On 21 September 2015 the Supreme Court of NSW, in the matter of Allsvelte Pty Ltd v Cassegrain Wines Pty Limited [2015] NSWSC 1370, refused to allow a lessee to exercise an option to extend a retail lease due to the lessee's conduct and several "wilful" breaches by the lessee during the initial term of the lease. McCabes acted for the lessor, Cassegrain Wines, which was the successful party in the proceedings.

BACKGROUND

It is not uncommon for a lease to contain an option to extend for a further period exerciseable by the lessee, and provision by which the lessee's entitlement to the option is made to depend on performance by the lessee of a specified obligation.

If served with a notice of exercise of option, the lessor has 2 options - either accept the extension or promptly serve on the lessee a "prescribed notice" under section 133E of the Conveyancing Act 1919 (NSW), specifying the lessee's breach of the relevant obligation and stating that the lessor proposes to treat the breach as preventing the lessee from exercising the option.

There are strict rules in place pertaining to the wording of any such notice served by the lessor due to the serious consequences that follow, and in this regard a "section 133E notice" may be regarded as loosely akin to a bankruptcy notice.

Despite the existence of any breaches a lessee can respond to such a notice by promptly approaching the Supreme Court of NSW for relief under section 133F of the Conveyancing Act, essentially asking the Court to forgive the breaches on whatever terms the Court thinks fit, and allow the lease to continue for a further period. In exercising its discretion the Court is to consider the nature of the breach complained of and the conduct of the parties, as well as any other relevant factors.

In Allsvelte Pty Ltd v Cassegrain Wines Pty Limited, the parties entered into a lease of a restaurant premises situated within a winery located in Port Macquarie NSW for an initial 3 year term. Cassegrain Wines was the lessor and Allsvelte the lessee. The lease contained an option to extend for a further period exerciseable by Allsvelte. It also contained a term that Allsvelte can exercise the option only if, at the time of service of the notice of exercise of option, there is no rent or outgoing that is overdue for payment, and all Allsvelte's other obligations have been fully complied with.

Around 2 years and 9 months into the initial term, Allsvelte served a notice of exercise of option to extend for a further 3 years. Cassegrain Wines served a notice under section 133E, referring to 9 breaches of the lease which, it asserted, prevented Allsvelte from exercising its option. Allsvelte commenced proceedings, seeking relief under s 133F of the Conveyancing Act.

OUTCOME

The Court found that only 1 of the 9 breaches specified in the lessor's notice was sufficiently accurate and detailed. Justice Ball observed at [58] that in his opinion, a s 133E notice "must be specified with sufficient particularity to enable the lessee to make a decision whether or not to seek relief under s 133F and to seek that relief if it decides to do so", His Honour found that only one of the asserted breaches in the notice, relating to a late payment of one months' base rent, met this standard.

This breach was relatively minor in the overall scheme of things and was found to be "clearly inadvertent". However, the Court refused to exercise its discretion under s 133F to allow the lease to continue due to the following reasons:

  • The relationship between the lessor and the lessee had broken down and was likely to remain that way. This was relevant because the lessor and lessee were required to work together, including in relation to the use of common areas;
  • The lessee failed to provide sales records to the lessor or to allow the lessor to audit the lessee's sales records, which was required to determine the amount of turnover rent payable. If these records were provided, it would have become apparent that the lessee was required to pay additional rent. Further, this failure to provide relevant records was 'wilful'; and
  • The lessee failed to follow rules that were implemented by the lessor under the terms of the lease, to manage requests by the lessee to licence other parts of the winery for "one-off functions or events". This failure to follow rules was also 'wilful'.

The case highlights the importance of ensuring formal documents (including notices under a lease and/or statute) are drafted correctly, as well as a party having a clear and proper understanding of its contractual obligations (for example, a party's obligations under a lease).

In the above matter, Ball J found that the position taken by lessee in relation to a number of the disputes "appears to have been unreasonable" and turned on an incorrect interpretation of relevant clauses of the lease. The relationship between the parties soured as a result, which was ultimately the determining factor in the lessee being not entitled to exercise its option to renew.