One of the more difficult issues in the Primary RE case was the argument by Primary RE that the landlord failed to adequately prove the particulars of the breach in the notice.

The text of the notices is included in another post on this blog here.

It appears from the judgment that a significant amount of argument went to the question of whether the particulars of the breach had been made out.  However, it was common that the tenant had not maintained the plantations at all.  The Court also found that the former RE had neither the funds nor the ability to maintain the plantations, nor had it displayed any intention to maintain them.

The Court concluded that it was common ground that there was an ‘overarching breach’ and that the notice needed to go no further than to allege that breach.  Consequently, the court found that arguments about the adequacy of proof of the particulars in the notice was misplaced.

This finding has the potential to cause some confusion in the future.  For example, if a notice is served that alleges a general failure to maintain a premises, then gives particulars of, say, cracked walls and leaking pipes, can the landlord terminate the lease if the tenant hasn’t fixed broken windows?  I would ordinarily expect the answer to this question to be ‘no’.  However, this judgment suggests that the answer may be ‘yes’ if the landlord can maintain that the failure to fix the broken window is part of an ‘overarching breach’.  Although this is a simplistic hypothetical, it is not hard to imagine more subtle examples.

I suspect that most subsequent cases, such as my simple hypothetical, will be distinguished from the Primary RE case because the nature of the overarching breach in this case was so clear – the tenant was doing nothing at all.

Also, although it arises in a very different statutory context, this aspect of the Primary RE decision does not sit comfortably with the decision in Smith v Director of Housing (2005) V ConvR 54-700; [2005] VSC 46.  In that case, the landlord of a residential tenancies lease served a notice specifying breach of the endangerment provisions of the Residential Tenancies Act and giving particulars of an incident between the tenant’s grandson and Department of Housing staff (he chased them down the street with a 6 inch diving knife).  However, the Act only permits termination of a residential tenancies lease if the tenant or its guest endanger the occupants of neighbouring premises.  When the landlord applied for a possession order, it relied on a different incident between the tenant and a neighbour (the tenant slapped a neighbour after a different altercation).   Justice Bonjiorno held that the landlord could not rely on an incident that was different to the incident particularised in the notice.

Consequently, it remains prudent to:

• provide in a s 146 notice some particulars of the breaches relied on;  and
• not seek to rely on breaches outside those particulars when terminating the lease.

The relevant discussion took place at paragraphs to [94] to [104] of the judgment.  There is also a useful summary at [150].

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)).

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.

Given the number of issues raised in the Primary RE case and the size of the judgmnent (114 pages!), I thought it would be useful for those following this blog to have a separate post on each issue in the judgment.

The first and, perhaps, one of the less complicated issues considered in the Primary RE case was the treatment of forestry rights for the purposes of termination.

In some of the jurisdictions in which the plantations were established, the scheme operators granted forestry rights instead of leases.  A forestry right is a statutory form of profit a prendre.

Primary RE argued that the relevant forestry rights were in fact leases in all but name and that the creators of the scheme had chosen to grant forestry rights as a device to overcome prohibitions of subdivision.  As a result, the forestry rights were leases and could only be terminated by service of a s 146 notice.  Primary also argued that the s 146 notices were invalid, and, accordingly, so was the purported termination based on those notices (the validity of the s 146 will notices be discussed in another post).

The receivers argued that the forestry rights were not leases and that notice under s 146 was not required.

The Court found that the forestry rights were leases in all but name because they effectively granted exclusive possession to the former responsible entity and that s 146 notices were, accordingly, required.

Lawyers drafting and, importantly, terminating agreements that may arguably be leases in all but name to consider serving a s 146 notice.

A common example is a franchise outlet licence.  Many franchisors take a lease of the relevant shop then grant a contractual licence to the franchisee.  The outlet licence gives to the franchisee rights very similar to the rights of a tenant.  Lawyers for franchisors should consider serving a s 146 notice on the franchisee before terminating an outlet licence.  The absence of a s 146 notice may also give franchisees leverage after purported termination.

The relevant discussion takes place at paragraphs [84] to [93] of the Primary RE judgment.

A new version of Duncan’s Commercial Leasing in Australia has just landed on my desk.

This edition (the 6th) is a similar size to previous editions, which is relatively small when compared to other notable texts in this area.

The new edition follows the same format as previous versions.  It contains a precedent clause under most topics, followed by a discussion of the law relevant to that particular clause.

Past versions of the book have generally been directed towards practitioners who are preparing and settling leases and this version appears to be the same. However, I have found those versions useful in dispute resolution as well.

There is a new chapter on green leasing, which looks like it will turn into a growth area.

The book is published by Thomson Reuters and is available now.

An interesting issue came across my desk.

A tenant had exercised an option to renew its lease but, for various reasons, a deed of renewal was never executed.  The tenant then purported to assign the lease.  The question arose as to whether a lease in those circumstances is capable of assignment.

It seems to be well established that the exercise of an option creates an agreement to lease rather than a lease (see Farrands, The Law of Options, 2010 at 137).  The lease is not created until the parties execute a deed.

Under the doctrine in Walsh v Lonsdale, the putative tenant is to be treated as in many ways the same as a tenant of a legal estate.  However, the Courts have been careful to point out that Walsh v Lonsdale is based on the putative tenant’s ability to seek and obtain specific performance of an agreement to lease, and that the putative tenant does not have a legal lease (see, in particular, Chan v Cresdon Pty Ltd (1989) 168 CLR 242 and the discussion in Bradbrook, Croft and Hay, Commercial Tenancy Law, 3rd ed, 2009, at [4.8]).

An interest in a contract cannot be unilaterally assigned.  A tripartite agreement to novate is required, extinguishing the old contract and creating a new one. Consequently, it follows that the putative tenant under an agreement to lease can’t unilaterally assign its interest.  It seems to follow that the agreement for lease can’t be unilaterally assigned.

However, it may be possible to characterise the purported assignment as an agreement to assign future property (ie to assign the lease if and when it is created).  An agreement to assign future property may be effective and crystalises the moment the property is created (see discussion of Meagher, Gummow & Lehane, 4th ed, at [6-190] to [6-330]).

If that argument can be made out, then the assignee would need to either issue proceedings in the name of the assignor (or possibly join the assignor as a defendant) seeking specific performance of the agreement to lease and compelling the landlord to produce a deed.  However, if the assignor is in liquidation, deregistered or dead, specific performance of the agreement to lease may be difficult to obtain.

I have not found  a case directly on point, but the arguments seem compelling.  This all highlights the need to obtain a deed of renewal of a lease when an option is exercised.