Application, Implications and Limitations of s 128 of the Property Act 1974: ‘Relief against loss of Lessee’s Option’

Application

The provisions of section 128 of the Property Law Act 1974 (Qld) apply to lease agreements that contain options to purchase or renew and provide relief for tenants who are liable to lose their entitlement to exercise an option owing to the fact that they have breached their obligations under a lease.

Implications

Under the current scheme, when the tenant exercises an option, the landlord is obliged to serve the tenant within 14 days with a prescribed notice that:

  • specifies any relevant breach of the lease by the tenant
  • states that the landlord proposes to treat the tenant as having lost their entitlement to exercise the option as a result of the breach subject to any court order (as elaborated below)

Once the tenant has been served with the prescribed notice, they have a period of one month to begin proceedings in the Supreme Court of Queensland seeking relief against the effect of the breach and requesting that the court rule on the option. In granting relief the court has a very wide discretion and can take into consideration the following:

  • the nature of the breach complained of
  • the extent to which the Landlord has been prejudiced by the breach
  • the conduct of the Landlord and the tenant
  • the rights of persons other than the lessor and the lessee
  • the operation of other sections
  • any other circumstances considered by the court to be relevant

If the landlord fails to serve the tenant with the prescribed notice during the mandatory 14 day period, any breaches of the lease by the tenant will be regarded as having no effect on their entitlement to exercise the option.

Limitations

It must be noted that the provisions do not apply in situations where the tenant has exercised the option outside the required time period or if the notice of exercise of option is not compliant with the terms of the lease for any other reason such as its form and content or method by which it was served on the landlord.

There is also some uncertainty as to whether the provisions of section 128 should apply in circumstances where there have been fresh breaches by the tenant that occur in the period between the time they exercise the option and the expiration of the term of the lease.

This issue was considered by the Supreme Court of New South Wales in Flagstaff Investments Pty Ltd v Cross Street Investments Pty Limited [1999] NSWSC 999. In that case the court discussed section 133E of the Conveyancing Act 1919 (NSW) (which prior to January 2002 had identical wording to the current Queensland provision in terms of service of the prescribed notice by the landlord) and held that it did not extend to “breaches of covenant [terms in the lease] after notice [exercising the option]”.

The New South Wales legislation was subsequently amended to provide some clarity by adding provisions that enabled the landlord to serve the tenant with a prescribed notice regardless of whether the whether tenant breached the lease before or after they exercised the option.

Similar amendments have not been made in Queensland.

Conclusion

Notwithstanding the limitations of section 128, both landlords and tenants need to be aware of their rights and obligations under the current scheme. Specifically:

  • tenants should note the potential effect of breaches of the lease on their entitlement to an option
  • landlords should note the importance of acting within 14 days of receiving notice from the tenant exercising the option, to prevent the tenant from exercising their option to renew

For more information on lease agreements and relief against loss of lessee’s option to renew please contact Gavin McInnes on 3009 8444 or g.mcinnes@rclaw.com.au.

Elena Mastyuk

Senior Associate

Brisbane 07 3009 8444
Email e.mastyuk@rclaw.com.au

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Supervising Partners

Gavin McInnes

Partner

Brisbane 07 3009 8444
Sydney 02 9307 8900
Email g.mcinnes@rclaw.com.au

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