Gradual Investments Ltd v Kennedy (Approved)

Factual and Procedural Background

These proceedings involve a dispute between a landlord and tenant concerning alleged underpayment of rent pursuant to a lease dated 14 October 2008 for a convenience store and post office premises in a Dublin suburb. The parties agree that between 1 January 2014 and 13 October 2018, the tenant paid less rent than specified in the lease. However, two separate abatement agreements were in place for most of this period, under which the landlord agreed to accept reduced rent subject to the tenant's compliance with certain conditions.

The landlord alleges breaches of contractual obligations by the tenant during this period, which, if established, would render the abatement agreements void and entitle the landlord to claim the full rent. The tenant denies breaches and contends that the landlord is estopped from claiming the full rent. The landlord acquired the lease interest from the original landlord's receivers in 2014 and subsequently served a forfeiture notice in 2019 for unpaid rent, which was disputed by the tenant. The landlord commenced these proceedings in February 2020 seeking declarations that the abatement agreements are void and judgment for unpaid rent and interest.

The trial commenced in April 2024, with evidence and submissions concluded by July 2024, after which judgment was reserved.

Legal Issues Presented

1. Whether the tenant failed to comply with the terms of the first abatement agreement such as to render that agreement void.
2. Whether any agreement existed to accept abated rent for the period between the two abatement agreements (2015), and if so, whether the tenant complied with it.
3. Whether the tenant failed to comply with the terms of the second abatement agreement such as to render that agreement void.
4. Whether estoppel, waiver, or other reasons bar the landlord from claiming the full reserved rent on the basis that any agreement to accept reduced rent is void.
5. Whether the clause rendering the full reserved rent recoverable upon breach is a penalty clause and unenforceable.
6. Whether the interest provision in the lease applicable to any recoverable sums is a penalty clause and unenforceable.

Arguments of the Parties

Plaintiff's Arguments

• The tenant breached the abatement agreements by failing to pay arrears and service charges on time and by breaching covenants relating to alterations and restricted use of the premises.
• Such breaches rendered the abatement agreements void ab initio, entitling the landlord to claim full reserved rent.
• The landlord did not waive or is not estopped from enforcing its rights under the lease and abatement agreements despite accepting reduced rent during the relevant periods.
• The clause making the full rent recoverable on breach is not a penalty clause but a legitimate contractual provision.
• The interest provision in the lease, while claimed, is argued to be a penalty clause and should be replaced by a commercially appropriate rate.

Defendant's Arguments

• The tenant denies any breach of the lease or abatement agreements that could render them void.
• Even if breaches occurred, the landlord is estopped or has waived the right to claim full rent due to conduct including acceptance of reduced rent and correspondence suggesting ongoing operation of the abatement agreements.
• The clauses triggering full rent on breach are penalty clauses and unenforceable.
• The interest provision is also a penalty and unenforceable.
• The landlord’s claims are not bona fide but are a response to unrelated litigation concerning assignment consent.
• The landlord’s failure to keep a running account and apply payments properly is argued to preclude recovery of some sums.

Table of Precedents Cited

Court's Reasoning and Analysis

The court carefully examined the terms of the lease and the two abatement agreements, applying established principles of contractual interpretation, including the context and commercial purpose of the agreements. It found that the abatement agreements were binding or subject to estoppel and that the landlord was entitled to rely on them.

The court held that the abatement agreements could only be rendered void by breaches occurring during their currency, not after their expiry. The requirement of a prior written demand was necessary for payment defaults to render the agreements void. The court rejected the tenant’s argument that the landlord had to give an opportunity to remedy breaches before treating the agreements as void, noting that the lease provisions allowed forfeiture without notice for non-payment and breaches.

Regarding the first abatement agreement, the court found no breach sufficient to render it void, as the tenant eventually paid arrears within the required timeframe after demand. However, the landlord was entitled to claim the unpaid arrears balance of €25,800 due to failure to pay by the agreed date.

There was no evidence of any agreement to accept reduced rent in 2015, so the landlord was entitled to claim the underpayment of €57,000 for that year.

In relation to the second abatement agreement, the court found that the tenant breached the alterations covenant by carrying out significant refurbishments without prior written consent, breached the restrictive user covenant by exceeding the permitted area for alcohol sales, and failed to pay service charges within seven days of written demand. These breaches rendered the second abatement agreement void.

The court rejected the tenant’s estoppel and waiver arguments. It found no unambiguous representation by the landlord that it would not rely on breaches or demand full rent. The tenant failed to show reliance or detriment arising from any alleged representations or conduct. Correspondence from the landlord did not constitute waiver or estoppel, and statutory requirements for written waiver were not met.

The court also rejected the tenant’s argument that clauses rendering the full rent payable on breach were penalty clauses. The court distinguished these clauses as legitimate contractual provisions to protect the landlord’s original entitlement. However, the interest provision in the lease was found to be a penalty clause, charging an excessive interest rate, and thus unenforceable. The court proposed substituting a commercially appropriate interest rate (2% under the Courts Act) and held that interest should run from the date of the statement of claim delivery.

Holding and Implications

DISPOSED OF

The court held that:

• The first abatement agreement was not rendered void and the landlord cannot claim underpayment of rent during its period, but the landlord is entitled to claim arrears of €25,800 due to late payment of arrears.
• No agreement existed for abated rent in 2015; the landlord is entitled to claim the €57,000 underpayment for that year.
• The tenant breached the lease during the second abatement agreement period, rendering that agreement void and entitling the landlord to claim €117,991.78 in unpaid rent.
• The landlord is neither estopped nor has waived its rights to claim these sums.
• The clause making full rent payable upon breach is not a penalty clause and is enforceable.
• The interest clause in the lease is a penalty clause; interest will be calculated at 2% from the date of the statement of claim.
• The landlord is entitled to judgment for €200,791.78 plus interest at 2% per annum from 2 July 2020.

The decision directly affects the parties by confirming the landlord’s entitlement to unpaid rent and limiting interest recovery to a reasonable rate. No new legal precedent beyond the application of established principles was created.