When can a tenant that has been granted relief against forfeiture be relieved again from forfeiture?

In Lontav Pty Ltd v Pineross Custodial Services Pty Ltd [2011] VSC 485, Dixon J of the Supreme Court of Victoria looks at the issue of whether a tenant that had previously been granted relief against forfeiture should receive another grant of relief against forfeiture.

Background

On 23 June 2011, Hargrave J granted the plaintiff, Lontav Pty Ltd, relief from forfeiture of the lease of The London Café Bar & Restaurant in Beach Street, Port Melbourne (the premises). The defendant, Pineross Custodial Services Pty Ltd, is the owner and lessor of the premises.

In that first proceeding Pineross contended that Lontav was in material breach of the lease in four respects:

1.       failure to pay rent,

2.       failure to pay interest,

3.       failure to provide an increased bank guarantee and

4.       parting with possession without prior consent of Pineross.

The fourth ground of breach arose out of dealings between Lontav and Jamal Mohammad and/or a company controlled by him, Melbourne Entertainment Corporation Pty Ltd (MEC). On 21 April 2011, Pineross terminated the lease by re-entry. The central issue for determination in the first trial was the capacity in which Mr Mohammad and MEC occupied the premises.

About 6 weeks after the first grant of relief against forfeiture, Lontav forfeited the lease on different grounds. The tenant again sought relief from forfeiture in the Supreme Court.

In the original proceeding, Justice Hargrave ordered relief against forfeiture for the established financial breaches on conditions, most of which had been met by the time of the second proceeding.

Two of the conditions required Lontav to apply for re-transfer of the liquor licence for the premises to Lontav and for the appointment of Mr Mohammad as its nominee for the balance of the trial period specified in MEC’s current liquor licence. Justice Hargrave stated that this condition was necessary to restore the position intended at all times by the parties.

Lontav was in breach of cl 17 of the lease. Clause 17 was explicitly identified as an essential term. In summary, cl 17 required the lessee lawfully to carry on a liquor supply business at the premises, but that breach was not then the subject of a notice to remedy. The condition imposed by the court to cure the lessee’s breaches of cl 17, was envisaged as an apparently straightforward matter of rectification.

On 1 July 2011, when Pineross served a notice to remedy breach in respect of the default under cl 17, transfer of the licence to Lontav had not been achieved. The breach was not remedied in the period allowed by the notice. The licence had not been transferred from MEC to Lontav when Lontav closed its case (the last day of hearing was on 20 September 2011, when the tenant sought to re-open its case and file a letter from the Director of Liquor Licensing transferring the licence back to Lontav). The liquor licence had not been in Lontav’s name for over a year at that time.

Pineross has not physically re-entered the premises (it was restrained from taking possession by injunction).

Lontav did not dispute that the lease was validly forfeited on its terms on 3 August 2011 following its failure to have the licence transferred to it as required by the Notice. Lontav sought relief from that forfeiture.

The lease term expired on 30 September 2011.

On 18 June 2011, Lontav had served a Notice of Exercise of Option under cl 26 of the lease. The validity of this exercise of option was challenged by Pineross, primarily as Lontav was in breach of cl 17 when it purported to exercise the option. Lontav did not seek relief in respect of the option notice or the enforcement of any rights to a further term of the lease in the Supreme Court proceeding. Lontav commenced the process necessary to bring the matter before VCAT, where Lontav intended to seek the necessary relief should the forfeiture be relieved in the Supreme Court.

After embarking on an examination of the history of relief against forfeiture, Dixon J refused the application for relief against forfeiture.

His Honour noted (at paragraph 12):

Courts of equity have long granted relief against the forfeiture of a proprietary interest. The modern restatement of the principles governing relief against forfeiture is that of Lord Wilberforce in Shiloh Spinners Ltd v Harding [1973] AC 691 at 723–724:

It remains true today that equity expects men to carry out their bargains and will not let them buy their way out by uncovenanted payment. But it is consistent with these principles that we should reaffirm the rights of courts of equity in appropriate and limited cases to relieve against forfeiture for breach of covenant or condition where the primary object of the bargain is to secure a stated result which can effectively be attained when the matter comes before the court, and where the forfeiture provision is added by way of security for the production of that result. The word “appropriate” involves consideration of the conduct of the applicant for relief, in particular where his default was wilful, of the gravity of the breaches, and of the disparity between the value of the property of which forfeiture is claimed as compared with the damage caused by the breach.

Dixon J explained, due to the breach by the tenant being of an essential term of the lease, insistence by Pineross on strict legal rights will not ordinarily result in an unconscionable forfeiture of the lease of the premises.

The test is whether enforcement of strict legal rights by Pineross is unconscionable or inequitable, because that conduct is taking unjust or unfair advantage of circumstances of mistake or accident in Lontav’s breach of that essential term. In Legione v Hateley, Mason and Deane JJ explained (1983) 152 CLR 406 at 447 that: 

The critical question then is: Should specific performance ever be ordered when the purchaser is in breach of an essential condition? The argument in favour of a negative answer is forceful. If parties expressly or impliedly stipulate that performance of a term is essential to their bargain then it would ordinarily be unjust to the innocent party to require him to complete notwithstanding a breach of that term. Generally speaking equity expects men to carry out their bargains and “will not let them buy their way out by uncovenanted payment’ (Shiloh Spinners Ltd v Harding, per Lord Wilberforce). Nor will it remake the parties” contract simply because it transpires that as things have happened one party has made a bad bargain. But if there be fraud, mistake, accident, surprise or some other element which would make it unconscionable or inequitable to insist on forfeiture of the purchaser’s interest under the contract because he has not performed in strict accordance with its terms there is no injustice to the innocent party in granting relief against forfeiture by means of specific performance with or without compensation.

In equity, circumstances of wilful default must be exceptional when examined for unconscionability on the part of the party strictly asserting contractual rights. It is not usually unconscionable to enforce strict legal rights where the breach is deliberate or wilful; enforcing legal rights is appropriate, for the innocent party is not taking advantage of another’s misfortune in exercising legal rights on deliberate breach. In exercising the discretion conferred by s 146(2) of the Property Law Act 1958 (Vic), whether breach is deliberate or wilful is a matter to be taken into account.

His Honour relied on Hollingworth J’s review of the principles applying on relief from forfeiture in Beamer Pty Ltd v Star Lodge Supported Residential Services Pty Ltd, [2005] VSC 236 at [442]–[443].

His Honour thought the principles relevant to the application before him were:
• The court must be satisfied, in relieving against forfeiture, that there is a reasonable expectation that the tenant will honour the lease obligations in the future. Where the tenant is guilty of conduct, beyond the notified default, of such gravity that, even accepting the notified default has been remedied, it would not be unconscionable on the landlord’s part to insist on strict legal rights, relief may be declined.
• Much of the court’s consideration of whether or not to grant relief will focus on the conduct of the tenant.
(i) A tenant must, so far as possible, attempt to remedy the breach or breaches alleged in the notice served and pay reasonable compensation for the breaches that cannot be remedied.
(ii) A tenant must come to court with clean hands and ought not to be relieved if evincing an intention to continue or to repeat the breach of covenant.
(iii) Where the conduct of the tenant reveals a clear history of wilful breaches of more than one covenant, a case of contumacious disregard by the tenant of the landlord’s rights over a period of time, and a total lack of evidence as to the tenant’s ability to speedily and adequately make good the consequences of the default, relief against forfeiture will not be granted.

His Honour concluded that the tenant in this case was not deserving of an order for relief against forfeiture, and dismissed the application.

The tenant has previously been granted relief against forfeiture and it failed to remedy another breach of its lease, despite service of a notice under section 146 of the Property Law Act, 1958.

The tenant sought to rely on a purported exercise of an option. However, at the time that it purported to exercise the option for a further term under the lease, it was still in breach of clause 17. In those circumstances, Dixon J held the purported exercise of the option was nothing more than a counter offer by the tenant. The landlord had clearly not accepted that counter offer, and so the term of the lease expired on 30 September 2011, 2 days after the judgment.

W G Stark 
Hayden Starke Chambers