Replay Australia Pty Ltd v NightOwl Properties Pty Ltd

This case considered whether the discretion to grant equitable relief against forfeiture arose in circumstances where a lessee, after giving written notice of exercise of an option to renew a lease, had not complied with the other conditions for the exercise of the option, and the lease had expired. At trial the lessee succeeded in obtaining such relief. The Court of Appeal allowed the appeal, concluding that, in circumstances where the lease had expired and the option to renew was not validly exercised, the lessee had no interest in respect of which the discretion to grant relief against the forfeiture could be exercised.

Dalton and Flanagan JJA and Gotterson AJA

24 April 2023

Background

In 2014 Replay entered into a lease with NightOwl as lessee, for ground floor premises in Albert Street, Brisbane. [4]–[5]. The lease expired in October 2020. [4]. Under the lease, NightOwl had an option to renew, which was conditional on there not being “any unremedied breach” of the lease on the lessee’s part at the time of giving notice “or thereafter prior to the Expiry Date”, and on the lessee having “at all times during the term strictly observed and performed the provisions” of the lease. [8].

In January 2020, NightOwl gave Replay written notice of its exercise of the first option. [10]. However, no substantive response to the notice was received from Replay until December 2020, after expiry of the initial term of the lease. [10]. Between April and August 2020, NightOwl unilaterally decided to pay reduced amounts for rent under the lease due to the COVID-19 pandemic. [12].

When the lease expired in October 2020, NightOwl was in arrears of rent. [15]. In a letter dated 9 December 2020, Replay’s solicitors acknowledged that NightOwl had purported to exercise the option to renew the lease in January 2020, but Replay asserted it was “not obliged to grant a renewal” because NightOwl had failed to comply with the contractual prerequisites on account of the rental arrears and breaches. [17]–[18].

At first instance NightOwl sought a range of relief, including relief against forfeiture of the option to renew in the exercise of the court’s equitable jurisdiction. [26]. It was successful on this issue. [26]. On appeal to the Court of Appeal, the sole issue was whether the trial judge had erred in deciding that equitable relief against forfeiture was available to NightOwl. [32].

Why equitable relief against forfeiture was not available to NightOwl

The court considered that, for the discretion to grant equitable relief against forfeiture to arise, the first requirement was that there be an “interest” in respect of which that discretion could be exercised. [43]. The starting point was whether there was “any remaining interest that might require relief from forfeiture by an order for specific performance”. [43].

The court noted that in Mercantile Credits Ltd v Shell Co of Australia (1976) 136 CLR 326, Barwick CJ had indicated that before an option for renewal could be said to confer an interest in land “in the necessary sense”, “the option for renewal must be specifically enforceable”. [47]. A similar view was expressed by a plurality of the High Court in Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315 (albeit in the context of a purchase), where it was said that “the ‘interest’ of the purchaser is commensurate with the availability of specific performance”. [50].

In this case, NightOwl’s interest in the leased premises under the option to renew depended for its existence “on the availability of specific performance”. [52]. But here, the lease had expired in circumstances where “the option was not validly exercised”. [53]. In summary, NightOwl was not entitled to relief against forfeiture because it had no entitlement to specific performance after the lease’s expiry. There was no interest which provided a basis for the court to grant relief against forfeiture. [55].

Accordingly, the appeal was allowed. [60].

W Isdale of Counsel