Termination when tenant’s guarantor made bankrupt

In the interesting recent decision of N R Reid & Co Pty Ltd v Pencarl Pty Ltd [2011] VCAT 2241, Judge O’Neill sitting as a Vice President of VCAT considered a case in which the landlord terminated the lease after the tenant’s guarantor was made bankrupt.

The default and termination provisions of the lease took the usual form of giving the landlord the right to terminate the lease if the tenant’s guarantor became bankrupt.  However, the relevant clause was not expressed as a promise that was capable of being breached.

The landlord argued that:

1. the lease gave the tenant a contractual right to terminate the lease if the tenant’s guarantor was made bankrupt;
2. there is no sense in which the tenant ‘breached’ the lease as required by s 146 of the Property Law Act 1958 (Vic);  and
3. accordingly, no notice was required.

His Honour Judge O’Neill accepted that argument, but does not appear to have been referred to any authorities on the issue.

Duncan’s Commercial Leasing in Australia (6^th ed) discusses this issue, reviews the relevant authorities at [13.10], and concludes that:

1. the English courts have tended to treat breach of a condition in a lease as equivalent to a breach of a covenant, requiring notice under s 146 or its equivalent;  and
2. the issue is unresolved at appellate level in Australia.

This suggests that:

1. it remains prudent to serve a s 146 notice on a tenant where the tenant or its guarantor has been made bankrupt or placed into liquidation;  and
2. if the landlord has re-entered in those circumstances without a notice, it remains arguable that the re-entry was effective.