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A Breach of Lease May Not Mean the End of a Lease 

by Ross Pickmere, Jennifer Campbell, Mari Theron

Published: November, 2020

Submission: November, 2020

 



A recent High Court decision is a good reminder to both landlords and tenants of the Court’s power to stop a landlord ending a lease even where the tenant’s breach is serious and deliberate. Landlords need to act with considerable care in exercising their rights to end a lease due to a tenant breach if the breach causes no harm to the landlord but the ending of the lease would have material financial consequences for the tenant.


We review the High Court’s recent decision in Taste of Asia Limited v Hillcrest Properties Limited below.


If you would like further information about relief against forfeiture or the case mentioned in this article, please do not hesitate to contact one of our experts.


The Lease and Sublease


In October 2011, Taste of Asia Limited (Tenant) entered into a deed of lease with Hillcrest Properties Limited (Landlord) in respect of premises in Dunedin (Lease).


The Lease provided that the Tenant was not allowed to sublet the premises or any part thereof without first obtaining the written consent of the Landlord. Such consent was to be given by the Landlord if certain conditions under the Lease were satisfied (i.e. the Tenant could prove (to the reasonable satisfaction of the Landlord) that the subtenant was respectable, responsible and had the financial resources to meet the Tenant’s commitments under the Lease; that all rent and other monies payable had been paid; that there was not any subsisting breach of any of the Tenant’s covenants under the Lease; and that the Tenant would pay the Landlord’s reasonable costs in respect of such approval and (if appropriate) for inquiries made by the Landlord concerning the proposed subtenant).


In October 2013, the Tenant entered into a deed of sublease with Lim 88 Investments Limited (Subtenant) without obtaining the Landlord’s consent (Sublease). The annual rent payable under the Sublease was substantially more than the annual rent payable under the Lease. In June 2015, the Tenant and Subtenant entered into a further deed of sublease without obtaining the Landlord’s consent.


In February 2019, the Landlord became aware that the premises were being sublet to the Subtenant. The Landlord then gave notice to the Tenant that it intended to cancel the Lease and brought a proceeding seeking an order granting it possession of the premises. In response, the Tenant sought an order granting it relief against forfeiture.


Application for relief against forfeiture granted


The High Court dismissed the Landlord’s claim for an order granting it possession of the premises and granted the Tenant’s application for relief against forfeiture on the condition that the Tenant formally seek the Landlord’s consent to the Sublease.


Balancing competing considerations


The High Court’s judgment hinged on balancing competing considerations, including:


  • That there was a deliberate and serious breach of the Tenant’s obligations under the Lease. Not only did the Tenant fail to obtain the Landlord’s consent in both 2013 and 2015, it also included a clause in the Sublease that prohibited the Subtenant from communicating with the Landlord.
  • That the Landlord did not suffer any direct or indirect harm (e.g. financial harm) as a result of the Tenant’s breach. The Landlord received all payments due under the Lease by the Tenant.
  • That the Landlord would have been required to grant consent to the Sublease (as the conditions to sublet under the Lease were established, albeit with the benefit of hindsight).
  • That cancellation of the Lease would produce very significant financial consequences for the Tenant. Not only would the Tenant lose the benefits of its investment and efforts in developing the businesses (e.g. converting the premises from a hardware store into a restaurant and takeaway business), it would also lose the ability to generate income from the businesses (e.g. as sublessor and as an operator of the businesses in the event that the Subtenant was no longer able to continue).
  • That the Subtenant would not be prejudiced by the cancellation of the Lease. The Subtenant supported the Landlord’s efforts to cancel the Lease, presumably because the Subtenant would then be free to enter into a lease of the premises directly with the Landlord on terms that would be more favourable to it than those of the Sublease.

The High Court found that the factors weighing against cancellation (e.g. the loss that the Tenant would suffer) outweighed the factors favouring cancellation (e.g. the serious breach of the Tenant’s obligations under the Lease).


Authored by Mari Theron, a Solicitor in MinterEllisonRuddWatts' Property and Real Estate team.


Footnote:


Taste of Asia Limited v Hillcrest Properties Limited [2020] NZHC 2081.


 



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