Validity of s 146 notices? Primary RE Ltd v Great Southern Property Holdings Ltd

The notices served on the former RE/tenant in the Primary RE case stated that (omitting formalities and title particulars):

2. The lease contains the following terms (among others):

(a) the Tenant will at all times during the term of the Lease establish, tend and manage the Plantation Crop (as defined) in a proper and skilful manner and in accordance with sound silvicultural and environmental practices adopted within the forestry industry and as and when appropriate prepare, cultivate, spray herbicide and insecticides, plant seedling trees, fertilise and Harvest (as defined) the Plantation Crop (as defined) (clause 6(b));

(b) Plantation Crop means the crop of Eucalyptus trees planted and tended on the Leased Land for commercial wood production (clause 1(n)).

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3. The Tenant is in breach of the Lease because it failed to establish, tend and manage the Plantation Crop in a proper and skilful manner in accordance with clause 6(b) by virtue of failure to conduct appropriate:

(a) replanting of seedling trees (in full programme) where seedling trees have failed; and

(b) weed control of the Plantation Crop.

TAKE NOTICE THAT the Landlord requires the Tenant within 30 days of service of this Notice to remedy the aforesaid breaches of the Lease insofar as the same may be capable of remedy and to make reasonable compensation in money to the Landlord for the said breaches of the Lease.

FURTHER, THE LANDLORD GIVES NOTICE that if this Notice is not complied with within 30 days of service of this Notice, the Landlord may exercise its right to re-enter and take possession of the Leased Land or any part of the Leased Land. If the Landlord does re-enter the Leased Land, the Lease will be absolutely determined.

A copy of the complete notice has been scanned and included under paragraph [41] of the judgment.

Primary RE argued that the notices were invalid because:

• a landlord is required to comply strictly with the requirements of s 146 (or its interstate equivalents) before terminating a lease;
• the notices did not properly specify the breach alleged;
• the notices failed to specify what compensation the landlords would accept to avoid re-entry or forfeiture;
• the time allowed before re-entry was unreasonably short; and
• the notices were required to be served on the Growers as sub-tenants.

The Receivers for the land owning company argued that:

• the landlord is not required in a s 146 notice to prescribe the means by which a breach is to be remedied or how the tenant was to respond;
• the notices specified the covenants in the leases which the landlord alleged had been breached and the manner in which the breach had occurred;
• the tenant could not claim the status of a stranger who knew nothing of the land, leases or management documents. Even though it was in external administration, the Liquidators had access to the tenant’s books and records, legal advice and forestry staff;
• the landlord was required to, and did, identify the covenant in the lease alleged to have been breached and the manner in which it is alleged to have been broken, but that they did not have to go that step further and give particulars of the breach. The notice must be interpreted according to common sense and take account of the relevant objective context. The relevant issue is how the reasonable recipient would have understood the notice; and
• in this case, the tenant had a reasonable knowledge of the state of each plantation, the contents of the product disclosure statements, relevant operations manuals, reports of lack of funds and the tenant’s insolvency and inability to cure the defaults.

Primary RE submitted in response that the landlord cannot rely on the tenant’s assumed or actual knowledge when a statute required something to be included within a compliant notice.

The Court found that:

• complaints arising out of the uncertainty of words such as ‘proper’ had been rejected in the context of clause 6(b) of the lease (discussed in another post on this blog); and
• such was the nature of the management obligations under the lease that the tenant was under no misapprehension as to what was required.

The main operative passages of this part of the judgment are:

121. This was not a case where the tenant was expected to read between the lines in order to understand what the landlords required should be done to remedy the breach. What was to be done, if the breach was to be remedied and forfeiture avoided, was for the tenant to resume its management of the plantations according to its own forestry manuals. Had it done so, and communicated a credible position to the landlords for the resumption of its obligations, and offered reasonable compensation for any damage to the reversion, the landlords would not have been in a position to terminate. At the very least, the tenant would have had strong grounds to apply for relief against forfeiture.

122. There was an air of unreality about Primary’s submission concerning the extent to which the allegations of breach were vague or uncertain, and its rejection of the knowledge of the tenant as a relevant consideration. The business of the tenant was to establish and maintain the plantations. By reason of the collapse of the Group, the tenant had ceased performing those functions. It was no longer tending or managing the plantations in any manner or according to any practice. It was, quite simply, not performing any part of its obligation set out in cl 6(b) of each lease.

123. Following the collapse of the Group, and the tenant’s inability to continue to perform its management functions in relation to the plantations, it might well have been adequate for each of the notices to have identified a breach under cl 6(b) in more general terms, such as a failure to tend and manage the Plantation Crop as required under cl 6(b), without descending to further particularity. If the tenant was inclined to remedy such a breach there was no misunderstanding as to what was to be done. It would be required to recommence management of the plantations. That would also address the specific consequences of breach identified by the landlords as particulars.

124. Ultimately, the debate over the extent to which the tenant’s knowledge and surrounding facts could be relied upon to construe the notices, became arid. It was resolved in part by the findings in relation to the certainty of meaning of expression in cl 6(b) and the statement of breach in the notices of default. More particularly, it was resolved by the tenant’s acknowledgment of its continuing overarching breach due to insolvency.

This leaves open the question of how prescriptive a notice needs to be if the tenant is complying only partially with the relevant obligations.

Practitioners are advised to review their precedent s 146 notices in light of this discussion and the notice replicated in the text of the judgment.

The relevant discussion takes place at paragraphs [76] to [83] and [105] to [124] of the judgment.