Flagstaff v Cross Street [1999] NSWSC 999 (30 September 1999)

Last Updated: 30 September 1999

NEW SOUTH WALES SUPREME COURT

CITATION: Flagstaff v Cross Street [1999] NSWSC 999

CURRENT JURISDICTION: Equity

FILE NUMBER(S): 3041 of 1999

HEARING DATE{S): 15 September 1999

JUDGMENT DATE: 30/09/1999

PARTIES:

Flagstaff Investments Pty Ltd (Plaintiff)

Cross Street Investments Pty Ltd (Defendant)

JUDGMENT OF: Windeyer J

LOWER COURT JURISDICTION: Not Applicable

LOWER COURT FILE NUMBER(S): Not Applicable

LOWER COURT JUDICIAL OFFICER: Not Applicable

COUNSEL:

Mr N C Hutley SC with him Mr M A Jones (Plaintiff)

Mr S Epstein (Defendant)

SOLICITORS:

Corrs Chambers Westgarth (Plaintiff)

Baron & Associates (Defendant)

CATCHWORDS:

LANDLORD AND TENANT - Leases - option to renew - breach of covenant after notice of intention to renew - compliance with covenants to expiry condition precedent to right to new lease - effect of s133E of Conveyancing Act - purported exercise of option - when occurring - competing single judge decisions - Agreements for lease - when leases under s129 of Conveyancing Act - s128 of Act - requirement for term to have commenced

LAW REFORM - Conveyancing Act ss133E-133G - need for amendment

ACTS CITED:

Conveyancing (Amendment) Bill, 1972

Conveyancing Act 1919 ss128, 129, 133E, 133E(2), 133G

New South Wales Law Reform Commission Options in Leases (LRC5 1968)

Stuckey, The Conveyancing Act 2nd ed Law Book Company, Sydney (1969) para 590

DECISION:

No entitlement to new lease. Summons dismissed.

JUDGMENT:

1

IN THE SUPREME COURT

OF NEW SOUTH WALES

EQUITY DIVISION

WINDEYER J

THURSDAY 30 SEPTEMBER 1999

3041/99 FLAGSTAFF INVESTMENTS PTY LTD v CROSS STREET INVESTMENTS PTY LTD

JUDGMENT

Question for decision

1 This action requires the court to determine whether s133E of the Conveyancing Act 1919 bears upon the entitlement of a lessee to a new lease pursuant to an option where a breach of covenant occurs after notice of exercise is given.

Facts

2 Flagstaff Investments Pty Ltd (Flagstaff) is the lessee of shop 24 in the Georges Centre in Cross Street Double Bay, pursuant to lease registered number 20804448. That lease as originally granted was in respect of part of the land in Certificate of Title Vol 15247 Folio 68. It appears that property must have been subject to a strata sub-division as the evidence shows that the leased premises are now Lot 16 in Strata Plan 53877, being Folio Identifier 16/SP53877, but nothing turns on that. The title search shows the whole of that lot to be subject to the lease to Flagstaff. The defendant Cross Street Investments Pty Limited (Cross Street) was not the original lessor under the lease; it purchased the premises subject to the leases in 1996.

3 The lease was for a period of five years, commencing on 24 June 1994 with an option for a further period of five years. The lease provided that the leased premises could only be used as commercial premises for the purpose of carrying on the business described in Item 4 of the Reference Schedule. That limited the use to "showrooms, salerooms, storage rooms and offices relating to the sale of ladies' clothing and accessories and art gallery."

4 The lease incorporated the provisions set out in a filed Memorandum number T627856. The provisions relating to the option and its exercise are set out in Clause 18 of that Memorandum. So far as is relevant the Clause provides:

18.1 If the Lessee shall desire to take a renewed lease of the demised premises for the further term of years specified in Item 7 of the Reference Schedule computed from the expiration of the lease and shall give to the Lessor not less than six (6) months' previous notice in writing thereof and shall during the term duly and punctually pay the rent reserved by the lease at the times hereinbefore appointed for payment thereof and shall duly observe and perform the covenants and agreements by and on the part of the Lessee expressed or implied in the Lease up to the expiration of the term of the Lease the Lessor shall at the cost and expense of the Lessee grant to the Lessee a renewed lease for a further terms of years so specified upon the same terms and conditions as are herein contained but excluding this Clause 18 ...

5 By letter dated 15 December 1998, Flagstaff gave formal notice of exercise of option as follows:

Flagstaff Investments Pty Ltd being the lessee of shop 24 in the Georges Centre, 45-51 Cross Street, Double Bay, pursuant to registered lease number 2080448 hereby gives formal written notice of exercise of option pursuant to clause 18 of the memorandum T627856.

Signed: (Seal)

Date: 15/12/98

6 It is not suggested that this does not fulfil the notice requirements of Clause 18.

7 On three occasions in March 1999, real estate auctions were held in the showroom in the leased premises, these being conducted by Di Jones Real Estate. It seems from the evidence these were intended to be weekly evening events for a fee of $750 per week. It was admitted at the commencement of the hearing before me that allowing such activity was a breach of covenant under the lease. In those circumstances it is not really necessary to discuss further the particular provisions said to have been breached. Mr Teplitsky, the managing director of Cross Street, became aware of the proposed use of the premises for auctions through advertisements in the Wentworth Courier and in fact attended the auction which was held on 17 March 1999.

8 On 22 March 1999 the solicitor for Cross Street sent a notice of breach of covenant and intention to re-enter pursuant to s129 of the Conveyancing Act 1919. This notified various breaches of lease terms and required the unauthorised activities to cease by 29 March 1999, in default of which the lessor gave notice of intended re-entry.

9 By letter of 29 March 1999, the solicitor for Flagstaff denied there was any breach, but stated that nevertheless none of the matters or conduct alleged to constitute a breach would continue. There is no claim of any further breach. By letter of 31 March 1999, the lessor's solicitor wrote reiterating the claim of breach and said that "having regard to these breaches the lessor will not be granting any renewal of the lease under Clause 18 and is unwilling to give effect to the lessee's notice of exercise of option dated 15 December 1998." The letter sought confirmation that the premises would be vacated by 23 June 1999.

10 As a result of negotiations the defendant agreed not to re-enter provided these proceedings were commenced by 7 July 1999, which was done by summons filed on that day.

Claims

11 By amended summons filed at the commencement of the hearing, the plaintiff seeks:

1. A declaration it validly exercised the option for a new lease, either on or about 23 June 1999, or on or about 15 December 1998.

2. An order for specific performance of the option agreement provisions.

3. Orders restraining re-entry.

4. Further or other relief.

It was accepted that notice was given that the plaintiff would claim that it intended to apply for relief against forfeiture of the right to renew under this last head.

12 The main claim of the plaintiff under 1 and 2 above is that s133E of the Conveyancing Act 1919 operates so as to prevent the defendant from refusing to grant a new lease. This is the principal matter for decision. By cross-claim the defendant seeks possession. It is accepted that if the plaintiff fails, then an order for possession should be made.

The law and the Act

13 In Gilbert J McCaul (Aust) Pty Ltd v Pitt Club Limited (1959) 59 SR (NSW) 122, the full court considered an option which was in terms almost identical with the clause under consideration here. The court held that such a provision was an irrevocable offer to grant a lease:

In the present case the lessor irrevocably offered to grant a lease. Its offer prescribed the time and manner for acceptance. Only by performing the conditions prescribed could it be accepted and result in an agreement for a lease. A purported acceptance without performance of the prescribed conditions would not and could not be an acceptance of the offer. It would be in reality be a counter offer by the original offeree requiring acceptance by the original offeror if an agreement were to result. (p123)

14 There is of course a continuing controversy as to whether an option ought to be considered as an irrevocable offer or a contract subject to conditions. Mr Hutley, senior counsel for the plaintiff accepted that I should follow the decision in McCaul and was indeed bound to do so, but I note that he reserved his right to argue the contrary on any appeal. I proceed on that basis. In my view there can be no doubt that I am bound by McCaul.

15 What was decided in McCaul was that the observance and performance of the covenants and agreements in the lease was a condition precedent to the right to exercise the irrevocable offer so that any breach by way of non-observance or non-performance at any time during the term of the original lease, whether or not complaint was made at the time, was sufficient to prevent the tenant's entitlement or right to a new lease pursuant to the option. It appears that it was at least partly as a result of this decision that a reference was given to the New South Wales Law Reform Commission, which resulted in its report on Options in Leases (LRC5 1968) which in turn gave rise to amendments to the Conveyancing Act in 1972. The relevant sections for consideration here are s133E which are as follows:

133E. Breach of certain obligations not to preclude lessee from exercising option except in certain circumstances

(1) In this Division "prescribed notice" means a notice in writing that:

(a) specifies an act or omission, and

(b) states that, subject to any order of the court under section 133F, a lessor giving the notice proposes to treat that act or omission as having precluded a lessee on whom the notice is served from exercising an option contained in the lease.

(2) Where an act or omission that constituted a breach by a lessee of the lessee's obligations under a lease containing an option would, but for this section, have had the effect of precluding the lessee from exercising the option, the act or omission shall be deemed not to have had that effect where the lessee purports to exercise the option unless, during the period of fourteen days next succeeding the purported exercise of the option, the lessor serves on the lessee prescribed notice of the act or omission and:

(a) an order for relief against the effect of the breach in relation to the purported exercise of the option is not sought from the court before the expiration of the period of one month next succeeding service of the notice, or

(b) where such relief is so sought:

(i) the proceedings in which the relief is sought are disposed of, in so far as they relate to that relief, otherwise than by granting relief, or

(ii) where relief is granted upon terms to be complied with by the lessee before compliance by the lessor with the order granting relief, the lessee fails to comply with those terms within the time stipulated by the court for the purpose.

133F. Court may grant relief from breach of certain obligations

(1) Relief referred to in section 133E may be sought:

(a) in proceedings instituted in the court for the purpose, or

(b) in proceedings in the court in which:

(i) the existence of an alleged breach by the lessee of the lessee's obligations under the lease, or

(ii) the effect of the breach from which relief is sought,

is in issue.

(2) The court may, in proceedings in which relief referred to in section 133E is sought:

(a) make such orders (including orders affecting an assignee of the reversion) as it thinks fit for the purpose of granting the relief sought, or

(b) refuse to grant the relief sought.

(3) The court may, in proceedings referred to in subsection (2), take into consideration:

(a) the nature of the breach complained of,

(b) the extent to which, at the date of the institution of the proceedings, the lessor was prejudiced by the breach,

(c) the conduct of the lessor and the lessee, including conduct after the giving of the prescribed notice,

(d) the rights of persons other than the lessor and the lessee,

(e) the operation of section 133G, and

(f) any other circumstances considered by the court to be relevant.

(4) The court:

(a) may make an order under subsection (2) on such terms as to costs, damages, compensation or penalty, or on such other terms, as the court thinks fit, and

(b) may make any consequential or ancillary order it considers necessary to give effect to an order made under that subsection.

133G. Lease to continue in force until issue decided

(1) Subject to any order of the court and to this section:

(a) where:

(i) an option is contained in a lease,

(ii) the lessee exercises, or purports to exercise, the option, and

(iii) the lease would, but for this paragraph, expire within the period of fourteen days after the exercise, or purported exercise, of the option,

the lease shall be deemed to continue in force until the expiration of that period,

(b) where:

(i) a prescribed notice is duly served on a lessee, and

(ii) the lease in respect of which the notice is served would, but for this paragraph, expire within the period of one month referred to in paragraph (a) of subsection (2) of section 133E,

the lease shall be deemed to continue in force until the expiration of that period, and

(c) where, in relation to a lease continued in force under paragraph (b), relief referred to in section 133E is sought by a lessee, the lease shall, subject to subsections (2) and (3), be deemed to continue in force until:

(i) the proceedings in which the relief is sought are disposed of, in so far as they relate to that relief, otherwise than by granting the relief, or

(ii) effect is given to orders made by the court in granting that relief in so far as they affect the lessor or relate to an assurance to the lessee.

(2) Paragraph (c) of subsection (1):

(a) does not apply to or in respect of a lease that, but for that paragraph, would continue in force for a period longer than the period for which it is, by the operation of that paragraph, continued in force, and

(b) does not, where a lessee fails to comply with terms imposed upon the lessee pursuant to paragraph (a) of subsection (4) of section 133F, operate to continue the lease in force beyond the time of that failure by the lessee.

(3) Where, under subsection (1), a lease continues in force after the day on which, but for that subsection, it would expire:

(a) the lease so continues in force subject to the provisions, stipulations, covenants, conditions and agreements in the lease (other than those relating to the term and the option contained in the lease) but without prejudice to any rights or remedies of the lessor or lessee in relation to the lease, and

(b) the lessee, if the lease is of land under the provisions of the Real Property Act 1900 and the lessee is in possession of the demised premises, has the protection of paragraph (d) of section 42 of that Act as if the lease were a tenancy referred to in that paragraph.

(4) Subject to subsection (5), where, pursuant to an option contained in a lease continued in force under subsection (1), the lease is renewed or a new lease is granted, the period during which the lease was so continued in force shall be deemed to be part of the term for which the lease was renewed or the new lease granted, and any lease granted pursuant to an exercise of the option shall be expressed to have commenced when the lease containing the option would, but for subsection (1), have expired.

(5) Subsection (4) does not apply to or in respect of a lease that stipulates for the commencement of any lease granted pursuant to an exercise of the option contained therein on a day that is later than the day on which the lease so granted would, but for this subsection, commence under subsection (4).

16 The question for determination here is the impact of s133E on breaches of covenant which occur after notice of intention or desire to take a renewed lease is given, but prior to the expiration of the term of the original lease. It has been necessary to set out the legislation in detail to explain my decision.

17 This is a matter which is the subject of conflicting decisions by single judges of this court. In Beca Developments Pty Ltd v Idameneo (No. 92) Pty Ltd (1989) NSW ConvR. 55-459, Young J held that the particular option provision he was considering did not amount to an irrevocable offer subject to condition precedent for acceptance, but was such that when notice of exercise was given:

equitable rights came into existence entitling the lessee to a new lease from 1 July 1988, but there was a condition of forfeiture, that if at 30 June 1988 there were breaches of the lease, then the right to get a new lease would be forfeited.

There can be no doubt that the construction that notice gave rise to rights was open upon the wording of the clause under consideration and I do not think that further consideration need be given to that part of the decision. Young J was not departing from McCaul; the different facts brought forth a different interpretation of the rights arising under the option, although with respect, I do not agree with his conclusions as to the nature of the rights on notice of exercise. In view of the conclusion I have come to as to the proper construction of the particular clause in question, on one basis there is no need for me to consider in any detail, the conclusion of Young J based on s129 of the Conveyancing Act when read with s128 which makes s129 applicable to an agreement for lease in certain circumstances. However, as Hodgson J, in the next case to which I refer, seemed to accept the conclusions of Young J on this point it is better to deal with them.

18 Section 128 of the Conveyancing Act provides that for the purpose of s129 of the Act "lease" includes an "agreement for lease where the lessee has become entitled to have his lease granted". As I understand his decision, Young J held that the rights referred to in paragraph 17 amounted to an agreement for lease subject to forfeiture in the event of breach of the original lease prior to termination, that being a condition subsequent to entitlement to a lease. It follows he said that in the absence of notice under s129, the breach could not be relied upon.

19 In my respectful opinion, the more correct view is that on the wording of the option provision in Beca, and accepting some conditional contract as arising on notice of exercising of option, what came into existence was an agreement for lease, the rights to a lease or performance being conditional upon performance of the covenants of the original lease to its end. In other words, fulfilment of the covenants was a condition precedent to the right to a lease under the agreement. In such circumstances, in the event of breach the agreement for lease was not a "lease" under s129 of the Conveyancing Act because the lessee never became entitled to have the lease granted: it was not a matter of forfeiture: Greville v Parker [1910] AC 335.

20 Young J in Hayes v Gunbola Pty Ltd [1988] NSW ConvR 55-375 dealt at length with the words "lease includes an agreement for lease where the lessee has become entitled to have his lease granted". He came to the conclusion that the words should be read as having the words "had there been no forfeiture" inserted after the word "entitled". This accords with the view in Stuckey, The Conveyancing Act 2nd ed Law Book Company, Sydney (1969) para 590 and notes to that section and also conforms to the decision in Greville. As an alternative he considered the words could refer to a situation where a lessee had entered into possession and paid rent under the agreement and had become entitled to have the lease granted, although there may have been some subsequent breach. The latter case of course envisages the term as having commenced and in my opinion, so does the former.

21 Section 129 of the Conveyancing Act is in terms directed towards breaches during the term of the lease, re-entry has no relevance otherwise. Forfeiture under that section is directed to determination of a term, which has commenced, by forfeiture. Thus I do not consider s129 has anything to say about breach of a condition precedent to entitlement to a lease under an agreement for lease, nor do I consider failure to comply with a covenant in the original lease is a breach of a condition subsequent to an agreement for lease bringing about defeasance or forfeiture of the equitable interest upon which s129 can be brought to bear.

22 In Nessmine Pty Ltd v Devuzo Pty Ltd [1989] NSW ConvR. 55-496, Hodgson J was dealing with a lease containing an option clause to all intents and purposes identical with that in McCaul and the one in the present case. The term of that lease expired on 17 or 18 August 1989. The notice of exercise of option was served on 2 June 1989. At the expiration of the term there was a breach of the covenant in the lease requiring the lessee to keep the premises clean and in good and tenantable repair. No notice had been served under s133E of the Conveyancing Act. Thus His Honour had to determine if the phrase "purported exercise of the option" within s133E(2) was the giving of the notice on 2 June 1989 or whether the purported exercise of the option occurred upon the expiry date of the original lease. The case was precisely on the same foot as the instant case in that it proceeded on the basis there was no occasion to give the notice under s133E when the notice of desire to exercise the option was served, because there was no breach at that time, the breach being on termination of the original lease. Hodgson J said at p58,618 that the clause he was considering:

contemplated that the lack of an existing breach as at the date of termination of the original lease is a condition precedent to the exercise of the option and in my view therefore the purported exercise of the option within s133E(2) does not occur until the end of the term. In my view s133E(2) then applies to require the lessor to give a notice under that section within fourteen days thereafter if he wishes to rely on any breach as preventing an exercise of the option.

It would follow, if that conclusion is right, that in the instant case the purported exercise of the option was at the end of termination day, namely 24 June 1999, and that as no notice under the relevant section was given a valid exercise of the option has taken place. I should add that His Honour concluded that had he been wrong in deciding that the purported exercise of the option took place at the termination of the original lease, but rather took place when the notice was given, then on the reasoning of Young J in Beca which he seemed to accept, the same result would arise because there could have been no forfeiture of the equitable right to a new lease in the absence of a notice under s129 of the Conveyancing Act. As I have said, I am unable to agree with that and note that no detailed consideration of this question was necessary for the decision in Nessmine.

23 The next case for consideration is the decision of Bryson J in Rethmeier v Pioneer House Pty Ltd [1970] NSW ConvR. 55-516. The option clause in the lease under consideration there was in terms almost precisely the same as those in Nessmine, McCaul and the instant case. His Honour's attention does not seem to have been directed to Nessmine. At page 58-848 he said in relation to s133E(2):

In my view the subsection was drawn with regard to practices which are long established and almost invariably followed in New South Wales with respect to the manner of exercise of options for renewal of leases in which the delivery of a written notice is almost invariably required that the lessee take some plainly recognisable and active step to show that he wishes to exercise the option. Of course parties could choose some other fact or circumstance as constituting the exercise of an option and in a completely different field relating to option trading in shares parties contract by reference to standard clauses under which they are deemed to exercise the option available to them unless they indicate otherwise. In my experience such provisions are not known in respect of leases and the legislature spoke in relation to well-established and well-known practices. This lease conforms with well-established practice which I take it the legislature had in contemplation, and that practice requires written notice of an intention to exercise an option. That written notice and its delivery are in my view purported exercise of the option by the plaintiffs within the meaning of subsec. (2).

Even though outstanding matters for perfection of their right of renewal would be affected by action or inaction of the lessees, I do not see other action of the lessees or their omissions to perform covenants as within the range of the reference by the legislature to the lessees' purported exercise of the option. Accordingly, I am of the view that subsec. (2) takes away the effect only of breaches, including failures to pay rent in due time, which had occurred up to the date of the notice, either 12 or 17 May 1989.

24 His Honour went on to consider the decision of the Court of Appeal in England in Bass Holdings Limited v Morton Music Limited [1988] Ch 493, but went on to say that he could see no difficulty in reconciling the intention of s133E with the requirement that after notice was given there should be absolute compliance with the covenants. It follows that his decision was contrary to that of Hodgson J in Nessmine.

25 The last case for consideration is Lolly Pops (Harbourside) Pty Ltd v Werncog Pty Ltd [1998] NSW ConvR 55-861. This was another decision of Young J which dealt with many matters not relevant to the present determination. Nevertheless His Honour considered the decisions in Beca, Nessmine and Rethmeier and also stated that insofar as an earlier decision of his in Brennan v Kinjella [1993] NSW ConvR 55-677 held that s133E only applied to breaches up to the date of the tenant's notice, that should be disregarded. His Honour decided not to follow the decision in Rethmeier. He said that if he did follow it then the whole purpose of the legislation, which appears from the Minister's Second Reading Speech in the Legislative Assembly, would be frustrated. At page 56-747 His Honour said:

Mr Murr submitted that I should follow what Bryson J did in the Rethmeier case. With respect to his Honour, I do not think that I should. The whole purpose of the legislature which appears from the extract from the Minister's Second Reading Speech set out in the judgment of Kirby, P in the Snowy River case [Marshall v Council of Shire of Snowy River (1994) 7 BPR 97-567] at p 14,455 is that the artificial rule in the Gilbert J McCaul case was to be put to rest and that a more flexible position adopted whereby in the first instance the parties, and in the second instance the court, could do justice in each situation. It seems to me that the approach which Bryson, J took virtually means that the remedial measures taken by the legislature can be completely thwarted merely by the form of the clause requiring a notice of exercise to be given prior to the expiry of the lease. It seems to me that the constructions taken in Beca and Nessmine accord far more with what the legislature intended. Anything contrary to this in Brennan v Kinjella may be disregarded.

Thus, in the instant case, even though there were breaches, the landlord did not give any notice under s 133E. The breaches are thus not a complete bar to the tenant succeeding, they are merely matters which the court takes into account in its discretion as to whether to grant specific performance.

26 The result of this survey is that there is a disagreement among members of the court as to the proper construction of s133E. It is therefore most unfortunate that it is necessary for me to give another decision at first instance on this question. It would be far better fixed by legislative amendment setting out an appropriate procedure to be followed if a lessor wished to rely on breach of a provision of the lease between the date of notice of intention to exercise option and the date of expiry of the original lease, and requiring the prescribed notice to be given within 14 days of notice if the lessor wished to rely on breaches up to the time of the notice from the lessee. However, I am required to consider the matter myself giving proper weight and consideration to the decisions to which I have referred, comity not being possible.

27 As the second reading speeches in the Legislative Assembly and Legislative Council on the Conveyancing (Amendment) Bill, 1972 have been referred to and relied upon to some extent by each side in the case before me and by Young J in Lolly Pops, I set out the relevant passages from the speech of Mr Maddison, the Minister for Justice in the Assembly on 23 February 1972 and the Honourable F.M. Hewitt, Minister for Labour and Industry in the Council on 8 March 1972:

28 Mr Maddison:

Proposed sections 133c and 133g introduce the principle that a lessee should be relieved from forfeiture of his option in any case where the court, after considering all circumstances, determines that such protection is reasonable. The amendment attempts to meet all combinations of contingencies and for that reason is lengthy and complex. In essence it provides, in paragraph (b) of proposed section 133c, a definition designed to distinguish the undertakings of a lessee which would normally be found in a lease, whether or not that lease contained an option to review or to purchase, and, on the other hand, terms of a lease which are referable only to such an option. The legislative scheme is that, where a lessee who has committed some breach of his undertakings to the lessor attempts to exercise such an option, the lessor, if he wishes to treat the lessee's conduct as precluding him from exercising his option, must serve notice upon the lessee to that effect. Thereupon, the lessee may approach the court for relief against forfeiture on his option and the court, after taking into consideration various matters specified in subsection (3) of proposed section 133F - notably the relative hardship as between lessor and lessee - may make such orders as it thinks fit for the purpose of granting the relief sought, or may refuse to grant that relief.

Proposed section 133G is basically intended to preserve the lessee's rights until the court makes its determination and, if the latter favours the lessee, for such further time as may prove necessary to enable him to obtain from the lessor an appropriate instrument of disposition. Unfortunately the provision cannot be drafted as simply as that, because of the numerous permutations of contingencies, such as the lease expiring before or after the date of the court proceedings, the possibility that an option to purchase may be exercisable outside the term of the lease, and a number of other factors. Provision for the various possibilities necessarily makes the amending legislation appear quite complex.

29 Mr Hewitt:

The second case is a decision in 1957 of the Supreme Court of New South Wales, reported as Gilbert J. McCaul (Australia) Proprietary Limited v Pitt Club Limited, which was concerned with the right of a tenant to exercise an option for renewal set out in a clause of his lease. The option was made conditional upon the tenant's compliance with the covenants of the lease, one of which was a covenant to pay rent at specified intervals. In fact both landlord and tenant treated this clause rather casually, with the result that the rent was paid irregularly by the tenant without the landlord's raising any objection. However, when the tenant purported to exercise his option, the landlord treated the breach by the tenant of his undertaking to pay the rent punctually as ground for refusing to grant a new lease, and the court upheld his right to so forfeit the tenant's option.

The Government feels that in such cases, where considerable hardship would fall upon the tenant without any corresponding hardship to the landlord, the court should be enabled to give relief from forfeiture of an option either to renew the lease or to purchase the reversion. Therefore, new sections 133C to 133G provide procedure whereby in such cases a court, upon consideration of the relative hardship as between landlord and tenant, together with any other material factors, may relieve the tenant from forfeiture of his option to purchase or renew.

30 While it is clear that is was sought to cover the various possibilities and that this intention ought to be given effect to in case of doubt, the question is whether s133E bears on the facts in this case. What is at issue is "the purported exercise of the option". In McCaul it must be remembered the breaches relied upon by the lessor were breaches prior to notice of exercise or intention to exercise. The court in McCaul discussed the position which arose where an offer is not accepted in accordance with its terms so that the acceptance amounts to a counter offer. At page 124 the following passages appear:

If a conditional offer is made and the offeree without performing the condition purports to accept it, that is to say makes a counter offer and that counter offer is accepted, it is a loose although not uncommon use of language to say that the original offeror has waived performance of the condition which was prescribed by his offer as being the manner of accepting it. In contemplation of law the original offeror has done no such thing. What he has done is to accept a counter-offer and in the result an agreement is made but it is not an agreement consisting of the original offer and an acceptance of that offer. ...

The American Law Institute's Restatement of the Law of Contract (Vol. 1, s. 61) states the position clearly and concisely:

Acceptance of Offer Which States Place, time or Manner of Acceptance.

If an offer prescribes the place, time or manner of acceptance its terms in this respect must be complied with in order to create a contract ...

The author's note is:

If the offeror prescribes the only way in which his offer must be accepted, an acceptance in any other way is a counter-offer.

In many and perhaps most cases, this may be of little or no practical importance. In the present case, however, it may be of considerable importance. The plaintiff's purported exercise of the option was not an acceptance of the offer made in cl. 4, but was a counter-offer and the question whether that counter-offer was later accepted was not raised and has not been litigated, and it must be remembered that the agreement which would result from an acceptance of that counter-offer is one of a type which the law requires to be evidenced by writing.

31 It will be noted that twice in this passage the court refers to purported exercise of the option by notice. So did the Minister in the Legislative Council. I do not consider the intention contended for by the plaintiff is plain from the speeches in the Legislature.

32 Judges in this Division are assumed to have a basic knowledge of conveyancing practice; Waltons Stores (Interstate) Ltd v Maher [1988] HCA 7; (1988) 164 CLR 387 at 435. Thus I can say that I know from long experience that solicitors generally consider their option problems are over when a valid notice of exercise is sent, even if in some instances this is more properly called "notice of desire for a new lease". I do not think that matters. I have little doubt that in everyday usage in legal offices the words "where the lessee purports to exercise the option" would be seen as referring to the sending of notice and to have nothing to do with compliance from then on with the lease. I agree with Bryson J on this. It is a strange view of language to think that a lessee is purporting to exercise an option by conforming to the covenants of the prior lease. The language of s133G I think, supports my view. That section makes provision for an extension of the term of a lease, which includes the option, for periods necessary to enable notice to be given by the lessor after exercise and a claim for relief to be made by the lessee. But on their plain wording, those provisions do not bring about a renewal of a term which is already ended before notice. Yet on the reasoning in Nessmine the position is that notice can be given up to fourteen days after the term ends, which situation is not addressed by s133G. It is necessary to remember that if the "purported exercise of option" requires giving notice plus performance of the covenants up to the end of the term, then no tenant would know his or her position as to a new term, until after possession ought to be given up to the landlord not only because McCaul requires performance of covenants but also because there is usually a covenant to deliver up the premises to the landlord in good repair: see Short form 5 Schedule IV Conveyancing Act. And in the same way no landlord would know whether there was an entitlement to grant a new lease for the period between termination and fourteen days thereafter. It should not be assumed that such uncertainty was a legislative intention. I should add that in Caltex Properties Pty Ltd v Pittard (1991) ANZ ConvR 612 a case in Western Australia dealing with similar legislation in that State, White AJ quite clearly considered that service of the notice was the purported exercise of the option. There are many cases where the term "purported exercise of the option" is used, although obviously in different factual situations, but they all assume service of notice is purported exercise: see for example MacDonald v Robins [1954] HCA 5; (1954) 90 CLR 515 at 528; Sperry Rand Australia Ltd v Arrandale Properties Pty Ltd [1979] VR 409 at 411 (a clause similar to that here) and Spectra Pty Ltd v Pindari Pty Ltd [1974] 2 NSWLR 617 at 619

33 In the result I conclude that s133E does not bear upon breaches of covenant after notice. It follows that a condition precedent to the entitlement to a new lease has not been fulfilled so that unless there is some other general relief against forfeiture available the plaintiff's claim must fail. No strong argument was addressed by the plaintiff on this question. That is not surprising as the law is clear that relief against forfeiture will not be granted in respect of loss of a new term, where the loss arises through non-fulfilment of a condition precedent to grant. See Finch v Underwood [1876] 2 ChD 310; B.S. Stillwell & Co Pty Ltd v Budget Rent-a-Car System Pty Ltd [1970] VR 589 at 595. If relief had been available, s133E would not have been necessary. It follows from this that the summons should be dismissed and an order for possession made. The parties asked that in the event of this conclusion they have the opportunity to address or agree upon the time when possession should be required to be given.

34 I conclude by saying I have found it necessary to embark on such a detailed consideration of the problem in deference to the competing views. It is clear that in this case a substantial amount of money is involved in this determination. At least for the future in the absence of appellate decision clear legislation should be enacted as quickly as possible.

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LAST UPDATED: 30/09/1999