Replay Australia Pty Ltd v NightOwl Properties Pty Ltd [2023] QCA 76

SUPREME COURT OF QUEENSLAND

CITATION: Replay Australia Pty Ltd v NightOwl Properties Pty Ltd [2023] QCA 76

PARTIES: REPLAY AUSTRALIA PTY LTD AS TRUSTEE UNDER INSTRUMENT 707248123 / ACN 088 310 785 / (appellant) / v / NIGHTOWL PROPERTIES PTY LTD / ACN 126 734 549 / (respondent)

FILE NO/S: Appeal No 13117 of 2022 / Appeal No 16181 of 2022 / SC No 8260 of 2021

DIVISION: Court of Appeal

PROCEEDING: General Civil Appeal

ORIGINATING COURT: Supreme Court at Brisbane – [2022] QSC 204 (Bradley J)

DELIVERED ON: 24 April 2023

DELIVERED AT: Brisbane

HEARING DATE: 3 April 2023

JUDGES: Dalton and Flanagan JJA and Gotterson AJA

ORDERS: The appeal be allowed.The respondent’s claim be dismissed.The order for costs made in the proceeding below against the appellant be set aside.The respondent pay the appellant’s costs of the proceeding below and of the appeal.

CATCHWORDS: LANDLORD AND TENANT – RENEWALS AND OPTIONS – EXERCISE OF OPTION – RIGHT TO EXERCISE OPTION – WHERE LESSEE IN BREACH OF COVENANT – where the lessee gave notice of exercise of an option for renewal but did not subsequently satisfy other conditions for the exercise of the option because it was in arrears of rent – where the lease then expired – where the lessee did not validly exercise the option for renewal – where no obligation arose for the lessor to grant a further lease – where the lessee’s interest arising from the option was commensurate with the availability of specific performance – whether the lessee had, after the expiry of the lease, an interest in the leased premises arising from the option for renewal – whether equitable relief against forfeiture was available to the lessee in respect of the option / LANDLORD AND TENANT – RENEWALS AND OPTIONS – NATURE OF AN OPTION – where the lessee argued that the giving of notice of exercise of the option for renewal created an interest in the leased premises which entitled it to seek equitable relief against forfeiture of the option – where the lessee argued that the option for renewal was a conditional contract – where the lessor argued that, regardless of the option’s legal characterisation, the lessee’s failure to satisfy the conditions for its exercise precluded the right to a further lease from arising – whether equitable relief against forfeiture was available to the lessee in respect of the option / Australian Aggregates (NSW) Pty Ltd v Maxmin Pty Ltd, unreported, Supreme Court of New South Wales, Hodgson J 17 September 1996, approved / Carter Holt Harvey Woodproducts Pty Ltd v The Commonwealth (2019) 268 CLR 524; [2019] HCA 20, cited / Grepo & Anor v Jam-Cal Bundaberg Pty Ltd [2015] QCA 131, followed / Hill v Terry [1993] 2 Qd R 640; [1990] QSCFC 96, cited / Mercantile Credits Ltd v Shell Co of Australia (1976) 136 CLR 326; [1976] HCA 9, applied / Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37, cited / Re Eastdoro Pty Ltd (No 2) [1990] 1 Qd R 424; [1989] QSCFC 112, cited / Stern v McArthur (1988) 165 CLR 489; [1988] HCA 51, cited / Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315; [2003] HCA 57, applied / Tripple A Pty Limited v WIN Television Qld Pty Ltd [2018] QCA 246, applied

COUNSEL: S J Keim SC, and R A Quirk, for the appellant / M A Jonsson KC for the respondent

SOLICITORS: Clinton Mohr Lawyers for the appellant / Preston Law for the respondent

THE COURT: The issue raised by this appeal is whether the discretion to grant equitable relief against forfeiture arises in circumstances where, after giving written notice of exercise of an option to renew a lease, a lessee has not complied with other conditions for the exercise of the option, and the lease has then expired.
The appellant (Replay) submits the learned trial judge erred in deciding that, in such circumstances, equitable relief against forfeiture was available to the respondent (NightOwl).
The issue arises in the context of the following relevant background.

Relevant background

At the time the proceeding was commenced, Replay was the named lessor in a lease dated 14 February 2014, which had expired. NightOwl was the named lessee. The lease was for 10 years, commencing on 14 October 2010 and expiring on 13 October 2020.
By the lease, Replay granted NightOwl a leasehold estate over ground floor premises at 132 Albert Street, Brisbane. NightOwl covenanted that it would punctually and regularly pay to Replay “the rent … reserved by the lease, without any deduction whatsoever and without prior demand, calendar monthly in advance” during the term and afterwards so long as it occupied the premises.¹
On 12 June 2015 the lease was amended. By the amendment, the parties relevantly inserted a new cl 7.2 which provided for a “first option for renewal”.²
Both the lease and the amendment were registered over the title to the land. It is convenient to refer to the registered lease as amended by the registered amendment as the Lease.
Clause 7.2 of the Lease relevantly provides:

“7.2****FIRST OPTION FOR RENEWAL

**7.2(A)**Conditions of Exercise of First Option

If the Lessee desires a further lease of the Demised Premises for the First Option Term, clause 7.2(B) and 7.2(C) shall apply if:

(a)the Lessee gives written notice of exercise of option to the Lessor during the Option Exercise Period;

(b)this Lease has not been terminated or surrendered;

(c)there is not at the time of giving the notice under clause 7.2(A)(a) or thereafter prior to the Expiry Date any unremedied beach of the provisions of the Lease on the Lessee’s part which has not been waived by the Lessor; and

(d)the Lessee has at all times during the term strictly observed and performed the provisions of the Lease on the Lessee’s part.

**7.2(B)**Grant of First Option Term

Subject to clauses 7.2(A) and 7.2(E) the Lessor shall grant to the Lessee and the Lessee shall accept from the Lessor a further lease of the Demised Premises for the First Option Term upon the same terms, with the necessary changes, as are contained in this Lease except for:

(a)this clause 7.2 which shall be omitted;

(b)the Base Rent payable during the First Option Term which shall be determined under the provisions contained in clause 18.2(A) and the Appendix; and

(c)any other alterations and additions which the Lessor may reasonably require.

**7.2(C)**Execution of Lease for First Option

If the Lease for the First Option Term is granted the Lessee shall execute and deliver to the Lessor or the Lessor’s solicitors a new lease … within 20 Business Days of the delivery of such lease … by the Lessor or the Lessor’s solicitors to the Lessee or the Lessee’s solicitors. Such lease … shall be prepared, stamped and (…) registered by the Lessor’s solicitors at the cost of the Lessee. If the Base Rent for the First Option Term has not been determined by the commencement date of the First Option Term the Lessee shall pending such determination and the execution of the lease … be bound by the terms of the lease for the First Option Term on the Lessee’s part. Subject to the provisions contained in clause 18.2(A) and the Appendix, if the Base Rent for the First Option Term has not been determined by the commencement date of the First Option Term then pending such determination the Lessee shall pay Base Rent at the rate payable as at the Expiry Date. Upon such determination the Lessor and the Lessee shall promptly make any necessary adjustment.

…

**7.2(E)**Guarantee and Indemnity for First Option

If a person has guaranteed the Lessee’s performance of the provisions of the Lease … If the Lessee does not procure the execution of such guarantee and indemnity the notice given under clause 7.2(A)(a) shall, at the election of the Lessor, be of no effect. In the event of such election the Lessee shall not be entitled to any lease for the First Option Term.”

The expressions used in cl 7.2 are to be understood in the following way:³(a)the Expiry Date is 13 October 2020;(b)the Option Exercise Period means not less than six months and not more than nine months prior to the Expiry Date, and so it is the period from 13 January to 13 April 2020; and(c)the First Option Term is the five years commencing on 14 October 2020 and expiring on 13 October 2025.
By an email dated 22 January 2020, NightOwl gave Replay written notice of exercise of the first option.⁴Among other things, the email asked Replay to send its “rental proposal … on the basis we have exercised our option to renew”. Despite follow-up emails from NightOwl, no substantive response to the notice of exercise of the option was received from Replay until 9 December 2020, after the expiry of the initial term of the Lease.⁵
On 26 March 2020, NightOwl wrote to Replay requesting rent relief due to the COVID-19 pandemic and the prevailing government restrictions on businesses. Although correspondence seeking and providing further information about NightOwl’s turnover was subsequently exchanged between the parties, no agreement was ever reached in relation to rent relief.⁶
Nevertheless, between April and August 2020, NightOwl unilaterally decided to pay reduced amounts for the rent and outgoings under the Lease in line with the reduction of its turnover.⁷ Replay gave no notice to remedy any breach during this period, including during the remaining initial term of the Lease.
In September and October 2020, NightOwl resumed paying the full rent and outgoings due under the Lease.
On 13 October 2020, NightOwl, having not yet received a response to its notice of exercise of the option, sent an email to Replay referring to that notice and enclosing an independent market rental valuation. By that email, NightOwl requested that Replay confirm its acceptance of the independent appraisal and forward the new Form 13 for signing or otherwise advise of its position.
The initial term of the Lease expired at midnight that day, at which time NightOwl was in arrears of rent due to its failure to pay part of the rent due in April, May, June, July and August 2020.
On 22 October 2020, 17 November 2020, 30 November 2020 and 3 December 2020, NightOwl sent further emails enquiring about Replay’s position in respect of granting a further lease.

“1.Night Owl has, on more than one occasion, been in breach of the lease during the term;

2.Night Owl is currently in breach of the lease …; and

3.our client has in no way waived any of its rights under the lease with respect to breaches by Night Owl of its obligations under the Lease.”

As to NightOwl’s “current breach”, the letter stated:

“Night Owl has unilaterally decided to pay reduced rent over the period from 1 April 2020 to 31 August 2020 and is currently in arrears of rent in the amount of $57,821.52.”

Replay’s solicitors enclosed a Form 7 Notice to Remedy Breach of Covenant in respect of that breach. The letter concluded with advice that Replay “reserves its rights in all respects”.
On 10 December 2020, NightOwl paid $57,821.52 to Replay, being the full amount claimed in the notice to remedy breach.
On 9 June 2021, Replay’s solicitors sent a letter to NightOwl which reaffirmed the position set out in their earlier letter dated 9 December 2020. Relevantly, the letter stated:

“Your client, through its unilateral decision to pay reduced rent from the period 1 April to 31 August 2021 [sic] was in breach of an essential term of the lease during the period after it exercised its option to renew the lease and prior to the lease expiry on 13 October 2020.”

On this basis, Replay reasserted that it “was not obliged to grant [NightOwl] a renewal of the lease due to [NightOwl’s] failure to strictly comply with clause 7.2A of the Lease”.
From 10 December 2020, Replay received and accepted from NightOwl continuing monthly payments of the rental that applied under the Lease at the Expiry Date.
At trial, NightOwl sought both a declaration that it had validly exercised the first option for renewal and an order for specific performance of the Lease. Further or in the alternative, it sought relief against forfeiture under s 124(2) of the Property Law Act 1974 (Qld) (PLA) or as an equitable remedy. Replay’s position was that the Lease had expired in circumstances where it was not obliged to grant a further lease because NightOwl was in breach of the conditions in cl 7.2(A)(c) and (d). NightOwl asserted that Replay had waived the breaches with respect to those conditions.

The decision below

NightOwl was successful at trial on the issue of the court’s jurisdiction to grant equitable relief against forfeiture.
The trial judge made the following findings which are not challenged on appeal:(a)The Lease expired on 13 October 2020.⁸(b)At the expiry of the Lease, NightOwl was in breach of cl 1.2 of the Lease by having failed to pay rent in the sum of $57,821.52.⁹(c)As a result, NightOwl did not satisfy the condition in cl 7.2(A)(c) for the exercise of the option, namely the requirement that there be no unremedied breach of the Lease which had not been waived by Replay.¹⁰(d)By the same conduct, NightOwl also did not satisfy the condition in cl 7.2(A)(d) for the exercise of the option, namely the requirement that the Lease provisions had been strictly observed and performed at all times during the term.¹¹(e)Replay had not waived NightOwl’s failure to satisfy the conditions in cl 7.2(A)(c) and (d) for the granting of a further lease.¹²(f)Replay was not re-entering; it was relying on NightOwl’s failure to satisfy cl 7.2(A) as a basis to refuse to grant a further lease, and there was no inconsistent conduct in taking the rent and relying on the non-satisfaction for that purpose.¹³(g)There was no unconditional agreement to lease.¹⁴(h)There was no unconscientious conduct on Replay’s part.¹⁵
On the issue of waiver by Replay of NightOwl’s breaches, the trial judge considered Replay’s conduct, including:(a)receiving, without substantive comment or demur, the correspondence sent by NightOwl on 22 October 2020, 17 November 2020 and 30 November 2020;(b)serving the notice to remedy breach on 9 December 2020;(c)receiving and accepting the $57,821.52 paid in response to that notice; and(d)receiving and accepting rent paid by NightOwl since 10 December 2020.
None of that conduct was held to be inconsistent with Replay having a right to rely on NightOwl’s failure to satisfy cl 7.2(A) as a basis for avoiding the obligation in cl 7.2(B) to grant a further lease.

This appeal

The sole ground of appeal advanced by Replay is that the trial judge erred in deciding that equitable relief against forfeiture was available to NightOwl. In essence, Replay’s submission is that, because the option to renew was not validly exercised, cl 7.2 did not confer on NightOwl, prior to (or after) the expiry of the Lease, any right to call on Replay for the grant of a further lease. Replay submits that, in the absence of any such right or interest, relief against forfeiture cannot be available following the expiry of the Lease.
NightOwl’s submissions in response are twofold. First, it seeks to vindicate the trial judge’s reliance on the reasoning of Gibbs J in Mercantile Credits Ltd v Shell Co of Australia (Mercantile Credits),²² which his Honour considered provided a basis for finding that NightOwl had an interest which could be relieved from forfeiture. Second, if it is unsuccessful in its primary submission, NightOwl seeks to establish that the trial judge, in any event, had jurisdiction to grant equitable relief against forfeiture on the basis of his Honour’s preferred characterisation of cl 7.2 as a conditional contract. This latter point is the subject of a Notice of Contention.
For the following reasons, NightOwl’s submissions ought to be rejected.

No obligation arose under cl 7.2(B) for Replay to grant a further lease

The circumstances in which an option for renewal will have been validly exercised by a lessee were considered by this Court in Grepo & Anor v Jam-Cal Bundaberg Pty Ltd (Grepo)²³ and Tripple A Pty Limited v WIN Television Qld Pty Ltd (Tripple A).²⁴
In Grepo, this Court considered an option for renewal, the terms of which are essentially identical to cl 7.2 of the Lease. Like the present case, the lease in Grepo had expired in circumstances where the lessee had, after delivering notice of its intention to exercise the option, failed to satisfy other conditions for the option’s exercise. The question in Grepo was whether relief against forfeiture pursuant to s 124 of the PLA was available to the lessee. Holmes JA, with whom Morrison JA and Douglas J agreed, held that, notwithstanding the timely delivery of a notice of intention to exercise the option, the failure to satisfy other conditions for the option’s exercise resulted in no obligation arising for the lessor to grant a further lease.²⁵ In the absence of any entitlement to a further lease, the lease simply expired.²⁶ This conclusion was not affected by whether the option for renewal was properly characterised as an irrevocable offer or a conditional contract.²⁷
As to the legal characterisation of an option for renewal and its significance, Holmes JA observed:²⁸

“For the purposes of this case, it is unnecessary for me to decide between the irrevocable offer and conditional contract approaches. I have concluded that, whatever view one takes of the character of an option to renew, in the present case the terms of cl 17, and the fact that there were breaches of covenants in this lease up to and at the date of its expiry, meant that the lessor was not obliged to grant a new lease. On the Gibbs J approach, the cl 17 option was an agreement to grant a further lease conditional on the lessee’s performance of the conditions set out in the clause. Absent the performance of those conditions, no entitlement to a further term arose. The option could be called an agreement for a lease but it could not be characterized as an agreement for a lease with the lessee then being entitled to the lease…

Applying the irrevocable offer analysis, I do not think that cl 17 lends itself to a similar construction to that of the clause in Beca. Clause 17 contained conditions precedent to acceptance of the offer: that notice be given at least six months before the existing lease’s end, which was met, and that it comply with the lease’s covenants up until that time, which was not met, so that the offer was not accepted. I note that in Tenstat Pty Ltd v Permanent Trustee Aust Ltd, McLelland J similarly construed an option with the same conditions as those in cl 17.

Even if that were not so, and the offer were accepted on the lessee’s giving notice of exercise of the option, with the requirement to fulfil the obligations in the lease as a condition subsequent, I would not regard s 124 as having any application. … If there were a conditional contract at the point when notice of exercise of the option was given, it was an agreement which gave the lessee the right if it performed the stipulated conditions to enter a new lease. It was not an agreement for a lease which the lessee was entitled to have granted while the requirement that it not be in breach of covenant at the end of the lease remained unfulfilled.” (emphasis added)

In Tripple A, a preliminary issue arose which concerned whether a lessor could waive a lessee’s failure to comply within time with the requirement to deliver a notice of exercise of an option. After considering the competing legal characterisations of an option,²⁹ Bowskill J, with whom Morrison and Philippides JJA agreed, determined that only by performing the conditions prescribed for the exercise an option could the offer to grant a further lease be accepted or the conditional contract be performed.³⁰ The legal position is that if a lessor nonetheless agrees to grant a further lease, the lessor has not waived the failure to comply with the conditions of the option but, rather, has accepted a counter offer. As Bowskill J relevantly observed:³¹

“… as to the requirement for the conditions of an option to be strictly complied with, once the time for performance of the stipulated condition(s) for exercise of the option has passed (whether on the irrevocable offer or conditional contract analysis), there is nothing to waive.”

In finding that relief against forfeiture was available in the present case, the trial judge drew a distinction between, on one hand, the notice condition in cl 7.2(A)(a) and, on the other hand, the conditions in cl 7.2(A)(c) and (d).³² His Honour held that the former condition required strict compliance in the sense that non-compliance would result in the right to exercise the option being “lost completely”.³³ By contrast, NightOwl’s failure to satisfy the latter conditions would not prevent a valid exercise of the option because those conditions could not themselves be treated as part of the “exercise” of the option.³⁴ The trial judge considered that if the latter conditions could be treated as such, then this would give rise to something of a commercial nonsense whereby “[t]he parties to such a lease would not know whether they were bound by a new lease until the existing lease term had expired”.³⁵ Further, it would mean NightOwl could “avoid being bound to accept a new lease by the simple expedient of terminating its insurance policy for plate glass” on the last day of the Lease term, thereby breaching cl 1.11 and, consequently, cl 7.2(A)(d) of the Lease.³⁶
Clause 7.2, however, should be construed according to ordinary principles, including the requirement that the clause be read as a whole.³⁷ Clause 7.2(B), which obliges Replay to grant a further lease to NightOwl, is expressly made subject, relevantly, to cl 7.2(A). If NightOwl desired a further lease, the obligation on the part of Replay to grant a further lease would only arise upon NightOwl satisfying each of the conditions in cl 7.2(A).
On a proper construction of cl 7.2 and having regard to this Court’s decision in Grepo and Tripple A, an obligation under cl 7.2(B) for Replay to grant a further lease could only arise if each of the conditions set out in cl 7.2(A) were satisfied by NightOwl. It is not disputed that, at the expiry of the Lease, NightOwl was in arrears of rent. Nor is it disputed that Replay’s conduct did not amount to waiver. In these circumstances, no obligation arose under cl 7.2(B) for Replay to grant a further lease because NightOwl had failed to validly exercise the option in the manner prescribed by cl 7.2(A).

No interest survived the expiry of the Lease

For the discretion to grant equitable relief against forfeiture to arise, the first requirement is that there be an “interest” in respect of which that discretion may be exercised.³⁹ In determining whether equitable relief against forfeiture is available to NightOwl, the starting point is therefore whether, the term of the Lease having expired with NightOwl not having satisfied cl 7.2(A)(c) and (d), there is any remaining interest that might require relief from forfeiture by an order for specific performance.
As adverted to above, the trial judge expressly relied upon the reasoning of Gibbs J in Mercantile Credits as authority for the proposition that, when a lease instrument containing an option for renewal (such as cl 7.2) is registered under the Torrens system, the interest conferred by that option is of the nature of an interest in the land which is dealt with by the lease.⁴⁰ On the reasoning of the trial judge, the “interest” to which Gibbs J refers appears to have been sufficient for the purposes of the present case to justify the availability of equitable relief against forfeiture.
The High Court in Mercantile Credits was concerned with whether an option for renewal contained in a registered lease derived indefeasibility from the registration of that lease. According to Gibbs J, the right of renewal runs with the land and the reversion and is so intimately connected with the leasehold that it should be regarded as part of the estate or “interest in the land” acquired under the lease, so as to obtain similar protection upon registration as the term itself.⁴¹ However, the reference by Gibbs J in Mercantile Credits to an “interest in land” is properly understood as a reference to that phrase within the meaning of the Torrens system legislation. It is not, nor was it intended to be, a reference to an interest in land which is capable of founding a claim for equitable relief against forfeiture.
This distinction was clarified by Barwick CJ in Mercantile Credits, who expressed a necessary qualification to the reasoning of Gibbs J. The Chief Justice stated:⁴²

“By virtue of s. 67, upon registration of the memorandum of lease, the “estate or interest specified in such instrument” passed to the lessee subject to the covenants set forth in the memorandum and to those implied by the Act. Again, it is important to observe the definition of land in s. 3 of the Act, including as it does “every estate and interest in land”. A right of renewal of a lease contained in the registered instrument, if when exercised it would create a specifically enforceable agreement for a further term in the land, does constitute, in my opinion, a present interest in the land within the scope of the Act. As to the effect of an option to purchase with which an option to renew is comparable in relevant respects, see Laybutt v. Amoco Australian Pty. Ltd. [(1974) 132 CLR 57, at pp 71-72] and cases there cited. A covenant giving a right of renewal of the term, in my opinion, forms part of the delineation of the lessee’s total interest in the land. Indeed, the basis of the doctrine that such a covenant runs with the land is that the covenant is “so annexed to the land as to create something in the nature of an interest in the land”, per Farwell J. in Miller v. Trafford [(1901) 1 Ch, at p 61 (at p 338)]. …

It is now settled that an estate or interest purportedly created by an instrument, void under the general law, derives validity and indefeasibility from the registration of the instrument purporting to create that estate or interest. … But the specific enforceability of the covenant for renewal, assuming its validity either under the general law or because of its presence in the registered instrument, will be decided under the general law. The interest in the land derived from the covenant will be coextensive with the extent to which the covenant could be ordered to be specifically performed.

…

In my opinion, because of the specific enforceability of the right to renew, if exercised, the registration of the memorandum of lease containing the covenant for renewal created an interest in the land commensurate with the extent of the covenant. The memorandum of lease in its entirety so far as it affected any estate or interest in the land obtained the priority given by s. 56, and the title of the registered proprietor of the lease, including that interest in the land derived from the covenant for renewal, became absolute and indefeasible by virtue of s. 69.” (emphasis added)

In that passage, Barwick CJ “qualified” what was said by Gibbs J by identifying that before an option for renewal can be said to confer an interest in land in the necessary sense, the option for renewal must be specifically enforceable.⁴³ The fact that the Torrens system might protect an option as part of a registered lease says nothing about the consequences of failing to validly exercise that option. In this respect, the trial judge’s reliance on the reasoning of Gibbs J to establish that NightOwl had an “interest” under the option that equity could relieve from forfeiture was misplaced.
This analysis accords with the reasoning of Hodgson J in Australian Aggregates (NSW) Pty Ltd v Maxmin Pty Ltd:⁴⁴

“Even if relief against forfeiture of the 1976 agreement was to be granted, there is a question whether the purported exercise of the option could be effective in any event. The option was subject to a condition that the Plaintiff should have “complied with all the terms and conditions of this licence”, and I have found that it has not in fact so complied. In my view, except in relation to the matter of estoppel, McCaul v Pitt Club [1959] 59 SR (NSW) 122 is still binding on me. …

The Plaintiff has submitted that in relation to the McCaul v Pitt Club question, relief against forfeiture can be granted. In my view, the case relied on by the Plaintiff in this regard, Mercantile Credits v Shell Co. (1976) 136 CLR 326 does not show that relief against forfeiture can be applied where the exercise of an option is challenged on the basis that a condition of the exercise of the option, namely compliance with the terms of the original agreement, has not been fulfilled. The case shows, in my view, that if relief against forfeiture of a lease or similar agreement is granted, then that relief will be effective to save the option clause as well as other clauses of the agreement. However, it has nothing to say about defective exercises of an option.” (emphasis added)

In Mercantile Credits, Barwick CJ considered that “[t]he interest in the land derived from the covenant [for renewal] will be coextensive with the extent to which the covenant could be ordered to be specifically performed”.⁴⁵ The Chief Justice further explained that registration of the lease containing the “covenant for renewal created an interest in the land commensurate with the extent of the covenant”.⁴⁶ That is to say, the interest of a lessee under an option for renewal contained in a lease is commensurate with the availability of specific performance.
A similar view was preferred by Gleeson CJ, McHugh, Gummow, Hayne and Heydon JJ in Tanwar Enterprises Pty Ltd v Cauchi (Tanwar),⁴⁷ albeit in the context of describing the “interest” of a purchaser in land under an uncompleted contract for sale. Their Honours said:

“In Stern, Gaudron J points out, consistently with authority in this Court, that the “interest” of the purchaser is commensurate with the availability of specific performance. That availability is the very question in issue where there has been a termination by the vendor for failure to complete as required by the essential stipulation. Reliance upon the “interest” therefore does not assist; it is bedevilled by circularity.” (citations omitted)

In Tanwar, the central issue was whether relief against forfeiture by an order for specific performance remained available to a purchaser of land under a contract where time was of the essence and the seller had terminated the contract for the purchaser’s failure to complete on time.⁴⁸ In holding that on the facts it was not, the plurality noted that, since relief against forfeiture was being sought in equity, the purchaser’s position would rise or fall on whether a court, having regard to the circumstances before it, would order specific performance.⁴⁹ That conclusion was apparently underpinned by a recognition that the termination of the contract pursuant to a valid rescission notice had extinguished both the contract and the purchaser’s interest in the land, so that neither could be the basis for relief. It was therefore not helpful to explain the availability of relief by reference to rights under a terminated contract.
Similarly, in the present appeal it is unhelpful to consider whether relief against forfeiture by an order for specific performance is available to NightOwl by reference to rights under an expired lease. Properly understood, NightOwl’s interest in the leased premises under the option to renew depends for its existence on the availability of specific performance.
The difficulty for NightOwl in the present case arises from the fact that the Lease expired in circumstances where the option was not validly exercised. At the expiry of the Lease, NightOwl remained in arrears of rent. This was not paid until 10 December 2020. It was therefore not by any act of Replay that the Lease came to an end but simply from the effluxion of the time. This was merely a consequence of the parties’ bargain.
In Tanwar, the plurality observed that, in the context of an alleged unconscientious reliance by the vendor upon their contractual power to terminate:⁵⁰

“… it does not assist to found the equity of the purchaser upon the protection of rights to injunctive relief acquired under a contract the termination of which has taken place. Whilst the contracts here were on foot, breach thereof by the vendors would have been restrained. But there was no relevant breach of contract by the vendors, and the contracts were terminated in the exercise of a contractual right to do so.” (emphasis added)

NightOwl cannot be entitled to relief against forfeiture of its interest (which is commensurate with its entitlement to specific performance) because, if Replay was entitled to allow the Lease to expire and had no obligation to grant a further lease, NightOwl had no entitlement to specific performance after the Lease’s expiry. In those circumstances, there is no interest or, to use the language in Tanwar, no “acquired right” which provides a basis for this Court to grant relief against forfeiture. As Replay correctly submits, there is nothing to specifically perform.
In Stern v McArthur,⁵¹ Mason CJ considered that equity is not authorised “to reshape contractual relations into a form the court thinks more reasonable or fair where subsequent events have rendered one side’s situation more favourable”. This view was endorsed by the plurality in Tanwar.⁵² However, granting relief in the present case would operate contrary to that proposition to “reshape” the parties’ bargain by creating an interest which, upon the expiry of the Lease, ceased to exist.

Notice of Contention

By its Notice of Contention, NightOwl relies on the trial judge’s preferred construction of cl 7.2 as a conditional contract to contend that the trial judge had jurisdiction to grant equitable relief against forfeiture independently of the proprietary character that was said to be acquired by cl 7.2 on the reasoning of Gibbs J in Mercantile Credits. In the course of oral submissions, it was submitted on behalf of NightOwl that, if cl 7.2 is treated as a conditional contract, an equitable interest arose upon NightOwl giving notice of exercise of the option. That argument depends on the distinction drawn by the trial judge between the condition in cl 7.2(A)(a) and the conditions in cl 7.2(A)(c) and (d). As explained at [41] above, however, Replay’s obligation to grant a further lease could only arise if NightOwl satisfied each of the conditions of cl 7.2(A).
NightOwl implicitly asserts that the conditional contract approach lends itself to the view that the grantee of an option obtains an equitable interest in the land the subject of the option because that is consistent with the interest which would arise under a conditional contract for sale.⁵³ NightOwl submits that relief against forfeiture should be granted based on its loss of that so-called interest. However, under the conditional contract approach, properly understood, the interest which arises remains contingent until the option is validly exercised because, while there is a “conditional contract”, there is no agreement to lease as between lessor and lessee in the relevant sense which would confer on the lessee the right to call for a further lease without more (that is, without satisfying the further conditions).⁵⁴ In this way, the Notice of Contention merely raises a difference without a meaning, as counsel for Replay correctly submits.

Costs appeal

There is also before this Court a separate appeal in relation to costs. However, it was accepted by the parties at the hearing that costs should follow the event.

Disposition

The following orders should be made:

The appeal be allowed.

The respondent’s claim be dismissed.

The order for costs made in the proceeding below against the appellant be set aside.

The respondent pay the appellant’s costs of the proceeding below and of the appeal.

Footnotes

Clause 1.2 of the Lease. ↩
There were some other amendments, including the insertion of a new cl 7.3 which provided for a “second option for renewal” in terms materially the same as cl 7.2. ↩
NightOwl Properties Pty Ltd v Replay Australia Pty Ltd [2022] QSC 204, [10] (Reasons). ↩
At trial, no issue arose as to the timing, manner or form of the notice of exercise of the option: Reasons, [107]. ↩
Reasons, [16]. ↩
Reasons, [48]. ↩
At trial, NightOwl did not assert that it was entitled to a reduced rent under the Retail Shop Leases and Other Commercial leases (COVID-19 Emergency Response) Regulation 2020 (Qld): Reasons, [51]. ↩
Reasons, [33]. ↩
Reasons, [51]. ↩
Reasons, [63]-[64]. ↩
Reasons, [68]. ↩
Reasons, [87]. ↩
Reasons, [84]-[86].

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