INDEMNITY COSTS AS THE PRICE OF RELIEF AGAINST FORFEITURE – Reasonableness on the weighing scales

Icechest Corp Pty Ltd v Quan [2017] WASC 345 is probably the latest Australian iteration of the question of who should bear the legal costs of a successful application for relief against forfeiture of a commercial lease.

The decision turned on whether the lessor had acted unreasonably in its initial refusal to allow the lessee re-entry, and in its approach to the ensuing ligation, such as to deny it a right to be indemnified for its costs.

The decision serves as a warning to lessors that a churlish or absolute refusal to accommodate a lessee in re-entering the lease can lead to adverse costs orders, and a reminder to lessees that despite the indulgences the law allows them in re-entering premises after breach and termination, they should expect to pay for it.

Background

The lessor had terminated the lease for the lessee’s failure to pay rent and outgoings and to provide a security deposit.  At or around the time proceedings for relief against forfeiture were commenced, the outstanding rent and outgoings had been paid.  The lessee promised to pay the security deposit within weeks, but was unable to provide the lessor certainty this would occur.

The lessor required payment of the security deposit immediately, the lessee’s commitment to honour future lease obligations on time, and payment of the lessor’s costs associated with the lessee’s defaults.

The lessee in its desperation to obtain re-entry also alleged the lease had been wrongfully terminated; a position it ultimately had to resile from.

Immediately prior to and during the litigation the lessor made an effort to confer with the lessee, to offer re-entry on terms tied to future compliance with the lease, and to minimise argument and cost to the parties.

Following the usual interim injunction proceedings, and once the lessee remedied its defaults; the lessor consented to relief against forfeiture.  At that juncture, given the state of the law reflected by Twinside Pty Ltd v Venetian Nominees Pty Ltd [2008] WASC 110, the lessee was likely to ultimately succeed in obtaining relief against forfeiture (in any event).

Lessons

By consenting to relief and avoiding the tactical power-play of trying to ‘drive the lessee into the ground’, the lessor secured an order for indemnity costs in its favour; namely for the lessee to pay all of the lessor’s costs, save those costs unreasonably incurred, with a view to the lessor otherwise being completely indemnified.

The lessee is left in the invidious position of having to promptly remedy its breaches to secure its relief, pay its own legal costs, and indemnify the lessor for its legal costs – all the while ensuring it continues to meet its future obligations under the lease.

By contrast, the lessor now has a tenant who will either be compliant – terrified of the potential financial burden of any future non-compliance and termination of the lease – or if non-compliant, liable to termination by the lessor in the knowledge a second-time application for relief against forfeiture is less likely to be granted.

Williams + Hughes acted for the lessor in this case.