As a lessee or lessor, you should be aware of your contractual obligations under a lease, but you should also be aware that misinterpretation over these obligations can sour the relationship you have with your other party. A recent decision in the New South Wales Supreme Court (Allsvelte Pty Ltd v Cassegrain Wines Pty Limited [2015] NSWSC 1370) highlights the dangers of poor conduct and "wilful" breaches under a lease term. In this case, the Court didn't allow the tenant (Allsvelte) to exercise its option to renew because of poor conduct for the duration of the original lease, and a series of "wilful" breaches of their responsibilities and obligations.
The background
Allsvelte leased restaurant premises for an initial three year term from Cassegrain with an option for Allsvelte to extend for a further period if they wished to do so. It also included a term that only allowed Allsvelte the ability to exercise this option if, at the time of service of this notice to exercise, there were no rent or outgoings overdue and all of Allsvelte's other obligations had been met.
When Allsvelte eventually served the notice to exercise their option, Cassegrain responded by serving a notice under section 133E of the Conveyancing Act 1919 (NSW), referring to nine breaches to the lease that Allsvelte had made, and preventing their option to renew.
Allsvelte tried to dispute this and find protection under section 133F of the Conveyancing Act 1919 (NSW).
The decision
The Court found that only one of the nine breaches was sufficient, however considered it too minor to work in Cassegrain's favour. However, the Court still held that Allsvelte couldn't renew its option or find relief in section 133F because:
- The relationship between the two had deteriorated and was unlikely to improve
- Allsvelte had "wilfully" failed to provide sales records to Cassegrain that would have eluded that the lessee was required to pay additional rent
- Allsvelte had "wilfully" failed to follow the rules the landlord wished to enforce under the terms of the lease.
The lesson
Be aware that leases often include options to renew and extend beyond the initial period of leasing. However, this option often depends on whether or not a lessee adheres to their obligations and responsibilities under a lease. Know what your contractual liability is under the terms of your lease, and make sure that you don't bring about any "wilful" breaches. As demonstrates, breaches can harm your relationship with your Lessor and prevent you from renewing at the end of the original lease period.
If you're a Lessor who has been served with a notice to exercise an option to renew in your lease, consider the relationship with your Lessee and whether they have conducted any "wilful" breaches that would allow you to prevent them from exercising this option. You, like Cassegrain, could act under section 133E of the Conveyancing Act 1919 (NSW) and explain the breaches of your lessee.
The Court will consider the nature of the breaches complained about as well as the behaviour and relationship between the two of you. In this case, Justice Ball said that the behaviour of the lessee "appears to have been unreasonable."
Before a negative relationship or misunderstandings over obligations under a lease occurs, it's important that you both fully understand the clauses involved in the lease. In addition, it's essential that the lease is appropriately and formally drafted to prevent miscommunication or misinterpretation over phrases or language. This case demonstrates what avenues parties may take if they arrive at this situation, but it also illustrates the consequences of parties that do not fully understand their contractual obligations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.