Leasing Law – Ice Breaks in Kwik-E-Mart court battle

A recent Supreme Court leasing law case has saved a convenience store from losing its business, and protected hungry Brisbane CBD shoppers’ go-to place for Doritos, Tim Tam’s, Gatorade, and Four’n Twenty pies.

NightOwl Properties Pty Ltd runs a busy convenience store in Albert Street in the busy Brisbane CBD.

A battle to enforce the option to renew the lease recently played out in a two-day Supreme Court trial.

NightOwl had a 10-year lease, expiring in October 2020, with two five-year options taking the lease out to potentially the year 2030.

January 2020: NightOwl validly exercised the option to renew the Lease for the five-year option starting on 14 October 2020.

On 26 March 2020: Covid caused international and state borders to be closed; workers sent home to work. Convenience stores were smashed by a lack of customers, and most had to close.

April – May 2020: Negotiations took place between NightOwl and the Landlord, for rent relief under the Mandatory Code of Conduct introduced by National Cabinet, which entitled tenants to a rent reduction based on reduction in turnover.

The negotiations fizzled when the Landlord didn’t reply to information provided by NightOwl. NightOwl decided to just pay the reduced rent anyway, and did so for five months, until August 2020. The total “reduction” amount unpaid was $57,821.52.

September 2020: NightOwl started paying full rent again.

13 October 2020: The lease expired, and NightOwl reminded the Landlord that it had exercised the option. NightOwl asked for lease extension documents.

9 December 2020: The Landlord finally flicked it to their solicitors, who advised NightOwl that Covid rent relief was denied, seven months after NightOwl requested it. The solicitors issued a breach notice for the $57,821.52 arrears. NightOwl was advised that the breach notice was for the expired lease, and that NightOwl was not entitled to its option, because it was in breach when the lease expired on 13 October 2020.

The very next day, NightOwl repaid the $57,821.52. The repayment wiped the debt and meant that NightOwl actually hadn’t benefited from rent relief at all.

Nevertheless, the Landlord pushed on, arguing that the letter of the Lease must apply. The Landlord refused to grant a new Lease and said that NightOwl must go.

NightOwl took the Landlord to court to protect their remaining five or ten years of their lease, and to prevent themselves from being kicked out.

NightOwl continued to serve the hungry and thirsty people of Albert Street until the Supreme Court trial was finally held in mid-2022, and the judgment was handed down on 30 September 2022.

At the trial, NightOwl made three arguments:

1. NightOwl said that the Landlord had waived its right to reject the grant of the option because of the Landlord’s delay in acting, because the Landlord happily kept collecting the rent, and accepted the payment of the arrears. NightOwl lost on this point. Strike One!
   
2. NightOwl said that section 124(2) of the Property Law Act 1974 should apply to grant it “relief against forfeiture” of the Lease”, which the court has discretion to do after looking at all of the circumstances. Ordinarily, a tenant stands a good chance of being protected by this provision, where the tenant has paid the rent arrears. But not this time! The court agreed with the Landlord’s argument that section 124(2) only applies to current lease terms, not a future option term. Strike Two!
   
3. NightOwls’ final throw of the dice was to rely on the complex law of “equity” to avoid eviction. There is a high bar to clear to succeed on these grounds. Happily, for NightOwl, the Court decided that it would be unfair in the circumstances for the tenant to lose its lease. The Court said that the loss of a further five or ten years of lease was disproportionate to the temporary harm of the underpayment of rent. All money had been paid back, and the Court ordered that to avoid injustice, the extension of lease must be granted.

Conclusion

Often the wording of a lease is defective, and this leads to disputes. However, on this occasion the wording was OK, and the law of equity had to be applied to give the tenant relief from losing its lease.

Ultimately a tenant can get a result which goes against the strict wording of the Lease. However, it can be very expensive to achieve, such as here where a two-day Supreme Court trial was required to achieve it.

In hindsight:

1. The Landlord should have issued the breach notice back when the reduced rent was being paid. This would have brought things to a head and forced the resolution of NightOwl’s request for reduced rent. But, for whatever reason, the Landlord let things slide until the matter was brought to a head.
2. NightOwl should have pushed the Landlord to the compulsory dispute resolution at the time, instead of just paying the lower amount of rent. This would have resolved the issues then and there.

Lessons to avoid pain and expense:

1. For landlords: Even where the letter of the lease seems to protect you no matter what, it is best not bury your head in the sand when a dispute arises but get legal advice and face it head on.
2. For tenants: Where you are having difficulty in a lease-related matter, get legal advice and face the issue rather than taking things into your own hands.

Also, tenants, do not think that a court will come to your rescue if you miss your option exercise date! NightOwl exercised their option in time in this matter, and the dispute was because of arrears of rent. The court affirmed that option dates must be strictly followed.

FC Lawyers are experts in leasing and commercial law. For any leasing law or business legal assistance, please contact our team.