For business operators, compliance with Lease agreements is essential to ensuring successful and continuing commercial relationships.  This was reiterated in the recent case of Grepo & Anor v Jam-Cal Bundaberg Pty Ltd [2015] QCA 131, where the operator of a business was prevented from extending the term of their lease because they had breached a number of its provisions. 

In this Alert, Special Counsel Natalie Gerrard and Law Graduate Kerrod Giles discuss the reasoning behind this decision and outline the important reminders within this decision for lessors and lessees. 

Background

Mr and Mrs Grepo (Grepo) leased premises containing a scrap metal business to Jam-Cal Bundaberg Pty Ltd (the lessee).  The lease commenced on 14 May 2010 and expired on 13 May 2013, and contained provisions:

  • requiring increases in annual rent with reference to the Consumer Price Index;
  • requiring the lessee to keep the premises free of rodents, termites, cockroaches and other vermin; and
  • allowing the lessee to exercise an option to renew the lease if the lessee:
    • not less than six months prior to the expiration of the lease gave written notice to Grepo that it wished to renew the lease; and
    • had at all times up to the date of expiration of the term of the lease complied punctually with its obligations under the lease.

Despite notice being served by Grepo on the lessee requiring the lessee to remedy breaches of the lease in October and December 2012 respectively, the lessee gave Grepo written notice of its intention to renew the lease on 5 November 2012.  Subsequently, two more default notices were served on the lessee in May and August 2013. 

Finally, in October 2013, Grepo gave the lessee notice terminating the lease (to the extent it was not already terminated) and Grepo commenced proceedings for the recovery of possession in the Queensland Supreme Court. 

Issues contested at trial

In their claim, Grepo alleged that the lessee had breached the lease and, as a consequence, did not have an entitlement to renew the lease.  Grepo specifically claimed that the lessee had failed to:

  • pay rent at an increased annual rate in accordance with the Consumer Price Index; and
  • keep the premises free of termites.

In response, the lessee counter-claimed for relief from forfeiture.  The lessee denied any breach of the lease had occurred allowing Grepo to deny the lessee’s right of renewal and argued that the lessee had lawfully exercised its right to extend the lease.

Proceedings

Both parties accepted that section 128 of the Property Law Act 1974 (Qld) applied to prevent Grepo relying on breaches of the Lease that occurred before the lessee purported to exercise its option on 5 November 2012.  This was because Grepo had not, as required by that section, within 14 days after receiving notice of the lessee’s intention to renew the Lease, notified the lessee that it intended to refuse any renewal on the basis of those breaches. 

Accordingly, the focus of proceedings turned to the conduct of the lessee after 5 November 2012.In the first instance, the trial judge found that the lessee had not breached the covenants concerning the payment of rent or the removal of termites for the following reasons:

  • Grepo had received payment of rent at the base rate without complaint for the entire period of the lease;
  • the construction of the rent review clause meant that the lessee was not required to pay rent at an increased rate until it received notification of the revised annual rent from Grepo; and
  • there was insufficient evidence to conclude that the lessee should have known of a termite problem and the lessee was only obliged to keep the premises “reasonably free” of termites.

As a result, the trial judge concluded that the lessee was in possession of the property under a renewed lease and dismissed Grepo’s claim.

On appeal

The Queensland Court of Appeal overturned the trial judge’s decision, holding that Grepo was entitled to retake possession of the premises and that the lessee was not entitled to an extension of the term of the lease.

The court upheld the trial judge’s decision regarding payment of rent, but determined that the lessee had breached the covenant to keep the premises free of termites.  Specifically, the court held that the wording of this covenant implied that the lessee’s obligations under this clause were not limited to dealing with evident termite problems.

Further, in observing that the lessee had not undertaken termite maintenance in any form, the court determined that the lessee had failed to take reasonable steps to keep the premises free of vermin and pests.

Key Points for Lessors and Lessees

The key points flowing from this decision that should be considered by lessors and lessees who have or are considering granting leases with options to extend, are:

  • breach of lease covenants that are not remedied will in many cases prevent a lessee from exercising an option to extend a lease term – if a lessor intends to rely on particular breaches to refuse the extension of a lease term, they should ensure they give the lessee proper notice of this in accordance with the relevant legislation;
  • parties should ensure rent review provisions are drafted so they clearly express whether notification is required to enforce any reviewed annual rent – special attention should be paid to clauses that deal with how much rent should be paid while the rental amount under the Lease is being reviewed; and
  • lessees should ensure that they seek legal advice about any covenants they are bound to under a lease so they can determine the extent of their obligations.