TIM BARR PTY LTD v NARUI GOLD COAST PTY LTD
Year of Decision: 2010
Whether option to purchase survives termination of lease
Breach of essential term
Forfeiture and termination — Relief against forfeiture
The first plaintiff lessee (of which the second plaintiff was principal) and defendant lessor entered into a lease on 23 June 2000, which included an option to purchase, containing the following terms: Clause 4.1 (described as “essential”): “The tenant must not use the Premises otherwise than for the purpose of the planting and cultivation of Lemon Myrtle Trees.” Clause 4.3 (described as “essential”): “Should the use to which the Premises are put by the tenant require the Licence consent or approval of any competent Authority then the tenant warrants to the landlord that it has prior to entering into this Lease obtained such licence, consent or approval and the tenant will at its expense maintain such licence, consent or approval as valid and operative during its occupation of the Premises or do anything else that may be necessary so(2010) 14 BPR 27,605 at 27606that the use is lawful and properly complies with all requirements of any statutory or other competent body or authority. The tenant will comply with all conditions attaching to any such licence, consent or approval.” Clause 4.5 (described as “essential”): “The tenant acknowledges and agrees that it is the tenant’s responsibility to comply with all statutory or other competent authority requirements with respect to the use to be put to the Premises.” Clause 7.1 (described as “essential”): “Subject to the following, the tenant will not during the continuance of the Lease assign or transfer this Lease or demise, sub-let, part with, share the possession of, or grant any licence affecting, or mortgage, charge or otherwise deal with, or dispose of the Premises or any part thereof, or by any act or deed procure the Premises or any part thereof to be assigned, transferred, demised, sub-let unto shared or put into possession of any person or persons.” Clause 15.5: “The Call Option (option to purchase) may be exercised at any time during the Call Option Period …” Call Option Period was defined as “the period commencing on the Call Option Commencement Date and terminating at 5 pm on the Call Option Expiry Date” and Call Option Expiry Date was defined as “the date of the expiry of the term of the Lease”. Clause 15.7: Upon exercise of the option to purchase (described as the Call Option), “the party bound by the Call Option as landlord at that date and the party exercising the Call Option shall become immediately bound as vendor and as purchaser respectively under the Contract”. Clause 18: “The tenant covenants as follows: (a) to take all steps and to do all things to ensure that as a result of the use and occupation of the premises by the tenant that the premises are not rezoned or reclassified by any local authority or other competent body or authority, particularly with respect to the Native Vegetation Conservation Act 1997 …” On 3 May 2002, the lessor sent the lessee a “Notice of Re-Entry” giving notice that the lessee was in breach of cl 4.3 and that the lessor would re-enter 14 days from service of the notice. The breach referred to related to the lessee’s failure to obtain development consent for planting and cultivation of lemon scented tea trees which had been undertaken by the lessee. The first plaintiff purported to exercise its option to purchase on 17 April 2003. The first plaintiff subsequently granted a third party, Austcorp Group Ltd, an option to purchase its interest in the lease and freehold. The defendant lessor argued that the first plaintiff’s exercise of the option was invalid as the lease was forfeited by re-entry following service of the 3 May 2002 notice, or alternatively was validly terminated prior to 17 April 2003, or alternatively was void ab initio or discharged by frustration. There was also an issue regarding the fact that a fiduciary of the defendant had an interest in the first plaintiff’s venture allegedly in breach of his fiduciary duty. At the time of its acquisition, Austcorp Group Ltd was aware of the dispute between the plaintiffs and the defendant.
Held that:(i) Whether an option to purchase incorporated in a lease survives termination of the lease is a question of construction. Here, cl 15.7 implies that the option could only be exercised while the defendant was “bound … as landlord” and hence could not be exercised after termination. However, in the absence of explicit language to that effect or a reason to imply such a restriction, a breach by the lessee alone would not have had the effecting of precluding the lessee’s exercise of an option to purchase. Had it been appropriate to imply such a restriction, Conveyancing Act 1919 (NSW) s 133E would not have applied. (ii) Although in the court’s opinion there are circumstances in which a lease may be discharged by frustration, the doctrine of frustration will not apply merely because circumstances outside the lease prevent one party obtaining a benefit, not referred to in the lease, that was that party’s reason for entering into the contract.
Firth v Halloran (1926) 38 CLR 261 , considered(iii) Breach of a term described in the lease as “essential” will give the innocent promisee a right to terminate the contract despite the inclusion in the contract of a right of re-entry for “any default in or breach of the due and punctual observance and performance of the provisions of this Lease”. Section 129(1) of the Conveyancing Act does not apply to such a termination.
Marshall v Council of the Shire of Snowy River (1994) 7 BPR 14,447 ; BC9403420 ; Apriaden Pty Ltd v Seacrest Pty Ltd (2005) 12 VR 319 ;  VSCA 139; BC200503602 , followed(2010) 14 BPR 27,605 at 27607 (iv) When a party to a lease purports to re-enter due to some particular breach of the lease, the non-defaulting party remains entitled to justify its termination by reference to breaches of other essential terms of the lease, even if it was aware of those additional breaches at the time. (v) The lessee was in breach of cl 4.1 as it had planted lemon scented tea trees rather than lemon myrtle trees. The discrepancy could not be resolved by construction as antecedent oral negotiations and expectations cannot be relied on if the written contract has a clear meaning. Further, the plaintiffs failed to discharge their onus of proof in its case for rectification. In that context, it was irrelevant that the type of tree planted had no negative impact on the defendant. Finally, there was no estoppel by convention as there was insufficient evidence of any antecedent mutual assumption of the parties that lemon scented tea trees were to be planted rather than lemon myrtle trees (vi) The fact that planting and cultivation of lemon myrtle trees could in some circumstances infringe certain legislation (such as the requirement not to damage certain habitat in National Parks and Wildlife Act 1974 (NSW) s 118D(1) ) unless a licence were granted does not make failure to obtain such a licence a breach of cl 4.3. (vii) The planting and cultivation of lemon myrtle trees was not “the continuation of a use of [the land] for a lawful purpose for which it was being used” prior to the introduction of a local environmental plan (being cattle grazing and pasture improvement) for the purposes of Environmental Planning and Assessment Act 1979 (NSW) s 109(1) .
Royal Agricultural Society of New South Wales v Sydney City Council (1987) 61 LGRA 305 ; BC8701327 ; Taggett v Council of the Shire of Tweed applied  NSWCA 260; BC9302191 , considered(viii) Since no development consent had been obtained for the planting and cultivation of lemon myrtle trees as required by that local environmental plan, the lessee was in breach of cll 4.3 and 4.5 of the lease. There was no estoppel by convention preventing the defendant’s reliance on this breach as there was insufficient evidence of any common assumption that no development consent was required. (ix) The lessee was not in breach of cl 7.1 by having entered into a joint venture agreement at the same time as the lease was granted and thus prior to cl 7.1 coming into effect. (x) The lessee was not in breach of cl 7.1 by granting Austcorp an option to purchase the lease as this did not “otherwise deal with” the lease for the purposes of the clause which, on construction, extends only to dealings that are analogous with mortgages and charges. (xi) The issuance of stop work orders under Threatened Species Conservation Act 1995 (NSW) and interim protection orders under National Parks and Wildlife Act did not constitute “reclassification” of the land for the purposes of cl 18. (xii) The breach of cl 4.3 could not be remedied for the purposes of Conveyancing Act s 129(1)(b) because the lessee covenanted in cl 4.3 that the licence had already been obtained at the date of the lease. In this context, obtaining consent later would not remedy the breach. (xiii) The limitation in Conveyancing Act 1919 (NSW) s 129 contained in s 129(6)(c)(i) relates to the taking in execution of the lessee’s interest in agricultural or pastoral land. The limitation does not apply to the clause granting the lessor a right to re-enter in certain circumstances as that is not concerned with levying of execution. (xiv) No action by the defendant after the inception of the lease but prior to its enforceable right to forfeit and re-enter on 3 May 2002 could constitute an election not to forfeit the lease.
McDrury v Luporini  NZCA 309 ;  1 NZLR 652 , applied(xv) Even if the notice under Conveyancing Act s 129 were invalid, the notice of 3 May 2002 would constitute a valid exercise of the defendant’s right to terminate the lease for breach of an essential term. Such right to terminate was not lost by the defendant’s application to council for development consent relating to the leased land, as this was not consistent only with the continuance of the lease. (xvi) Relief against forfeiture is available, in principle, in relation to deprivation following contractual termination.
Liristis Holdings Pty Ltd v Wallville Pty Ltd (2001) 10 BPR 18,801 ;  NSWSC 428; BC200102722 , applied(2010) 14 BPR 27,605 at 27608 (xvii) Relief against forfeiture would be available in relation to the breach of cl 4.1 alone. However, the first plaintiff did not make out any basis for the grant of relief against forfeiture in relation to the breach of cl 4.3, in that it did not establish, in the face of the defendant’s established right to terminate the lease for that breach, that it was necessary for the court to intervene to avoid the effects of unconscionable or unconscientious conduct by the defendant in setting up the termination. Relevant inquiries in this regard are whether the defendant itself contributed in some significant extent to the first plaintiff’s breach or derived some wholly disproportionate benefit from relying on it as a basis for termination and the “subsidiary questions” identified in Legione v Hateley (1983) 152 CLR 406 ; BC8300063 . (xviii) Termination by the defendant following breach of an essential term cannot be a breach of an implied obligation of good faith because the contractual framework expressly and deliberately embraced by the parties (in particular the provision that certain terms be treated as essential) allowed for termination in these circumstances irrespective of the triviality of the breach. In any event, such a claim would fail for lack of evidence as to the defendant’s purpose in terminating the contract. Further, termination that was itself a breach of an implied obligation of good faith would not render that termination ineffective. (xix) Even if the lease contains an implied obligation of co-operation, such an obligation would not have required the defendant to consent to a development application relating to lemon scented tea trees as this was not a permitted use under the lease. (xx) There was insufficient evidence of a misrepresentation inducing the defendant’s entry into the lease and thus the defendant had no right to rescind or to relief under Trade Practices Act 1974 (Cth) s 87 on such basis. (xxi) On the evidence, there was no fiduciary duty owed by the second plaintiff to the defendant. However, the second plaintiff (and hence the first plaintiff) knowingly participated in a breach of fiduciary duty owed by a third party to the defendant. Thus, had it been relevant, the first plaintiff would have held the lease and option to purchase on constructive trust for the defendant. (xxii) Austcorp had an equitable interest in the first plaintiff’s proprietary interest in the land by virtue of its conditional option to purchase. This is because, despite not having a right to specific performance, it had a right to lesser equitable remedies (such as an injunction). However, Austcorp recognised at the time of acquiring its interest that it would only acquire proprietary rights possessed by the first plaintiff (and it was aware of the dispute). Even if the case were one of competing priorities, the defendant would succeed against Austcorp due to Austcorp’s notice of the defendant’s claims at the time it acquired its interest. (xxiii) Thus, even if the option to purchase survived termination of the lease and the exercise of the option brought into existence a contract of sale, no specific performance of that contract would have been granted as a discretionary matter due to the plaintiffs’ complicity in a third party’s breach of fiduciary duty. Further, the plaintiffs’ complicity in that breach of fiduciary duty would have given rise to a constructive trust in the defendant’s favour regardless of rights asserted by Auscorp.
an option to purchase incorporated in a lease survives termination of the lease
Whether an option to purchase incorporated in a lease survives termination of the lease is a question of construction. Here, cl 15.7 implies that the option could only be exercised while the defendant was “bound … as landlord” and hence could not be exercised after termination. However, in the absence of explicit language to that effect or a reason to imply such a restriction, a breach by the lessee alone would not have had the effecting of precluding the lessee’s exercise of an option to purchase. Had it been appropriate to imply such a restriction, Conveyancing Act 1919 (NSW) s 133E would not have applied
Legislation No:14 BPR