Understanding default notices given under a lease

A default notice given under a lease does not necessarily require the tenant to rectify the defaults alleged within the time specified in the notice.

The Victorian provision concerning default notices is s.146(1) of the Property Law Act 1958. Section 146(1) provides in part:

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—

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.

[emphasis added]

The notice’s purpose is to give the tenant an opportunity to consider its position and give a response: See: Primary RE Limited v Great Southern Property Holdings Limited [2011] VSC 242 [147]. If the breach is capable of remedy, an adequate response may be to admit the breach and propose a course of remediation. See: Primary RE [147]. In Victoria a notice under s.146(1) must be given even where the tenant has repudiated the lease.

In Primary RE the tenants failed to perform lease and forestry agreements. The default notices gave the tenant 30 days to comply with the notice. The tenant argued, among many other things, that 30 days was insufficient to remedy the breach. Judd J said that a “sufficient response” by the tenant to the notices would have been to undertake to recommence management of the plantations and perform its obligations under each lease and to agree to pay compensation for any damage to the reversion [132].

At [147] His Honour said:

…having received the noticed of default, a sufficient response from the tenant to avoid forfeiture, re-entry or termination, would have been to recommence management of the plantations in compliance with its obligations under each lease and forestry agreement, coupled with a proposal to pay reasonable compensation for any injury to the reversion. In my view it would not have been necessary for the tenant to do more in order to avoid the risk of termination, provided the tenant had the capacity and communicated a genuine intention to do as proposed. Nothing of the kind was communicated by the tenant to any of the landlords. The fact that the remediation work, identified in the notices, might take one or more years was not a determining factor in the calculation of a reasonable time within which to respond.

The tenant contended that a “reasonable time” to respond to the notice was one year. Judd J rejected this argument. As to what is a “reasonable time”, Judd J said that this “depends upon the purpose for which the notice is given, the nature of the breaches alleged and what is required to be done to avoid forfeiture” [140}. A reasonable time is not the time necessary to actually undertake and complete the work.

The reference to “compensation” in s.146(1) is directed to loss suffered as a consequence of damage to the reversion and is not “intended a substitute for remediation” [133]. The landlord need not specify in the statutory notice the amount of “compensation” necessary to satisfy the demand. The question as to what is reasonable may be capable of negotiation, but if not, it may be determined by a court.

The s.146(1) notice in Primary RE is set out in paragraph [41]. One thing that emerges from Primary RE is that often less is better: for example, while it is necessary for the notice to specify the breach complained of, it is not necessary for the landlord to prescribe how the tenant should rectify the default [112].

Paragraph [105] of Primary RE contains a summary of the principles governing default notices.

This post originally appeared on roberthaykcblog