Leads Plus Pty Ltd v Kowho Intercontinental Pty Ltd

COUNSEL : M Cashion SC (P) J B Whittle SC and D Burwood (D) SOLICITORS : Henry Davis York (P) Truman Hoyle (D) CATCHWORDS : EQUITY [87]- Relief against forfeiture- Option- Not exercised in due time- Power to grant relief against forfeiture, but only in exceptional cases- No arguable case that present matter exceptional. - LANDLORD & TENANT [41] Relief against forfeiture- Option to renew- Not exercised in due time- Extent to which relief available. Bragg v Alam [1981] 1 NSWLR 668 CASES CITED : Harries v Bryant (1827) 4 Russ 89; 38 ER 738 Hillier v Goodfellow (1988) V Conv R 54-310 Legione v Hateley (1983) 152 CLR 406 DECISION : Interlocutory injunction refused.

THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION YOUNG J THURSDAY 18 MAY 2000

2420/00 - LEADS PLUS PTY LIMITED V KOWHO INTERCONTINENTAL PTY LIMITED

1 HIS HONOUR: This is an application for an interim injunction by a tenant against the landlord in respect of the tenant's failure properly to exercise an option for a renewed lease over premises in Harris Street, Ultimo. 2 The parties entered into a lease of the subject premises for three years terminating on 13 May 2000. Clause 17.1 of the lease was as follows: "If the Lessee desires to take a renewed Lease of the Demised Premises for the further Term...from the expiration of the Term and:

(a) gives to the Lessor previous notice of such desire not less than three months nor more than six months prior to the expiration of the Term; and

(b) is not then or at any time thereafter prior to commencement of such renewed Lease in default under the provisions of this Lease whether express or implied; and

(c) provided the Lessee has duly and punctually paid the rent and other moneys, if any, hereunder, the Lessor will at the cost and expense of the Lessee grant to the Lessee a renewal of this Lease for the said further Term..." 3 Under that clause, the last day for exercising the option was probably 13 February 2000, though argument could be put that it was 12 February 2000. It does not matter because the evidence clearly is that the earliest day on which the tenant purported to exercise the option was 14 February 2000. 4 The evidence for the plaintiff tenant is that a fax giving notice of its desire to exercise the option was sent to the lessor's managing agents on the late morning of 14 February 2000 and that there was a conversation between the principal of the lessee, Mr Graham, and the managing agents confirming that the fax had been received. The managing agents deny ever receiving any such fax on that day (though they do have a record of another fax about a minor matter to do with the building from the tenant being received that day). Their fax machine's register does not show any such fax having been received. They do have a record of receiving a letter bearing the date 14 February 2000 which was received on 28 February 2000 in an envelope postmarked 25 February 2000. 5 The plaintiff tenant has been given a notice by the landlord to vacate the premises on 28 May 2000. There is evidence that the plaintiff has been using the premises in a special way. It has made a contract with the Australian Taxation Office ("ATO") to be intimately involved with what is called the "e-tax project" which involves creating a system for the ATO where taxpayers can lodge their tax returns electronically. The plaintiff's contract is to assist the ATO in provision of e-tax, and has involved installation of complex cabling and technology at the premises with appropriate security. The plaintiff says that there would be no time now to move premises and relocate the fitout and cabling, and that unless it is permitted to stay in the premises between 1 July and 31 December 2000, the e-tax project as a whole will be in jeopardy. There is some evidence from the plaintiff that had it been aware on about 14 February 2000 that there was a dispute as to whether its exercise of option would be effective, either as a matter of law or practice, it may then have been able to move premises, but because there was no such notification it did not do so. 6 Mr Cashion SC who put the case for the plaintiff submitted that on two grounds an interlocutory injunction should be granted until the final hearing of this case to keep the plaintiff in possession of the premises. The two grounds were: (1) relief against forfeiture; and (2) estoppel. 7 As to relief against forfeiture, Mr Cashion SC conceded that whilst there has been some academic writing in the area there is not to his knowledge any reported case where a Court has ever granted relief against forfeiture to a tenant who had failed to exercise an option to renew a lease in due time. However, he put that such an order could be made as a matter of principle and there is an arguable case that it should be made in the instant proceedings. 8 When a judge is faced with an interim or interlocutory application for injunction the judge basically has to consider three matters:

(a) whether there is an arguable case that the plaintiff will succeed at the trial;

(b) the balance of justice, sometimes called the balance of convenience; and

(c) whether damages are an adequate remedy. 9 I should flesh this out a bit. There is no question in the instant case that damages are not an adequate remedy so I need only deal with (a) and (b). 10 So far as whether there is an arguable case, as I understand the position, strictly speaking that only applies to questions of fact. Where questions of law are involved the judge ordinarily decides the questions of law at the interlocutory hearing, but may decline to do so if it is inappropriate. The normal cases where it will be inappropriate will be:

(a) where there is insufficient time to give proper consideration to the points involved; and

(b) where the points of law are so intertwined with questions of fact that it should be left to the hearing. Otherwise the points are decided. 11 The Court does not make findings as to fact. However, when the Court is considering whether there is an arguable case the Court looks at not only the facts that have been submitted by the plaintiff, but also the facts that have been submitted by the defendant and asks whether in the light of both sets of evidence at the hearing there is an arguable case. No determination is made as to who is telling the truth, but it seems to me that it is within the assessment of an "arguable case" to take into account factors such as that one side is more consistent with the documents than the other. 12 So far as balance of convenience is concerned, the prime purpose of the exercise is to preserve rights until they can be dealt with by a final hearing of the Court. This is often referred to as keeping the status quo. Accordingly, where what the Court is doing is to leave the parties in exactly the same position as they were before the dispute with an undertaking as to damages then the Court usually need look no further. There will be cases where one has to look further because of the damages that might be suffered one way or the other. Indeed, even if there is a relatively slight prima facie case, if the consequences for the plaintiff are so dire, the Court may grant an injunction even though it has very great doubts as to whether the plaintiff will succeed at the trial. Likewise, if there will be dire consequences for the defendant, the plaintiff may be expected to put forward greater evidence of an arguable case than otherwise. Also, if the whole dispute will virtually be decided by the interlocutory application, the Court must bear that in mind. Finally, in keeping the status quo the Court must be careful not to create rights and not to force people into a commercial relationship where at least one of them would prefer to be free of it. There is, thus, a distinction between the case where one is merely keeping a relationship going and a case where one is creating a renewed or fresh relationship. The worst thing that a Court could be asked to do is to grant a person what is virtually a proprietary right at the expense of somebody else, merely because it would take some time for litigation to establish that right to be brought on for trial. 13 Accordingly, I approach the present case with that general background. 14 So far as relief against forfeiture is concerned the term is used in equity in various senses. Traditionally, relief against forfeiture and the once allied principle of relief against penalties, came about where a covenant in a bond, a mortgage or a lease and the forfeiture of a sum of money or the mortgagor's interest or the lessee's interest was held by equity to be a security for the payment of a money sum or some other event. In those cases equity would look to see what was the real intention of the parties and if that real intention could be met by the plaintiff paying a sum of money or doing something else then equity would prevent the other party from taking advantage of the covenant which was designed merely to secure that payment or event. Thus, in a lease if there was a rent of $10,000 a year with a proviso for re-entry if the rent was 14 days in arrears, provided that the arrears were paid together with costs, equity would stop the landlord from re-entering. If the landlord had already re-entered, even though the lessee's interest had disappeared at law equity would compel the landlord to grant a fresh lease for the balance of the term. 15 That, however, is not the type of relief against forfeiture that is being considered in the instant case. The type of forfeiture that is being considered here is one where the plaintiff has possession of property and an event has occurred which has caused that property to be forfeited or lost at law. In certain events equity will intervene so that that loss can be reversed. 16 The prime instance of this type of relief against forfeiture is where common law regards a covenant as having to be strictly and literally performed, but equity considers that it is enough if it is really and substantially performed according to the true intent and meaning of the parties. Accordingly, although at law a time clause may be what common lawyers call a condition so that a contract will be able to be terminated if the condition is not complied with, equity would prima facie regard a time clause as being merely permissive, though would sometimes require compensation as a term of giving relief. Before the Judicature Act reforms, the person seeking to rely on the equitable rule would have to commence proceedings in a Court of equity for relief against the operation of the common law. After those reforms s 13 of the Conveyancing Act, 1919 would apply with reference to time so that the former equitable doctrine has become part of the general law. 17 I use the example of time because there are some situations where, in equity, time is also essential. That is what is often referred to in a situation where time is of the essence of a contract. Where time is essential in equity as well as in law, equity will ordinarily give no relief at all because the true intent and meaning of the parties is that time is essential. 18 In the instant case it is conceded by the tenant that time was essential with respect to the exercise of the option. Accordingly, ordinarily the present type of relief against forfeiture would not be available. 19 However, in Australia (though not in England) in recent years courts have indicated that they may in some circumstances be prepared to go a little further with the second type of relief against forfeiture. Even if there is a condition which is essential not only in law but essential in equity, and even though equity would not grant specific performance because a time condition which is essential in equity had been breached, the Court, notwithstanding, may still make an order for relief. However, it will do this only in exceptional circumstances: see particularly Legione v Hateley (1983) 152 CLR 406, 449. As Mason and Deane JJ say at that page, "Whether the exceptional circumstances exist in a given case hinges on the existence of unconscionable conduct". 20 There is great doubt that even if this principle does apply it can operate in a situation where what is forfeited is the equitable interest in property that exists under an option to renew a lease prior to the exercise of the option. There is discussion of this in the article by Professor A G Lang, "Forfeiture of Interests in Land" (1984) 100 LQR 427 at 449 and following. 21 The view that I have tentatively taken and which is, I think, reinforced by the judgment of Peter Murphy J in Hillier v Goodfellow (1988) V Conv R 54-310, is that equity does have jurisdiction to make such an order but one must find that there is unconscionable conduct before one can exercise that discretion. 22 The cases on relief against forfeiture generally have been far more sympathetic to a plaintiff whose misfortune has come about as a result of accident or surprise rather than one that has come about through negligence. Indeed the view that was taken in the 19th century commencing with the attitude of Lord Eldon and which is still much in vogue in England today is, as Sir John Leach MR put it in Harries v Bryant (1827) 4 Russ 89, 91; 38 ER 738: "Ignorance is considered to be wilful, where a person neglects the means of information, which ordinary prudence would suggest; and accident is not unavoidable, which reasonable diligence might have prevented." 23 Whichever way one looks at it, in the instant case there was not pure accident or surprise. The tenant did not look at the lease until just before the last day the option could be exercised, and at the very least slack office procedures were the reason why the option was not exercised in time. These are matters involving failure to act with reasonable diligence or prudence rather than pure accident or surprise. 24 Apart from pure accident or surprise, the Court only gives relief in this sort of case, even on the most benign view of the law towards a plaintiff, where there are exceptional circumstances which are connected with the existence of unconscionable conduct. The clearest case of unconscionable conduct is where the grantor of an option (the lessor) deliberately avoids the proper attempts of the lessee to exercise the option; see, for instance, Bragg v Alam [1981] 1 NSWLR 668. However, unconscionable conduct may take other forms. It is not necessary that the conduct involve some fault on the part of the landlord, though normally that will be the case. There will be some cases where it will be unconscionable for the landlord to take advantage of a small mistake on the part of a tenant to obtain a windfall. 25 As Mr Cashion SC points out, a number of subsidiary questions inevitably arise as guidelines as to whether the conduct was unconscionable viz (I will substitute the word "lessor" for "vendor" in the quotation I have adapted from Legione v Hateley at 449 so that it makes sense in the current context):

(1) Did the conduct of the lessor contribute to the lessee's breach?

(a) trivial or slight; and (b) inadvertent and not wilful?

(3) What damage or other adverse consequences did the landlord suffer by reason of the lessee's breach?

(4) What is the magnitude of the lessee's loss and the lessor's gain if the forfeiture is to stand?

(5) Is specific performance with or without compensation an adequate safeguard for the lessor? 26 Some of these questions can be answered favourably to the lessee in the instant case, but not the majority of them. The conduct of the lessor in no way contributed to the late exercise of the option by the lessee. The breach was wilful in the traditional sense of the word, that is, not exercising reasonable diligence or prudence. The lessor has not to date suffered much by way of adverse consequences. The only damage that is put forward is that it may lose another tenant who wishes to extend into the space currently occupied by the plaintiff. The plaintiff does indeed stand to lose everything by its failure because it is too late to move into new premises, it will breach its contract with the Tax Office and would appear to be in danger of liquidation. 27 In all these circumstances, is there a sufficiently arguable case and does the balance of convenience favour the grant of an injunction so far as the relief against forfeiture case is concerned? 28 In my view the answer to these questions is "No". The failure to exercise the option was purely a matter of the tenant failing to act with reasonable diligence in managing its own affairs. It was in no way the fault of the landlord nor is the landlord going to gain a windfall of any great moment as a result of what happened. Even if the facts are found in the plaintiff's favour the chances of the plaintiff being successful at the trial to my mind appear to be merely speculative. Furthermore, to grant an injunction would have the effect of compelling the landlord to have the plaintiff in its premises after the agreed period for lease had come to an end, so that it would be more than merely preserving the status quo. 29 I might have been prepared to grant an injunction for a short period of time after 28 May 2000 so that the dispute between the parties could be dealt with on a final hearing. However, the indication was that it would take some time for the plaintiff to get ready and I do not feel that it is appropriate to keep the plaintiff in possession while that is happening. 30 The second limb of the argument relies on estoppel. It seems to me that that has got even less chance of there being an arguable case than with the former. First of all, there is a very serious problem of fact for the plaintiff in that the evidence of its officers conflicts with the documents kept by the defendant, including the records produced by the defendant's fax machine register. However, even if that is overcome there is no duty on a landlord to notify a tenant that the tenant has not exercised its option in time. Although there is correspondence going from the tenant to the landlord which seems to proceed on the basis that the tenant is remaining in the premises for the long haul, there is not to my mind sufficient indication it was the type of correspondence to which the landlord should have replied, "I don't know why you are writing this sort of letter because you won't be in the premises for very long". In any event the plaintiff's case is strongest if the facts are that there was an exercise of the option on 14 February 2000 and very much weaker if the facts fall out that there was an exercise only on 28 February 2000 as per the landlord's records. To date the only evidence is that if the plaintiff had known on 14 February 2000 that there was a dispute about the exercise of the option it might have got new premises in time. There is no material as to what might have happened on 28 February or any later date. Furthermore, there is no evidence that any search was made for other property or that any was available. In my view, there is not a sufficient prima facie case on estoppel. 31 The upshot is that I am not prepared to grant any interlocutory relief. 32 I stand the matter over to the Registrar's list for directions at 9.30 am on Tuesday 23 May 2000. 33 I order that the plaintiff pay the costs of the interlocutory application. 34 The exhibits may be returned. oOo

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