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Court of Appeal confirms equity cannot provide relief for lapsed lease options

10 May 2023

#Dispute Resolution & Litigation, #Property, Planning & Development

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Court of Appeal confirms equity cannot provide relief for lapsed lease options

In Replay Australia Pty Ltd v NightOwl Properties Pty Ltd [2023] QCA 76, the Queensland Court of Appeal confirmed that where a tenant does not validly exercise their option to renew within the timeframes required by the lease, the interest created by the option lapses. Therefore, equity cannot assist by providing relief against forfeiture of an option right that does not exist.

The Court’s findings at first instance that the tenant, NightOwl, had failed to properly exercise its option were not challenged on appeal. The failure arose because NightOwl had substantial and long-outstanding arrears of rent at the time it purported to exercise its option, which breached the conditions attached to the exercise of the option. On this basis, the lessor, Replay, claimed it was not obliged to renew the lease.

Despite this, the Court at first instance held that:

  • NightOwl was a leaseholder with an equitable interest in the land arising from its option for renewal and attached to its leasehold estate
  • NightOwl’s right of renewal ran with the land and the reversion and was so intimately connected with the leasehold that it should be regarded as part of the estate or interest acquired under the lease, in order to obtain similar protection upon registration as the term itself
  • the loss of contractual rights under a lease was no bar to the availability of equitable relief against forfeiture of an estate or interest in property
  • the loss of the equitable interest conveyed by the option for renewal would involve a lesser proprietary interest than the leasehold to which it was attached, but nevertheless an interest capable of yielding an equivalent leasehold estate
  • the Court was able to grant equitable relief against the loss of a proprietary interest arising from an option for renewal contained in a registered lease.

The position was overturned on appeal. Dalton and Flanagan JJA and Gotterson AJA unanimously:

“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.”

The Court of Appeal considered the analysis in the first instance judgment to be incorrect in its application of the findings of the High Court in Mercantile Credits Ltd v Shell Co of Australia (1976) 136 CLR 326. The Court at first instance considered Mercantile as authority for the proposition that the interest conferred by a registered lease containing an option was sufficient to justify the availability of equitable relief against forfeiture of the option.

The Court of Appeal held this to be a misapplication of the relevant principle in Mercantile. Rather, on considering Mercantile and a number of other relevant cases, the Court of Appeal determined the proper position as being:

“...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 ... 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.”...
“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.”...
“Properly understood, NightOwl’s interest in the leased premises under the option to renew depends on its existence on the availability of specific performance.”

As the option was never validly exercised, it had lapsed. Therefore, equity could not assist because that right had been lost.

Key takeaway

The decision reflects what is commonly understood in the law surrounding the exercise of options. It also reflects a common sense approach to the commercial realities facing lessors, namely that they must be able to have certainty around the enforceability of their lease contracts in order to properly manage their assets.

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The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

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