One for the Little Guy
By Russell Cocks, Solicitor
First published in the Law Institute Journal
The recent case of Xiao v Perpetual Trustee Company Limited and Macquarie Office Management Limited [2008] VSC 412 is a typical ‘David versus Goliath’ scenario, with the outcome complying with biblical expectations.
Xiao (the tenant) operated a café/restaurant in the ground floor of a substantial office building that was owned by Perpetual (the landlord) and managed by Macquarie (the manager), which employed an estate agent to manage tenancies (the agent). The tenant had paid $320,000 for the business in 2006, taking over a lease due to expire on 30 September 2008. Importantly the lease provided for an option of five years and the question to be decided by the Court was whether the tenant had validly exercised the option. If not, the tenant would be obliged to vacate the premises on 30 September 2008.
Jurisdiction
Most disputes involving retail premises, as these premises were, are heard in VCAT. An exception exists if the tenant is seeking relief against forfeiture and the Court was satisfied that a claim for relief against forfeiture of an option came within this exception. Once the jurisdiction of the Court is enlivened, appropriate remedies, such as a declaration or specific performance, become available.
The option
The central issue was whether the tenant had exercised the option within the applicable time limits. Certainly the tenant had exercised the option, on 19 June 2008, but the landlord argued that this was inoperative as it was outside of the applicable time limit. The provisions in the lease required the tenant to exercise the option ‘not less than six (6) months prior to the expiry of the Term’. The term was due to expire on 30 September 2008, so the lease required the tenant to exercise the option prior to 31 March 2008 and there is no doubt that the tenant’s notice on 19 June failed to comply with this time limit. However the tenant sought to rely upon the landlord’s overriding statutory obligation (s 28 Retail Leases Act) to give notice to the tenant of the need to exercise the option. The Act requires the landlord to give this notice to the tenant between 6 and 12 months before the last day for exercise of the option; in this case between 30 September 2007 (6 months before the last day) and 30 March 2007 (12 months before the last day). Failure by the landlord to give notice within these time limits results in the tenant being entitled to exercise the option at any time within 6 months of the landlord in fact giving the notice.
Notice
The landlord was ‘late’ with the option notice. The agent purported to send the option notice to the tenant on 4 December 2008, meaning that the ‘statutory extension’ gave the tenant 6 months from that date (4 June 2008) to exercise the option. On 12 June the lawyers for the landlord wrote to the tenant advising that the tenant had lost the right to exercise the option, as the tenant had failed to exercise the option within 6 months of the option notice and that the tenant was required to vacate the premises at the expiration of the term, namely 30 September 2008. The tenant gave notice of exercise of the option on 18 June and shortly after issued these proceedings seeking enforcement of the option.
At this point the judgment entered ‘the twilight zone’ as far as practising lawyers (and agents) are concerned – an intimate analysis of the minutia of service. Nobody wants to think that a document that they have served may in fact be held to have not been served, but that was the outcome in this case. The landlord’s responsibility was to ‘notify’ and the Court held that that meant that the information had to in fact come to the attention of the tenant. It was not the act of the landlord ‘serving’ the document that was the touchstone; rather it was proof of the fact that the information had reached the tenant that was necessary. The agent gave evidence that the notice had been posted to the tenant, both in the normal mail and by registered mail, on 4 December 2007. But the Court was not satisfied that the normal mail letter had been received (or indeed posted) and was satisfied that the tenant had not collected the registered mail until 31 December 2007, which was when the landlord had fulfilled the obligation to ‘notify’. This made the tenant’s exercise of the option on 19 June 2008 within the 6 months extended period for exercise and thus enforceable.
The Court drew the crucial distinction between ‘service’ and ‘notification’, placing a higher onus in respect of the latter. However it also concluded that even if the lower threshold of ‘service’ was all that was required, then ‘service’ had not been achieved as the letter referred to 3 June 2008, whereas 6 months from ‘service’ would have been 6 or 7 June, depending upon the definition of ‘service’ adopted. As Maxwell Smart would say, ‘Missed by that much!’
The outcome was a win for the little guy, who would have, perhaps unfairly, lost a business that had cost a significant amount of money. No doubt that did not influence the outcome, but nevertheless it is a pleasing happenstance.
Tip Box
Whilst written for Victoria this article has interest and relevance for practitioners in all states.