The compensation requirement in a s 146 notice. Primary RE Ltd v Great Southern Property Holdings Ltd & Ors [2011] VSC 242

Section 146 of the PLA states that (emphasis added):

(1) A right of re-entry or forfeiture under any proviso or stipulation in a lease or otherwise arising by operation of law for a breach of any covenant or condition in the lease, including a breach amounting to repudiation, shall not be enforceable, by action or otherwise, unless and until the lessor serves on the lessee a notice—

(a) specifying the particular breach complained of; and

(b) if the breach is capable of remedy, requiring the lessee to remedy the breach; and

(c) in any case, requiring the lessee to make compensation in money for the breach—

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and the lessee fails, within a reasonable time thereafter, or the time not being less than fourteen days fixed by the lease to remedy the breach, if it is capable of remedy, and to make reasonable compensation in money, to the satisfaction of the lessor, for the breach.

Primary RE argued that:

• s 146 of the PLA requires the landlord to specify the compensation demanded with enough particularity to inform the tenant of what was alleged to allow it to make a decision on whether to remedy the breach, offer compensation, seek relief from forfeiture or otherwise contest the alleged breaches;
• the notices failed to provide particulars of compensation which would be acceptable if re-entry or forfeiture were to be avoided;
• the landlord is not obliged to seek compensation in a s 146 notice;
• the compensation demanded is compensation for breaches that are not otherwise capable of remedy, that is, an amount in addition to remedying the default; and
• the requirement to seek damages in the notice is not satisfied by a bald statement requiring the tenant to ‘make reasonable compensation in money to the landlord for the said breaches’.

The Receivers of the land owning companies argued that:

• the quantum of compensation may, but need not, be specified in a s 146 notice; and
• one purpose of the notice is to give the tenant the opportunity to consider whether it ought to offer any and, if so, what compensation.

The Court found that:

• a landlord will rarely by in a position to specify the amount of compensation necessary to satisfy a reasonable demand;
• compensation is directed to loss suffered to the reversion and it is not intended to be a substitute for remediation;
• the tenant will also rarely be in a position to precisely quantify compensation and will rarely be in a position to do more than agree to pay a reasonable sum;
• what is a reasonable sum may be the subject of negotiations or may be determined by a court; and
• consequently, Primary RE’s complaints about the failure to specify an amount of damages failed.

Only a fortnight ago a tenant pleaded against one of my clients the argument that the landlord’s s 146 notice sought damages, so damages were the appropriate remedy, rather than termination of the lease, so this finding has potential to be relevant to a number of disputes.

Also, the finding that the compensation in a s 146 notice relates to only damage to the reversion is interesting. The judgment does not elaborate on this. It will be interesting to see how this finding plays out in future cases.

The relevant discussion is at paragraphs [125] to [133] of the judgment.