In the recent decision of MIR Holdings Pty Ltd & Anor v Marina Square Retail Pty Ltd  NSWSC 1418, the Supreme Court of NSW was required to consider the inter-relationship between the recently introduced Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) (Regulation) and a tenants equitable remedy for relief against forfeiture.
Marina Square Retail Pty Ltd (Landlord) leased retail premises known as RT414 and RT412/413 to MIR Holdings Pty Ltd (MIR) and SKRG Pty Ltd (SKRG) (together, the Tenants). Each of the leases commenced on 21 November 2018. The Tenants failed to pay rent, outgoings and other charges pursuant to the leases, and as result of the defaults, the Landlord served a Notice of Breach of Covenant on each of the Tenants on 11 September 2020 (the MIR Notice and the SKRG Notice).
The MIR Notice required payment of $97,812.39 and the SKRG Notice required payment of $29,120.90 within 14 days to rectify the non-payment of monies for rent, outgoings, marketing fund contribution, trade waste charges and water usage charges, all up to 31 March 2020.
The notices advised of the Landlord’s intention to terminate the leases and take possession of the premises if the specified amounts were not paid within the 14 days.
Application for Relief
The Tenants did not pay the amounts specified in their respective notices. As a consequence, on 1 October 2020, the Landlord served on each of the Tenants a Notice of Re-entry and Termination. The Tenants commenced proceedings in the Supreme Court of NSW seeking relief against forfeiture (restoration of possession to the tenant) upon giving:
- the usual undertaking as to damages;
- payment of all amounts outstanding under the respective leases;
- replacement bank guarantees; and
- consent to an order to pay the Landlord’s costs.
Third Party Rights
Prior to the Tenants’ application for relief, the Landlord had entered into Agreements for Lease (AFLs) dated 31 August 2020 and 21 September 2020 with Chicken V Property Management Pty Ltd and Kyoto Cuisine Pty Ltd, respectively (together, the New Tenants). Each of the AFLs was conditional upon the landlord securing vacant possession of the premises. The leases were to commence on the Commencing Date, being the earlier of the Fitout Period or when the New Tenants commenced trade. The Fitout Period was defined as being 4 weeks after the Handover Date, being the date the New Tenants were granted access to the premises to commence fitout works.
At the time of the Tenants commencing proceeding, the New Tenants had taken possession of the premises. The AFLs became unconditional on 1 October 2020 when the Landlord re-entered the premises, thereby securing vacant possession. The Landlord subsequently handed over the keys to the New Tenants on 7 October 2020, which became the Handover Date. There was no evidence before the Court to suggest that the New Tenants were aware of the applications made by the Tenants for relief against forfeiture.
The Tenants’ initial application was dismissed by Rein J on 2 October 2020. Their renewed application before Stevenson J on 13 October 2020 was also dismissed.
Third party rights
Stevenson J considered that the adverse impact on third party rights alone was sufficient reason not to grant relief against forfeiture. It was also “the reason, or a reason” that relief was not granted by Rein J [at 36]. The position on third party rights was summarised by Stevenson J as follows [at 19]:
“The Court will generally not grant relief against forfeiture where a third party has acquired rights over the property. However, if the third party knew of the relevant circumstances, and had notice of the lessee’s claim to seek relief, relief may be granted. “
Although Stevenson J considered that the adverse impact on third party rights was enough to deny a claim for relief against forfeiture, he also discussed other relevant considerations as noted below.
The Tenants argued that they were “impacted lessees” within the meaning of the Regulation and that as a result, the Landlord was prohibited from repossessing the premises under r.6 of the Regulation.
- applies only to ‘the exercise or enforcement of rights under a commercial lease in relation to circumstances occurring during the prescribed period’ – the ‘prescribed period’ is defined as being the period from 24 April 2020 to 31 December 2020 (r. 5); and
- protects ‘impacted lessees’ from any ‘prescribed action’ by the lessor, for example, exercising a right of re-entry due to the lessee’s failure to pay rent or outgoings (r. 6).
His Honour noted that the Regulation was “not concerned with defaults prior to the COVID-19 pandemic and prior to the prescribed period” [at 55]. The defaults specified in each of the notices dated 11 September 2020 related to the non-payment of rent, outgoings and other charges “up to 31 March 2020”. As these defaults were prior to the prescribed period, the Regulation did not apply to the Tenant’s circumstances and the Landlord was not prohibited from re-possessing the premises.
Persistent and significant default
Another factor which weighed against the Tenants’ claim for relief was that “their default under the leases was persistent and significant” [at 61]. His Honour referred to Campell J’s summary of the general principles regarding relief against forfeiture in Wilkinson v S & S Gikas Pty Ltd  NSWSC 1314:
“If there is any sufficiently serious risk that the tenant will not be able to perform its obligations in the future, it may be that the consequence is that it is not unconscionable for the landlord to insist on its strict legal right.”
Given some of the charges payable under the lease had been accruing since the commencement date, for example trade waste charges for the period from commencement to late March 2020 and water usage charges for the period a significant period, Stevenson J opined that he “would, in any event, have hesitated to grant the relief they [the Tenants’] seek” at .
When considering an application for relief against forfeiture, the Court will take into account:
- whether such relief would adversely affect the rights of innocent third parties; and
- whether the tenant’s default was so persistent and significant that it evidenced an inability to comply with the lease in future.
While impacted lessees are protected by the prohibition against re-entry for non-payment of rent and outgoings under the Regulation, this protection applies only to defaults which occur during the prescribed period from 24 April 2020 to 31 December 2020. Even if the tenant meets the definition of an impacted lessee, if it defaulted on the lease prior to the prescribed period, it will not be protected by the Regulation in respect of that default.