystallised by application of the processes required by the COVID-19 regime. There will be considerable scope for further disputation and possible disadvantage caused to one party or both as a result of the course that each takes in implementing the COVID-19 regime.

11. [119]

    I do not think the Court should simply publish this judgment, make consequential orders, and then wash its hands of the matter. The Court is not called upon to supervise the parties’ conduct in implementing, in a responsible and good-faith manner, the requirements of the COVID-19 regime. However, it is probably proper for the Court to require the parties to agree a suitable and efficient process for implementing the COVID-19 regime in a timely way.

12. [120]

    I will receive further submissions from the parties concerning the course that is proper for the Court to take to facilitate the early achievement of such certainty as may be available from the process required by the COVID-19 regime.

13. [121]

    The parties should otherwise confer and submit to my Associate short minutes of order to give effect to these reasons for judgment.