Todarello Property Investments Pty Ltd v GJA Kalra Pty Ltd

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Clause 5 of the new schedule provided:

Clause 6 of the new schedule provided:

Clause 7 of the new schedule provided:

Clause 8 of the new schedule provided:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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