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Insolvency doesn't necessarily mean that relief against forfeiture cannot be granted

Caseflash 25 May 2016

In the case of Baby Zone (Aust) Pty Ltd (Administrators Appointed) v Keira Street Ventures Pty Ltd [2016] NSWSC 528, Justice Robb granted relief against forfeiture of a Lease in favour of Baby Zone, a tenant that failed to pay the rent in accordance with the terms of the Lease and was about to be insolvent.

Facts

On 1 June 2013, the plaintiff, Baby Zone entered into a lease from Moschella Holdings Pty Ltd of property 398 Keira Street, Wollongong (the Property). Baby Zone conducted a retail business selling baby products from the Property. The defendant, Keira Street Ventures Pty Ltd (Keira Street) became the registered proprietor of the Property and subsequently Baby Zone paid rent to Keira Street until a date in September 2015, when a monthly payment was not made on time.

On 28 October 2015, Keira Street purported to forfeit the Lease by re-entry on the ground of non-payment of rent in accordance with the Lease. Baby Zone immediately paid the rent that was overdue. On 10 December 2015, Administrators were appointed for Baby Zone under s 436A of the Corporations Act 2001 (Cth).

On 18 December 2015, the Administrators of Baby Zone entered into a contract with Baby Bounce Pty Ltd (Baby Bounce) for the sale of the stock on the Property, and 10 other locations. Not long after, Baby Zone entered into another contract with Baby Bounce to sell Baby Zone’s retail business conducted from the Premises for a price of $100,000, and planned to assign their Lease to Baby Bounce.

An issue arose between the parties as to whether the Court would grant Baby Zone relief against forfeiture in order for Baby Zone to assign the Lease to Baby Bounce.

What is relief against forfeiture?

Relief against forfeiture (as it applies to leases) is where the Court makes orders that allow the tenant to return and occupy premises that had been re-entered by a landlord (usually after the tenant fails to pay rent, or has defaulted on the lease).

However, relief against forfeiture of a Lease does not rely on any mistake or failure to properly act on the part of the landlord.The landlord may act in accordance with the Lease, and relief may still be granted. It is up to the Court’s discretion whether or not to grant relief. The principles behind relief against forfeiture, is reliant on fairness, equity, and if the tenant can prove that it would be unfair to deny the tenant the right to return to the premises. As part of asking the Court for that relief, the tenant will have to agree to put the landlord back in the same position it would have been in, if the breaches were not to have occurred.

Courts decision to grant relief against forfeiture

On assessment of the evidence, the Court found that Baby Zone paid Keira Street the monthly rent late on a number of occasions, but not so late as to give rise to an event of default. Keira Street was unable to prove that it warned Baby Zone that they might forfeit the lease if any monthly rent payment was late by more than 14 days. The rent due on 28 September 2015 remained outstanding for more than 14 days, and Keira Street entered the property and forfeited the lease on 28 October 2015. It did so following a single event of default. Baby Zone then paid the amount in default immediately.

Thereafter, and particularly after the Administrators were appointed, the monthly rent was paid on time, and the rent was consistently up-to-date. Accordingly, Keira Street did not suffer any loss.

The Court found that, were it not for the possibility that Baby Zone could sell its business and assign the Lease to Baby Bounce, it would be appropriate to refuse the application for relief against forfeiture, since Baby Zone was to become insolvent, and the grant of relief against forfeiture would be futile. However, Justice Robb stated that, the fact that Baby Zone would inevitably soon be insolvent was not an absolute ground for refusing relief against forfeiture.

The Court weighed the benefits of the relief against forfeiture, and found that if relief was granted then Baby Zone would be able to realise the value of the Lease for the benefit of the creditors. However they still had to decide whether allowing relief would sufficiently protect Keira Street.

The principal of Baby Bounce, Mr Hamdache, agreed to provide a bank guarantee equivalent to three months’ rent to secure an assignment of the Lease, as well as a personal guarantee to Keira Street, as additional security for Baby Bounce’s obligations. Keira Street did not make any submission that either the principal nor the company Baby Bounce were not a respectable, responsible, solvent, fit and proper person or entity, capable of adequately carrying on the business, whilst performing and observing the terms and conditions of the Lease. Consequently, the Court granted relief against forfeiture sought by Baby Zone.

The Court has shown that it is willing to grant relief against forfeiture to companies facing insolvency so long as the interests of the Lessor are sufficiently protected.


Gary Newton, Partner
Sydney

Henry Yuan, Paralegal
Sydney

Caseflash 25 May 2016
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