When can a tenant overturn a landlord’s termination of the lease? (the tenant’s equitable remedy of relief against forfeiture)

The recent decision of the Supreme Court of Western Australia in Western Choice Pty Ltd v Lenz Corp Pty Ltd [2015] WASC 316 is a timely reminder of the Court’s power to order “relief against forfeiture” (which means the landlord cannot terminate a tenant’s lease).

The facts

The facts of that case can be summarised as follows:

  • The tenant defaulted in payment of rent under its lease.
  • The landlord issued a notice of default in respect of that breach to the tenant.
  • The tenant did not remedy the breach.
  • The landlord issued a further notice to the tenant terminating the lease.
  • The tenant then transferred $15,000 to the managing agent.  This sum was considerably in excess of the unpaid rent.
  • The landlord refused to accept this payment of money.

The tenant applied to the Court for relief against forfeiture.

The decision

The Court’s decision can be summarised as follows:

  • The granting of relief against forfeiture is at the discretion of the courts.
  • The underlying principle for the granting of this relief is clear: the courts normally relieve against forfeiture for non payment of rent.  Provided the landlord is compensated for all arrears of rent and loss arising from the non payment, the tenant will generally succeed in having the lease restored.
  • A history of tardy payments is not, of itself, grounds for refusing relief.

Relief will generally be refused when the tenant is hopelessly insolvent, because in such a case the reinstating of the lease would be futile.

Analysis of the law

At common law, a landlord has the right to enforce forfeiture of a lease where the tenant breaches a term that is expressed as a condition of the lease agreement.

Breach of covenant, on the other hand, does not give a landlord right to forfeit the lease unless such a right is expressly embodied in the lease agreement.

In practice this is rarely an issue as tenancies created by a formal document invariably reserve a right of forfeiture for breach of any covenant, including the covenant to pay rent.

The occurrence of an event that entitles the landlord to forfeit a lease does not of itself amount to a forfeiture of the lease, unless and until the landlord takes action to determine the lease, either by physical peaceable re-entry or by issue and service of a writ proclaiming possession.

The modern doctrine of relief against forfeiture is now enshrined in section 81 of the Property Law Act 1969 (WA) (PLA).

The Supreme Court is the Court that has the power to grant relief against forfeiture.

There is no time limit within which a tenant may seek relief against forfeiture for non-payment of rent.  Of course, if the delay to seek relief is unjustifiable it may operate against the grant of relief.

It is, of course, up to the court to determine whether to grant a tenant relief from forfeiture.  The purpose of the jurisdiction to grant relief against forfeiture is not to release parties from their bargains. 

On the contrary, it is a general principle of law to enforce contractual obligations, except in appropriate circumstances.

The onus is upon the person seeking relief to satisfy the Court that relief ought to be granted.

Where the tenant tenders the outstanding rent and costs, the courts usually, as a matter of course, exercise the discretion in favour of the tenant.

In Greenwood Village Pty Ltd v Tom the Cheap (WA) Pty Ltd [1976] WAR 49, Jackson CJ aptly summarised the judicial attitude as follows

Equity regards a proviso for re-entry on non-payment of rent as merely a security for rent, so that if the landlord can be restored to his position by payment of arrears of rent or other moneys due and any costs and expenses to which he has been put the tenant is entitled to be relieved against the forfeiture of his tenancy. The object of the proviso is to secure to the landlord the payment of his rent; and when the rent has been paid, the tenant should ordinarily be relieved from forfeiting his term.

It has also been held that the courts will not refuse to grant relief against forfeiture to a tenant because he or she has a bad rent history “at least on the first application”.

The courts will not take into account breach of any covenant for which the landlord is required to serve notice under section 81 of the PLA, where no such notice was served.

Another issue that commonly arises is whether tenants who make good their default by payment of outstanding rent nonetheless are not entitled to relief against forfeiture where the breach was wilful.  The courts have held that the fact that the default was wilful is just one of the factors the courts will take into account to determine whether it is equitable to grant relief.

Section 81(8) of the PLA expressly excludes the statutory relief:

  • where a landlord forfeits the lease because the lessee is bankrupt, has assigned the lease or parted with possession of the premises without consent; and
  • in the case of a lease of any licensed premises as defined under the Liquor Control Act 1988 (WA) where the lessee has breached any term by which the licence granted in respect thereof may by forfeited.

Generally, the courts will almost certainly grant relief against forfeiture if the tenant makes good the breach and/or any financial loss, and if the tenant is able and willing to fulfil his or her obligations in the future.

However, recent authorities indicate that the fact that a breach is irremediable is not necessarily a bar against the grant of relief, though the courts take a particularly strict view about such breaches.

Even if the breach is wilful and/or serious it does not necessarily preclude judicial relief against forfeiture.

The Supreme Court of WA Full Court case of Old Papa's Franchise Systems Pty Ltd v Camisa Nominees Pty Ltd [2003] WASCA 11, illustrates a relatively rare judgement where the Court refused to grant relief against forfeiture.

  • The case involved a lease of commercial properties for a term of 10 years for two options each of five years.  The tenant sought permission to assign the lease but the landlord declined.  Notwithstanding, the tenant assigned the lease.  The tenant also made some unauthorised improvements to the land and was in default of payment of rent.  The Court found that the tenant was in breach of the lease agreement and that the landlord had a right to terminate the lease.  The trial judge declined to relieve the tenant from forfeiture.
  • On appeal to the Full Court, in a leading judgment McLure J agreed with the appellant that the breach of the lease resulting from the improvements was relatively minor and added some value to the property.  McLure J also agreed that refusal to grant relief would cause very significant prejudice to the appellant’s business.  McLure J observed where a tenant undertook to remedy the breaches giving rise to forfeiture, the Court should grant relief against forfeiture as a matter of course and only refuse to do so in exceptional circumstances.

In this case McLure J found that the wilful nature of the breach of covenant not to assign without consent, in circumstances where both the assignor and assignee were in serious financial difficulties, justified the trial judge’s refusal to relieve the tenant from forfeiture.

Lavan Legal comment

The case law is consistent in that where a tenant is ready and willing to remedy the breach (whether the breach is non-payment of rent or any other covenant) that gave rise to forfeiture, it is almost certain that the Court will grant relief from forfeiture except in exceptional circumstances.

The main reason for this is that forfeiture of a lease more often that not, results in substantial loss to the tenant, which usually is disproportionate to the loss the landlord is likely to suffer due to the breach.

Whether there are “special circumstances” to justify the Court to refuse to grant relief from forfeiture depends on the circumstances of each individual case.  There are two grounds landlords tend to plead to show special circumstances:

  • wilfulness of the breach; and
  • the tenant’s financial inability to meet his or her obligations under the lease.

The case law demonstrates that neither ground by itself is enough to determine the matter, especially, it would seem, where the landlord stands to gain a windfall.  The Court takes into account all the circumstances of each case.  The circumstances vary so much that previous cases are at best examples and not authority for a particular decision.

Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.