In a recent Queensland Court of Appeal decision, the tenant had purported to exercise its option out of time. The Court upheld the primary judge’s finding that:

1. the purported exercise of an option out of time constituted an offer by the tenant to enter a new lease on the same terms as the option;  and
2. the Court can look to the conduct of the parties after the formation of the alleged contract to determine whether a contract has been formed.

While the law applied by the Court is settled and not controversial, the decision serves as a reminder to landlords and tenants to properly document the creation or otherwise of a lease or agreement to lease to avoid uncertainty and protracted litigation, particularly after the exercise of an option.

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—

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.

The notices specified times of between about 1 an 2 months.

Primary RE:

• argued that a reasonable time was the time necessary to actually undertake and complete the work;
• adduced evidence from a prominent solicitor expert in leasing that obtaining legal advice on the tenant’s rights would take between 19 and 37 working days;  and
• adduced evidence that remediation of the alleged breaches may extend beyond a year.

The Receivers of the land owning companies submitted that s 146 required the landlord to give the tenant a reasonable time to consider a response, not to complete the required remediation.

The Court held that:

147. The true purpose of the notice is to give to the tenant an opportunity to consider its position and give a response. If the breach is capable of remedy, that response may be to admit the breach and propose a course of remediation. If compensation is sought, that response may involve agreement to pay reasonable compensation to be assessed. If the breach is not admitted, or the landlord rejected a proposal for remediation, the tenant may then apply for relief against forfeiture. 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 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 Court went on to find that:

• the tenant did not have the financial and other resources to enable it to resume management of the plantations;
• one month was sufficient time to consider a response in any event.  The response did not require foliar analysis or complex legal advice.  The tenant knew of its obligation to maintain the plantations;  and
• the tenant’s Liquidators could have responded in a short period of time by assuring the landlords that they would maintain the plantations and offering reasonable compensation but they failed to do so, constituting a continuing representation that they would not remedy the breaches.

Landlords generally specify the minimum period of 14 days in their notices.  Lawyers should consider this part of the judgment when drafting s 146 notices under a lease that does not specify the period of the notice.

The relevant discussion is in paragraphs [137] to [158] of the judgment.

In the decision of Lontav Pty Ltd v Pineross Custodial Services [2011] VSC 278, handed down last Thursday, a tenant applied to the Supreme Court seeking orders that the landlord of a retail premises lease had wrongly purported to terminate the lease and, in the alternative, sought relief from forfeiture.

There are a couple of interesting findings in Hargraves J’s reasons:

• the s 146 notice expired on a public holiday (Good Friday).  The tenant argued that the time for compliance should extend to the next business day.  The Court rejected that argument on the grounds that there is no general extension for compliance until the next working day where the contracted time to perform an act falls on a weekend or public holiday unless the contract provides otherwise (see paragraph [61]).  This is important for practitioners advising tenants who have received a s 146 notice, particularly as the tenant has to pay the landlord’s costs of a relief from forfeiture application, usually on a solicitor and client or indemnity basis;
• the tenant was in arrears of rent and certain outgoings.  The tenant paid some of the arrears of rent under a note designating the payment as a rental payment.  The landlord purported to re-allocate that money to outgoings in what the court described as a deliberate attempt to increase the rental arrears that it could rely on.  The court found that the landlord cannot re-allocate a payment to a different debt if the tenant has already done so (see paragraphs [64] and [65]).  Practitioners should be aware that receiving rent after a right to terminate has accrued affirms the lease and waives the landlord’s ability to terminate;  and
• the tenant had tried to sell its business and assign its lease but had not obtained the landlord’s consent to the assignment.  The tenant then became very ill and appointed the purchaser as agent to manage the business.  The landlord argued that the tenant had breached the covenant not to part with possession.  The Court considered some cases on this topic and concluded that, in the particular circumstances of this case, the appointment of a manager did not breach the covenant against parting with possession (see paragraphs [77] to [98]).

The s 146 notices served on the former RE cited a failure to tend and maintain the plantations on the leased land in breach of the leases.

The receivers of the land owning company argued that a failure to maintain is not a breach capable of remedy.

Primary RE argued the contrary position, stating that the breaches could be remedied by either tending the plantations or re-planting as required.

The Court held that a failure to tend the plantations is a breach capable of remedy by, in this case, recommencing remediation works or re-planting.

However, the Court found that the real issue in this case was that the landlords were not required to wait until expiry of the time required to complete the remediation works when it was plain that the tenant could not and would not do so because of its insolvency.

I think there is an analogy at this stage of the judgment to decisions about repair and maintenance in an ordinary lease.  Tenants served with a s 146 notice alleging a failure to maintain should consider commencing repairs as soon as they receive the notice and inform the landlord of the work being done and when it can be completed.  Even if the tenant does not accept liability for the repairs, it may be useful to at least take preliminary steps in this direction to support a relief from forfeiture claim in the alternative.

Landlords serving a s 146 notice alleging a failure to repair should be aware that a tenant may be able to either remedy the breach during the term of the notice or seek relief from forfeiture on an undertaking to complete the required work within a specified period.

The relevant discussion is at paragraph [137] to [139] of the judgment.

The decision in the Timbercorp Almonds apportionment case was handed down last week and is available here.

The case arose out of the collapse of the Timbercorp Ltd managed investments schemes.  When the Liquidator sought to sell land on which almond orchards were planted as part of various managed investment schemes operated by the Timbercorp group, the mortgagees claimed to be entitled to most or all of the proceeds of sale.  The investors (referred to as Growers) claimed an interest as sub-tenants in possession of or licensees with rights over the land.  When the Liquidator sought judicial approval for the sale, the Court ordered that the funds be placed into a trust account pending hearing and determination the nature and value of rights held by claimants on the fund (referred to in the various orders as a Rights Proceeding).  The first decision creating a fund can be found here.  Similar orders were made with respect to land sold from other Timbercorp schemes.

The latest decision is the result of the first Rights Proceeding.  The Growers were unsuccessful in their claims against the fund.