Starting up a business can be difficult. There are a wide multitude of factors that need to be considered and weighed up before taking the deep plunge into the wide world of commerce. One of the most crucial questions is ‘where do I set up the business’? Location is everything these days and if you find a good spot, you need to hold on to it with both hands. So, you take out a 5-year lease to ensure that you have some type of longevity. But how many of us think about what happens after this initial period expires? You would be surprised.
Getting your legal representative to include an appropriate option in the lease may be a way of covering you if things are going well and the location is a prime factor to your success. Section 133C of the Conveyancing Act 1919 (NSW) (‘CA’) defines an option as a right on the part of the lessee to require the lessor to:
1. Sell, or offer to sell, to the lessee the reversion expectant on the lease.
2. To grant, or offer to grant, to the lessee a renewal or extension of the lease, or a further lease, of the demised premises or a part thereof.
In Misiaris v AFC Holdings (1988) 15 NSWLR 231 at , Needham J provided that the option to renew is a provision for the benefit of both the lessor and lessee and cannot be waived by either. An option has also been described in a number of recent decisions in the New South Wales as a conditional agreement for a further lease and an irrevocable promise to keep an offer to grant a lease open for a specified period of time: McCaul (Aust) Pty Ltd v Pitt Club Ltd (1957) 76 (NSW) 72.
A lessor may object to a lessee exercising an option if the lessee has breached the lease. This is done by serving a prescribed notice pursuant to section 133E CA. A prescribed notice is essentially a notice in writing, served in most cases within fourteen days from the lessee purporting to exercise the option, that specifies the lessee’s breach of the relevant obligation in the lease and stating that, subject to an order of the Court under section 133F CA, the lessor proposes to treat the breach as precluding the lessee from entitlement to the option.
The onus then shifts to the lessee to approach the Court for a grant of relief against forfeiture in accordance with section 133F CA. Whilst relief against forfeiture proceedings are on foot, section 133G CA provides that the lease will usually continue in force until the proceedings are decided. In Allsvelte Pty Ltd v Cassegrain Wines Pty Ltd (2015) 18 BPR 35,637, Justice Ball provided that:
‘In any proceedings for relief under s 133E the burden of proof of a breach of the lease lies upon the lessor, while the burden of demonstrating that relief should be granted, assuming that the alleged breaches are made out, lies upon the lessee: Re Denny’s Restaurants  Qd R 92, applied in Evanel Pty Ltd v Stellar Mining NL  1 NSWLR 380 at 387-8’
So once a breach noted in the section 133E CA notice is made out, the onus shifts on the lessee to convince the Court that relief against forfeiture should be granted.
Granting relief under section 133F CA discretionary and a wide power exercisable by the Court. In Dee-Tech Pty Ltd & Anor v Neddam Holdings Pty Ltd (2013) 16 BPR 31,089, Justice White provide that:
‘The principles of relief against forfeiture of a lease are discussed in Shilo Spinners Limited v Harding  AC 691 at 724, 725. The question is whether:
1. The primary object of the bargain embodied in the lease can be effectively attained when the matters comes before the court on the application to be relieved against forfeiture of the option.
2. Whether the lessee’s default was wilful or persistent.
3. The gravity of the breaches.
4. Any disparity between the value of the property of which forfeiture is claimed compared with the damage caused by the breach.
These considerations are also engaged by s 133F(3)’.
An important consideration is that a lessor’s main goal in entering into a lease is for rent. If rent is paid he/she might think twice about denying the option. This is of course unless the breaches are so untenable that an application is forced on the lessor.
If you would like to discuss anything about relief against forfeiture, please do not hesitate to contact me by:
Phone: (02) 9232 4466
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