Newstart 236 Pty Limited v Chantal Holdings Pty Limited [2000] NSWSC 1102

New South Wales Supreme Court

CITATION : Newstart 236 Pty Limited v Chantal Holdings Pty Limited [2000] NSWSC 1102 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 4147/2000 HEARING DATE(S) : 24/11/00; 27-28/11/00 JUDGMENT DATE : 1 December 2000

PARTIES : Newstart 236 Pty Limited v Chantal Holdings Pty Limited JUDGMENT OF : Simos J at 1

COUNSEL : L. Aitken (Plaintiff) M. Slattery QC with M. Walsh (Defendant) SOLICITORS : Gray & Perkins (Plaintiff) Wood Marshall Williams (Defendant) CATCHWORDS : Landlord and tenant - Forfeiture of lease for non-payment of rent - Relief against forfeiture sought solely to enable lessee to exercise option allegedly granted in lease - Alleged option unenforceable - HELD: relief against forfeiture refused because option unenforceable - HELD further, relief against forfeiture would be refused even if option was enforceable because plaintiff (lessee) had not established that it was probable that it could obtain finance to exercise option. CASES CITED : Pioneer Quarries (Sydney) Pty Limited v Permanent Trustee Co of NSW Ltd 2 BPR 97145 DECISION : Plaintiff's claim for relief against forfeiture of lease for non-payment of rent refused.

THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

SIMOS J

Friday 1 December 2000

4147/00 NEWSTART 236 PTY LIMITED v CHANTAL HOLDINGS PTY LIMITED

JUDGMENT

1 HIS HONOUR : By statement of claim filed 16 November 2000 Newstart 236 Pty Limited, the plaintiff claims as against Chantal Holdings Pty Limited, the defendant, inter alia, that on or about 14 September 1999 the plaintiff executed a lease from the defendant, which lease was expressed to commence on 1 January 2000. It is alleged in the statement of claim that the plaintiff executed the lease relying on certain representations allegedly made by the defendant to the plaintiff (see later). 2 The statement of claim also alleges that in or about February 2000 the plaintiff paid the sum of $98,357 to the defendant "in satisfaction of the rent claimed to be outstanding". 3 The statement of claim further alleges, so far as relevant, that in or about 8 September 2000 the defendant "purported improperly and without justification to terminate the lease and to exclude the plaintiff from the property as notified by letter of 8 September 2000 from the defendant to the plaintiff." 4 The statement of claim further alleges that, following the obtaining of relief by way of injunction from this court restraining the defendant on an interlocutory basis from interfering with the plaintiff's possession and occupation of the premises, on or about 25 October 2000 the plaintiff by its solicitors, tendered to the defendant the amount of rent then claimed to be outstanding in the sum of $55,000.00. The statement of claim further alleges that on or about 13 November 2000 the plaintiff by its solicitor, tendered to the defendant a further amount of $15,000.00 being the amount of rent due for November 2000. 5 Finally, it is alleged in the statement of claim that the plaintiff is ready willing and able to comply with its obligations under the lease and in the premises is entitled to relief against forfeiture, if any such forfeiture has occurred. 6 The plaintiff claims, so far as material, that it was entitled to relief against forfeiture of the lease on such terms and conditions as to the Court seems fit. 7 By its cross claim, the defendant (cross-claimant) alleged that before 8 September 2000 the plaintiff committed acts of default under the lease including, allegedly, non-payment of rent, whereupon on 8 September 2000 the defendant exercised its rights under the lease to determine the lease and re-enter the premises and take possession thereof by changing the locks upon the premises and by the service of a notice of re-entry upon the plaintiff. 8 The cross claim also alleged that by clause 3.03 of the lease the plaintiff covenanted to pay a minimum rental of $15,000.00 per month to the defendant and that clause 15.01 of the lease provided that the plaintiff was deemed to be in default under the lease if the rent reserved under the lease or any part thereof was unpaid and in arrears for fourteen (14) days whether or not any formal or other demand thereof shall have been made. The cross claim also referred to clauses 15.06.1 and 16.01 of the lease pursuant to which if the plaintiff was in default under the lease without any prior demand or notice the defendant was at liberty to re-enter into and take possession of the premises and eject the lessee therefrom, and thereupon the lease would be determined and the plaintiff was required upon the determination of the lease to peaceably surrender up and yield the premises to the defendant in good repair and condition. 9 The cross claim also referred to service of a notice to re-enter executed by the defendant and addressed to the plaintiff and dated 8 September 2000 and to the notice of termination of lease executed by the defendant and addressed to the plaintiff also dated 8 September 2000, by reason of which it was alleged that on and from that date, namely 8 September 2000 the lease was determined and the plaintiff had no right, title or interest in the premises and no right of re-entry thereto. 10 Finally, it was alleged in the cross claim that on 8 September 2000 it was agreed between the plaintiff and the defendant that Mr David Ross, acting for the plaintiff would be given a limited licence to enter the premises for the sole purpose of properly removing property of Mr Ross and/or the plaintiff from the premises, in which connection Mr Ross and the plaintiff were expressly prohibited from conducting any business at the premises or selling any goods from the premises. The cross claim alleges that the plaintiff and Mr Ross committed breaches of the licence in that they commenced and continued to sell goods from the premises and to conduct business from the premises, and further changed the locks of the premises and did not vacate the premises within a reasonable time, and that Mr Ross and the plaintiff were now trespassers upon the premises, which they have continued to occupy. 11 The cross claim claims so far as material, judgment for possession of the premises and consequential relief. THE ESSENTIAL FACTS 12 The essential facts for present purposes are that the defendant, acting through Mr Sandvoss, was a customer over a number of years of the plaintiff through Mr Ross, in relation to the sale and purchase of building supplies, sold by Mr Ross on behalf of the plaintiff to Mr Sandvoss, on behalf of the defendant, the relevant transactions being sometimes of the order of $10,000 to $20,000 over a period of two to three months. 13 In about May or June 1999 Mr Ross told Mr Sandvoss that he had to vacate the premises in which he was conducting the plaintiff's business by reason of an impending rise in the rent payable by the plaintiff for those premises, whereupon Mr Sandvoss suggested that Mr Ross might consider the purchase by the plaintiff of certain premises owned by the defendant. Although Mr Ross was interested in such a purchase, the plaintiff lacked the financial resources to enter into a contract immediately, as a result of which the parties discussed the possibility of the plaintiff being granted an option by the defendant to purchase the subject property, but in a context in which, pending any exercise of any option that might be granted, the defendant would continue to receive rent from the premises. In this connection Mr Ross and Mr Sandvoss agreed that the plaintiff would take a lease for three years from the defendant at a rental of $15,000 per month. It was agreed that the lease would commence on 1 January 2000, although the defendant would be allowed access to the premises for the three months, October, November, December 1999, rent free, in the event that the plaintiff did exercise the option. 14 Mr Ross made it clear to Mr Sandvoss that the plaintiff was not in a position to pay a rental of $15,000 per month from its business and it was agreed that the plaintiff would provide security for payment of rent in the form of a bill of sale over a motor cruiser owned by the plaintiff or Mr Ross, and a fixed and floating charge in favour of the defendant over the assets of the plaintiff. The idea was, of course, to secure to the defendant the payment of rent of $15,000 pending the exercise by the plaintiff of the option. 15 I note that in relation to the statement by Mr Ross to Mr Sandvoss that the plaintiff would be unable to afford $15,000 per month rental, Mr Sandvoss informed Mr Ross that he was free to sublet part of the premises and indeed Mr Sandvoss did organize for a furniture company to sublease a section of the property although it is not stated at what rental. 16 It appears that the defendant had made an application for development approval to the local council in respect of the demolition of the existing building on the land and the erection of one hundred and forty five storage units on two levels, and that this was made known to Mr Ross at the time of the original inspection of the property, who was apparently interested in carrying out this development. Development approval was apparently obtained by the defendant on about 22 May 1999 and in due course the documents relating to the approved development application were handed by Mr Sandvoss to Mr Ross. It appears that this was not done immediately upon receipt by Mr Sandvoss of the details of the approval but Mr Sandvoss says that this was because he was concerned with many other matters at the time. 17 In due course the parties entered into a lease for three years at a monthly rental of $15,000, the lease containing a provision relating to the grant of an option in the following terms:- "30.5 The Option is an option to purchase the Demise Premises to be granted by the Lessor to the Lessee or its nominee." 18 At the time of execution of the lease and prior thereto, the words "2 million dollars" were written in at the end of this clause and initialled by the parties. 19 It appears that as time progressed, despite his efforts to do so, Mr Ross had been unable to obtain finance to purchase the subject property, and in the meantime being unable to pay the rental from the business activities of the plaintiff, it became necessary to sell the cruiser and apply the proceeds of $98,357 to the payment of rent and this was done. Thereafter it seems plain that when the proceeds of sale of the cruiser had, as it were, been exhausted in payment of rent, the plaintiff became in arrears in the payment of rent and the defendant through Mr Sandvoss forfeited the lease on 8 September 2000, changed the locks and excluded the plaintiff and Mr Ross from occupation. 20 The history relating to payment of rent was as follows. Mr Sandvoss, a director of the defendant, forwarded a letter dated 11 February 2000 to the plaintiff advising a rental arrears as at 1 February 2000 of $59,146. The rent was six weeks in arrears by mid February 2000 but Mr Ross's boat was not sold until 21 March 2000 for $98,357. According to Mr Sandvoss whose evidence I accept (as I also do the evidence of Mr Ross, it being unnecessary for present purposes to resolve any conflicts of evidence which may exist) the proceeds of sale were received by Mr Ross and Mr Ross gave Mr Sandvoss a cheque for $51,357 and also gave him a further cheque for $47,000 being $98,357 less $51,357. According to Mr Sandvoss this put the plaintiff in credit for rent until mid June but did not provide for the three months access period for the sum of $45,000. 21 According to Mr Sandvoss he had regular conversations with Mr Ross in January and February 2000 seeking payment of rent, on which occasions Mr Ross would reply in words to the effect that he could not pay because he had no money, that he was waiting for someone to pay him, or that his sales figures were not what they used to be, as his turnover had dropped. 22 Mr Sandvoss also says that after the rent became due again in July after the exhaustion of the credit from the boat sale proceeds, he made further requests for the rent from July until September to which Mr Ross made replies of the same kind as set out above. Mr Sandvoss says that on one occasion in August-September 2000 he said to Mr Ross that he, Mr Ross, had been in the building for 12 months and he had not received one rent cheque (other than the proceeds of sale of the boat) from the plaintiff and enquired where all the money was going. Mr Ross is said to have replied that he had other priorities and had to pay back tax and could not pay the rent. Mr Ross also said that he did not have the money to pay the tax so he had not put his returns in and he now could not get finance from the bank because he had not got tax returns for the last three years. There were further conversations requesting payment of rent in August and early September, to which Mr Ross replied in words to the effect that he was trying to get some finance lined up, maybe in a couple of days, or in a few days, indicating a number of financial institutions to whom he had made applications for finance. 23 Towards the end of August Mr Ross told Mr Sandvoss that he had had meetings with "people" from Westpac and the National Bank relating to finance and that they both told him he needed a 20 percent deposit before they could consider approving finance but that Mr Ross did not have 20 percent available. 24 As the goods of the plaintiff remained on the premises after the locks had been changed, it was agreed between Mr Sandvoss and Mr Ross that Mr Ross and the plaintiff would be allowed back into possession for the purpose of removing the plaintiff's goods to another place. This occurred and some of the plaintiff's goods were removed to another place, but the plaintiff through Mr Ross remained in occupation of the premises and continued to trade, that is to say, to sell building materials. This was in breach of the arrangement between the parties whereby Mr Ross or the plaintiff were allowed back into possession of the premises for the purpose only of allowing the plaintiff and Mr Ross to remove the plaintiff's goods. Subsequently the plaintiff obtained an interlocutory injunction restraining the defendant from again taking possession of the premises pending the hearing of an application by the plaintiff for relief against forfeiture. RELIEF SOUGHT 25 The plaintiff now seeks relief against forfeiture relying upon the general principles relating to relief against forfeiture as set out in the headnote to the case of Pioneer Quarries (Sydney) Pty Limited v. Permanent Trustee Co of NSW Limited 2 BPR 97145, a decision of Hope J (as he then was) and in respect of which his Honour's statement of the principles as encapsulated in the headnote reads as follows:- "In equity, generally the power to re-enter or forfeit for non-payment of rent is regarded as a security for the rent and provided the lessor and other persons concerned can be put in the same position as before the forfeiture or re-entry, the lessee is entitled to be relieved against forfeiture upon payment of rent, costs and interest and other expenses. A lessee is not entitled to relief against forfeiture as of right. The court has discretion in the matter though it may only be in very special circumstances where relief will be refused." SUBMISSIONS ON BEHALF OF PLAINTIFF 26 Counsel for the plaintiff submitted, inter alia, in effect, that the substance of the transaction between the plaintiff and the defendant was clear, and that the substance of the transaction could be given effect to, allegedly without prejudice to the defendant, by granting the plaintiff the relief sought, or at the very least, making some kind of conditional order which would give the opportunity to the defendant to exercise the option and/or enter into a contract for the purchase of the land at a price of $2 million provided he had obtained the necessary finance prior to the end of December this year. 27 Counsel for the plaintiff submitted that the substance of the arrangement between the parties was encapsulated in the following question and answer given by Mr Sandvoss during cross-examination:- "Q. The whole nature of the transaction commercially was simply this, was it not, 'I will give you a little over a year to provide finance, buy the site, develop it, and on default of that you will leave and I will do with it what I will'? A. Yes." 28 I note in passing that on the same page of the transcript the following questions and answers were given by Mr Sandvoss:- "Q. So why, having contemplated giving Mr Ross a year to do that, did you in the middle of March this year start dickering with Mr Wilson and Mr Smith in relation to another transaction? A. The reason was I found Mr Ross didn't seem to have the capability to get it up and running … Q. Put the deal together? HIS HONOUR: Q. Get finance to buy the land? WITNESS: Yeah. AITKEN: Q. But you knew you were contractually bound to him one way or another to the end of the year, weren't you? A. If he had signed the option , I am sure I would have been. Yes, sir." 29 In my opinion, however, the alleged substance of the arrangement between the parties also included, ultimately, agreement that the parties would enter into a lease of the subject premises, legally binding according to its terms, which included the obligation upon the plaintiff to pay rent of $15,000 per month, and the right of the defendant to forfeit the lease for non-payment of the rent. 30 It was also part of the substance of the arrangement between the parties that the lease would contain an option in favour of the plaintiff to purchase the land for a price of $2 million, but the parties did not agree on the terms of the option to be granted, including the terms upon which the purchase would proceed if the option was exercised, and in the event the lease contained only an agreement to grant an option but on unspecified terms as to the option itself, including the terms upon which the purchase would proceed if it was exercised. NO RELIEF AGAINST FORFEITURE BECAUSE OPTION UNENFORCEABLE 31 The failure of the parties to agree upon the terms of the option, either as part of the substance of the agreement or otherwise, including the terms upon which the purchase would proceed if the option was exercised, meant that there was a large and important omission from the so-called substance of the arrangement between the plaintiff and the defendant, the effect of which omission, in my opinion, rendered the so-called substance of the arrangement between the parties legally unenforceable. 32 In my opinion, it is plain that the words used in clause 30.5 of the lease, according to their ordinary and natural meaning, connote and mean only that the parties have agreed that the defendant will grant ("to be granted") to the plaintiff at some time in the future an option to purchase the subject premises at a price of $2,000,000. 33 Those words, however, do not record any agreement between the parties as to the specific terms upon which any such option would be granted, including a term as to the terms upon which the defendant would sell the subject property to the plaintiff in the event that the option was exercised. It is not suggested, and there is no evidence, that there was any other agreement between the parties as to such terms, either of the option or of the contract for sale in the event that the option was exercised. 34 It was somewhat faintly suggested by counsel for the plaintiff that the terms of any contract for sale of the subject premises, consequent upon the exercise of the option by the plaintiff, would be the terms to be included in an open contract as provided in the Conveyancing Act, but in my opinion there is no warrant for any such submission, not least because the only agreement between the parties as recorded in clause 30.5 of the lease is to the effect that the parties had agreed that at some time in the future the defendant would grant to the plaintiff an option on unspecified terms to purchase the subject property. In that context the terms of any contract to sell and purchase the land pursuant to the exercise of the option are, in my opinion, completely at large, and clause 30.5 of the lease does not, in those circumstances, evince any intention of the parties to limit to the terms of an open contract, the terms of the relevant contract for sale which might be provided for in the terms of the option to be granted at some time in the future. 35 Consistent with this view, and, perhaps, to some extent, supporting it, is the fact that as early as September 1999 Mr Sandvoss, on behalf of the defendant, caused the defendant's solicitor to prepare a draft option agreement to be executed by the plaintiff and the defendant, and to forward it to the plaintiff and/or Mr Ross as appears from the letter dated 16 September 1999 from the defendant's solicitors to Mr Ross enclosing a "draft" option agreement, and whether or not such letter and draft option agreement was received by or on behalf of the plaintiff. The draft "option" agreement, which included a copy of the contract which it was proposed would be executed upon the exercise of the proposed option, was certainly brought to the attention of the plaintiff in March 2000, but has never, at any time, been executed by either the plaintiff or the defendant. 36 It was submitted on behalf of the plaintiff that an option had come into existence on the terms of the draft option agreement forwarded by the solicitors for the defendant. That document was described as a "draft" and in no way purported to be the result of any agreement between the parties. Moreover, it is plain that the document from its form was such as to contemplate its execution by both the plaintiff and defendant before it came into existence, and this of course, as stated above, was never done. Nor, in my opinion, is there any other evidence to support the proposition that the parties ever agreed to the terms of the draft option agreement by their conduct or otherwise. It is true that both parties may have proceeded to some extent upon the basis that "an" option was in existence, but there was no common or other basis for supporting the view that there had been some agreement between the parties as to the terms of the option. In those circumstances, in my opinion, there was no estoppel by convention since the parties did not conduct themselves on the basis that there was an option in the terms of the draft which was only a draft and which, as stated above, envisaged execution by both parties before it became operative. 37 It follows, in my opinion, that no enforceable option agreement ever came into existence between the parties, whether as part of the substance of the arrangement between them or otherwise, and further that the defendant is not estopped from denying the existence of an enforceable option. 38 It also follows, in my opinion, that for this reason the plaintiff is not entitled to relief against forfeiture of the lease for non- payment of rent, because the plaintiff's case for relief against forfeiture was put on the basis that the plaintiff wished to be relieved against forfeiture in order to have the opportunity to exercise the option, or not as the case may be, prior to the end of December 2000, at which time if it exercised the option the defendant would be in no worse position than it would have been if the lease had remained on foot and the option had been exercised. The plaintiff's claim for relief against forfeiture is thus based squarely upon the basis that the option is in existence and enforceable which, in my opinion, it is not. It follows, in my opinion, that the plaintiff's claim for relief against forfeiture must be dismissed.