Lease Disputes – What you need to know before “Changing the Locks”

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Lease Disputes and Early Termination of Leases – Notice to Remedy Breach – Case Note on Primary RE Limited v Great Southern Property Holdings Limited (recs & mgrs apptd) (in liq) & Ors [2011] VSC 242 (8 June 2011)

In Queensland, before a Landlord is entitled to re-enter the Leased Premises, re-take possession and terminate the Lease, the Landlord must generally first serve a Notice to Remedy Breach (“the Notice”) on the Tenant.

Pursuant to the Property Law Act 1974 (Qld) (“the Act”), the Notice must satisfy specific requirements before a Landlord is able to exercise a right of re-entry or forfeiture under the Lease.

Further, the Tenant must also be afforded “reasonable time after service of the notice to remedy the breach”.

Where a Landlord has failed to follow these requirements and/or failed to allow the Tenant “reasonable time” to remedy the breach, the Tenant is entitled to apply to the Court under the Act.

Examples of relief may include:

  1. costs;
  1. expenses;
  1. damages;
  1. compensation; and
  1. penalty or otherwise, including the granting of an injunction to restrain any like breach in the future.

The Decision

The Victorian Supreme Court decision of Primary RE Limited v Great Southern Property Holdings Limited (recs & mgrs apptd) (in liq) & Ors [2011] VSC 242 (8 June 2011) considered “what is a reasonable time within which a lessee is to respond to a statutory notice”.

The relevant provisions of the Property Law Act 1958 (Vic) discussed in the Case mostly mirror the Qld Act.

That decision involved the collapse of a number of companies in the Great Southern Group (“the Group”) following the Global Financial Crisis in 2008, being the Responsible Entity for 40 agriculture managed investment schemes operated by the Group.

These schemes involved a series of companies within the Group (later referred to as “the Landlord”) which acquired rights to land, and subsequently leased the land to another company within the Group (later referred to as “the Tenant”).

The Leases and Forestry Agreements involved land in Victoria, South Australia, Western Australia and Tasmania.

Following the collapse of the Group, the Tenant became insolvent and was no longer able to perform its management functions under each Lease.

The Landlord eventually issued a number of Notices to Remedy Breach requiring remedy of the alleged breaches within approximately 30 days, and particularising the alleged breaches and remedies required.

Following service of the Notices, the Tenant failed to remedy or compensate the Landlord as required under the Notices to Remedy Breach.

Eventually, the Landlords exchanged contracts of sale of the land with a third party purchaser, relying upon the failure to comply with the Notices to Remedy Breach as a right to re-enter the premises.

The new responsible entity, Primary RE Limited, challenged the validity of the Notices of Default and terminations on the grounds that:

  1. “the management obligations in each lease and forestry agreement were ambiguous or uncertain;
  1. the recitation of the breach in each notice of default was inadequate;
  1. that the notice did not allow reasonable time to remedy the breaches; or
  1. between service of the notices and termination, that the notices failed to specify compensation”.

In reaching its decision, the Court held that “as to what is a reasonable time within which a lessee is to respond to a statutory notice depends upon”:

  1. “the purpose for which the notice is given;
  1. the nature of the breaches alleged; and
  1. what is required to be done to avoid forfeiture”.

The Court further held that:

  1. “In the present case, having received the notices 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… 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.”; and
  1. “The tenant did not have the financial and other resources to enable it to resume its obligations to managed the plantations. It was insolvent and had ceased operations. It was in no position to remedy the alleged breaches… The absence of any response from the tenant, prior to termination, satisfied the precondition to the landlords’ right to terminate”.

Our Comments on the Decision

Ultimately each specific lease should be considered within its own specific context.

In particular, we consider the following to be important “take-home messages” for both Landlords and Tenants:

  1. Ensure that a Notice to Remedy Breach is appropriately expressed and delivered by the Landlord to the Tenant;
  1. Ensure that a Notice to Remedy Breach allows for “reasonable time” to remedy the alleged breach; and
  1. If a Notice to Remedy Breach is received, any response to the Notice should be carefully expressed by the Tenant, and carefully considered by the Landlord, as it may go to the “reasonableness” of the time to remedy the alleged breach.

 

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