What is a recent Victorian case analysing notices of default served on a tenant?

  • Author : Bill Stark - 24-05-2012

In Primary RE Ltd v Great Southern Property Holdings Pty Ltd [2011] VSC 242 Judd J of the Supreme Court of Victoria looks in some detail at notices under section 146 of the Property Law Act, 1958.

Background

This case arose out of the collapse of the Great Southern Group in May 2009. The Group, among other things, managed a number of forestry projects.

Judd J describes the relevant part of the Group in paragraphs 6 and 7 in this way:

[6] There were approximately 4000 investors in the scheme. The land employed in the 2007 Scheme was divided into 43,989 woodlots of approximately one third of a hectare each. The investors had, by May 2009, invested approximately $132 million in pursuit of the objects of the scheme. The relationship between the tenant, as Responsible Entity of the 2007 Scheme, and the investors was defined by a Product Disclosure Statement, a scheme constitution, the terms of each sub-lease or sub-licence, and a management agreement pursuant to which each grower engaged the tenant to prepare, establish, maintain and ultimately harvest trees.


 

[7] Following the collapse of the Group the tenant was unable to continue to perform its management functions, which included an obligation under each lease and forestry agreement, to “tend and maintain the Plantation Crop in a proper and skilful manner and in accordance with sound silvicultural and environmental practices adopted within the forestry industry”. It was insolvent, and in the absence of an injection of funds, did not have the money to discharge its obligations. Limited protective maintenance was carried out by the receivers for a limited time.

Notices of default

As a result of the tenant being unable to perform its duties under the various leases, from April 2010, the landlords served notices of default on the tenant alleging a breach of lease.

The notices of default required the alleged breaches to be remedied within 30 days. In addition to alleging a breach of a specific clause, each notice gave particulars of the breach, by stating the respect in which the tenants failure to perform its management obligations required remediation. For example, some notices alleged a failure to fertilise plantations or to control weeds.

Following service of the notices of default, the tenant took no steps to recommence management of the plantations, or to remedy any particular breach, or to make application for relief against forfeiture. The notices of default required payment of compensation. None was offered or paid.

Termination / re-entry

At various times after service of the notices of default, the landlords served notices of termination or re-entry.

Sale

On 17 December 2010, the landlords exchanged contracts of sale of the land with a third party purchaser. The plaintiff, Primary RE Ltd, was the new Responsible Entity for the 2007 Scheme, having been appointed to replace the tenant on 24 December 2010.

The court action

Primary challenged the validity of the notices of default and terminations by alleging that the management obligations in each lease and forestry agreement were ambiguous or uncertain; that the recitation of the breach in each notice of default was inadequate; that the notices did not allow reasonable time to remedy the breaches, or between service of the notices and termination, that the notices failed to specify compensation. J

udd J’s decision is 92 pages and 210 paragraphs long. I am focusing solely on his analysis of the requirements for a valid section 146 notice, which begins at paragraph 76.

Section 146 of the Property Law Act

Section 146(1) and (2) of the Property Law Act 1958 is the relevant provision.

Judd J decided at paragraph 104 that the overarching breach (the insolvency of the tenant), and its consequences on particular plantations, was proved by the landlords on the balance of probabilities.

Validity of notices of default

His Honour then went on to consider the Validity of notices of default. First, he looked at the useful summary of legal principles applicable to the construction of the relevant statutory requirements in the judgment of Hodgson JA in Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service [2010] NSWCA 268. His Honour said:

308. The purpose of s [146] is to give the lessee an opportunity to remedy any alleged breaches before the lessor exercises its legal right of forfeiture: Fletcher v Nokes [1897] 1 Ch 271 at 274; Horsey Estate Ltd v Steiger [1899] 2 QB 79 at 91; Ex parte Dally-Watkins; Re Wilson (1956) 72 WN (NSW) 454 at 456.

309. In my opinion, a proper opportunity is not afforded unless the lessee is alerted to the particular breaches on which the lessor proposes to rely and what the lessor requires in order to bring about a position where termination would not occur.

310. The reported cases are concerned with notices issued pursuant to alleged breaches of covenants to repair. In Fletcher v Nokes, a notice was issued under s 14 of the Conveyancing and Law of Property Act 1881 in which the lessor alleged generally that the lessee had “broken the covenants for repairing the inside and outside” of the demised premises, and required the lessee to repair “in accordance with the said covenants”. This notice was held insufficient because the lease was over six houses and the notice did not indicate in which of the houses the default was made. North J said (at 274):

I think the notice … ought to be such a notice as will enable the tenant to understand with reasonable certainty what it is which he is required to do. I do not mean that the landlord need go through every room in a house and point out every defect. But the notice ought to be so distinct as to direct the attention of the tenant to the particular things of which the landlord complains, so that the tenant may have an opportunity of remedying them before an action to enforce a forfeiture of the lease is brought against him. In my opinion, the notice which the plaintiff has given to the defendant is not sufficiently specific. Sect. [146] says that it is to be a notice “specifying the particular breach complained of.” I do not think that is met by a notice which simply says, “You have broken the covenants for repairing.” The plaintiff has not condescended upon any details, and, in my opinion, the notice is not sufficient under s 14[6].

311. To similar effect are the statements of Collins LJ in Penton v Barnett [1898] 1 QB 276 and Lord Russell CJ in Horsey Estate Ltd v Steiger [1899] 2 QB 79. Collins LJ said ( [1898] 1 QB 276 at 281):

I think, however, that we ought to construe the words “particular breach” in the section according to the obvious intention of the Legislature, which was that the tenant should be informed of the particular condition of the premises which he was required to remedy. The expression “breach” means the neglect to deal with the condition of the premises so pointed out, and not merely failure to comply with the covenants of the lease. The common sense of the matter is, that the tenant is to have full notice of what he is required to do. He has had notice, and has failed to act on it; and with regard to that the physical condition of the premises which he was required to make good was the same when the action was brought as when the notice was given.

312. Lord Russell CJ said ([1899] 2 QB 79 at 91):

To determine the character of the required notice, what it shall contain and when it ought to be given, it is necessary to consider the scope of s 14[6] of the Act … as a whole. The object seems to be to require in the defined cases (1.) that a notice shall precede any proceeding to enforce a forfeiture, (2.) that the notice shall be such as to give the tenant precise information of what is alleged against him and what is demanded from him, and (3.) that a reasonable time shall after notice be allowed the tenant to act before an action is brought. The reason is clear: he ought to have the opportunity of considering whether he can admit the breach alleged; whether it is capable of remedy; whether he ought to offer any, and, if so, what, compensation; and, finally, if the case is one for relief, whether he ought or ought not promptly to apply for such relief. In short, the notice is intended to give to the person whose interest it is sought to forfeit the opportunity of considering his position before an action is brought against him.

313. The statements in Fletcher v Nokes, Penton v Barnett and Horsey Estate v Steiger were quoted with approval in the leading case of Fox v Jolly [1916] 1 AC 1. Lord Buckmaster LC saw no reason to depart from the statement of North J in Fletcher v Nokes, “except so far as it seeks to establish the standard — often fluctuating and uncertain — of particulars in an action as a test of the sufficiency of the notice” (at 13). His Lordship went on to say that the particulars required for a notice in respect of a covenant to repair “would not necessarily be as detailed and minute” as the particulars required in respect of a claim for damages for breach of covenant (at 14).

314. Lord Atkinson was “quite willing” to accept the statement of North J, but said that it is to be borne in mind that the notice is addressed to a person who knows, or ought to know, the nature and condition of the premises, “so that a statement might be sufficient to draw his attention to the things of which the landlord complains, which might be insufficient so to do in the case of a stranger” (at 18).

315. Lord Parmoor said (at 22):

My Lords, in my opinion a notice is sufficient to comply with s 14[6] if it specifies to the lessee the breach complained of, with such particularity, as fairly to tell him what it is he is required to remedy, if it is capable of remedy, and what it is for which he is required to make compensation in money. To determine whether a notice complies with this test depends on the information which the notice, as a whole, may be fairly said to give.

316. The impugned notice in Fox v Jolly was served by the lessor of six small houses. Annexed to the notice was a schedule of dilapidations, including, for example, “Make good all cement fillets and all flashings” and “Repair landings and other woodwork”. Lord Buckmaster LC held that the notice sufficiently specified the landlord’s complaints and gave the tenant adequate notice of what he was required to do.

317. The Australian position reflects the above authorities. …

318. In Gerraty v McGavin [1914] HCA 23 ; (1914) 18 CLR 152 at 160 (decided before Fox v Jolly), Griffith CJ quoted with approval the statement that Collins LJ made in Penton v Barnett, and held that a notice merely quoting the covenant was insufficient. Isaacs J agreed in the result with Griffith CJ, saying that a lessor (at 164–165):

[M]ust then do what he would have to do if he had brought an action, namely, specify what he says is “the particular breach,” and not merely state that there has been “a breach.” If he does that, he is not bound to go further and instruct the tenant how to repair it. That would not only be an undue burden on the landlord, but, if effectual at all, would tie the tenant down to one particular mode of repairing his fault.

319. In Dogan v Morton (1935) 35 SR (NSW) 142 at 148, Davidson J (with whom Stephen and Street JJ agreed) referred to the English authorities and concluded:

The landlord must give the kind of particulars which will draw the attention of the lessee to the particular defect in the premises which he desires to have rectified in accordance with the covenant. The indication need only be such as would enable the lessee to understand with reasonable certainty what it is that he is required to remedy.

320. In Ex parte Dally-Watkins; Re Wilson (1956) 72 WN (NSW) 454 at 456, Street CJ (with the concurrence of Roper CJ in Eq and Sugerman J) said that the object of the notice is to bring to the attention of the lessee the matters which are complained of and to give him the opportunity of rectifying what has taken place in the past, if it be capable of rectification. To do so, the “vital thing” is to alert the tenant to the term of the lease alleged to have been broken and the manner in which it has been broken. Street CJ also held that the form set out in Sch 6 is not “a piece of sacramental ritual”.

321. In Johnson v Senes & Berger (1961) 78 WN (NSW) 861 at 864, Wallace J said (referring to Horsey Estate v Steiger):

The object of this legislation includes not only the placing of restrictions on and the giving of relief against forfeiture and re-entry, but the placing of the lessee in a completely informed position so as to enable him to elect what shall be his subsequent conduct.

322. Finally, in Visser v Jacobs (1987) NSW ConvR 55-350 at 57,164, Bryson J explained that:

The underlying mechanism achieved by the working of sec [146] is that provisions of leases which create rights of re-entry are not employed to deprive lessees of valuable leasehold interests if other measures are available to bring about the desirable result that covenants of leases are complied with and breaches of them are remedied.

Bryson J acknowledged that the “degree of specificity must vary with the circumstances and with the facts already known or manifest to the lessee”. One of the bases on which the notice in Visser was held invalid was that it contained no specification of particular breaches (only the general subject of the breaches).

His Honour concluded:

323. In my opinion, the above authorities clearly indicate that a notice under s [146] must not only allege breach, but must also describe the particular acts or omissions constituting the alleged breach; and the notice must indicate the acts of the tenant which the landlord would consider sufficient for the lease to continue, and upon completion of which the landlord would abandon its claim to forfeit. The standard of particulars or degree of specificity depends upon the circumstances, including the nature of the covenant alleged to be breached, the tenant’s actual or constructive knowledge, and whether the landlord claims reasonable compensation. To use the example of Lord Buckmaster LC, where there are several options open to a tenant to waterproof a leaking ceiling, then that choice is at the tenant’s discretion. Thus s [146] is, in my opinion, directed at allowing the tenant to bring about (within a reasonable time) a state of affairs under which the landlord would not pursue forfeiture.

324. In particular, the lessee should not be left to speculate as to whether, if it took whatever action it could to remedy the specified breaches, the lessor might nevertheless proceed to terminate the lease on the basis that the breaches were not capable of remedy or that, because what the lessee did was insufficient to eliminate loss caused to the lessor by the late performance of the lessee’s obligations, the lessee was still in breach.16

Judd J noted (at paragraph 106) that the landlords submitted that the tenant was not required, in a statutory notice, to specify the means by which a breach was to be remedied. In Fox v Jolly [1916] AC 1 Lord Buckmaster LC said:

Now the schedule is attacked on several grounds. It is said that it does not tell the tenant what it is he ought to do in order to remedy the breach of which the complaint is made. I am not prepared to accede to that view of the schedule. But even if it did not, I can find nowhere in the section any words which cast upon the landlord the obligation of telling the tenant what it is that he must do. All that the landlord is bound to do is to state particulars of the breaches of covenants of which he complains and call upon the lessee to remedy them. The means by which the breach is to be remedied is a matter for the lessee and not for the lessor. In many cases specification of the breach will of itself suggest the only possible remedy. For example, complaint that a covenant to paint or to paper has been broken can only be met by painting and papering. But it does not follow that this is always so. A particular covenant to keep the roof watertight, if broken, would be sufficiently defined by a reference to the covenant, a statement that the roof had not been kept watertight, and that the tenant was required to remedy the omission; the means by which this could be accomplished would be for the tenant to determine.

The landlords in Primary submitted that the notices specified the covenants in the leases which the landlord alleged to have been breached by the tenant, and the manner in which the breach had occurred.

They argued that they were not required to spell out how the tenant was to respond. They submitted that the tenant could not claim the status as a stranger which knew nothing of the land, and leases.

Judd J concluded that Primary’s complaint concerning the lack of specificity of the breaches in each of the s 146 notices was without substance. It was not for the landlord to prescribe the way in which the tenant was to remedy the breach. Nothing was being done by the tenant to tend and manage the plantations.

The decision (although quite lengthy) provides some useful insights into the requirements needed for a notice under section 146 of the Property Law Act, 1958 to be valid.

About the Author

Bill Stark

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