Plaintiff v Defendant

[2008] VSC 40

LANDLORD AND TENANT - right of re-entry under proviso in the lease for non-payment of rent - tenant owing sums other than rent - whether s 146 notice required - construction of lease - whether right of re-entry subject to requirement that notice be given.

Property Law Act 1958 s 146(1) and (12)

1 The plaintiff, Tenth Vandy Pty Ltd ("the lessee"), in August 1985 or thereabouts acquired a coffee lounge business, the Garden Inn Coffee Lounge, at the Waverley Gardens Shopping Centre. Upon the purchase, the lessee took an assignment of a lease of the premises which expired in 1990. The lessor was Handevel Pty Ltd, the proprietor of the shopping centre. Upon the expiry of this lease, Handevel entered into a further lease with the lessee dated 14 June 1990 for a term of five years.

2 The defendant, Natwest Markets Australia Pty Ltd, then called Natwest Australia Bank Pty Ltd was, since 1988, the registered second mortgagee of the shopping centre. On 1 February 1991, it entered into possession of the shopping centre and the lessee attorned and paid rental to it. I shall refer to Natwest as "the lessor".

3 Soon after entering into possession the lessor undertook refurbishment works which were carried out between 1991 and 1993. The lessee says that these works and certain other acts of the lessor disrupted its business so that it was unable to pay the rental for the period November 1993 to January 1994. As at 24 January 1994, the arrears of rental were $11,729.49. The foregoing allegations summarise the allegations of the Lessee in paragraphs 12-25 of the statement of claim. They were by agreement assumed to be correct for the purposes of this, the trial of preliminary questions under R 47.04.

4 As a consequence, the lessor on 24 January 1994 re-entered the premises and terminated the lease. The lawfulness of the re-entry and the validity of the termination are two significant issues in this case. Accordingly, on 9 November 2007 the Master directed that certain questions be tried as preliminary issues. These, as modified in the course of the preliminary trial by agreement between the parties, are the following:

1. Was the Defendant entitled to re-enter the premises described in the Lease for non-payment of rent on 24 January 1994 ("the re-entry") without first serving on the Plaintiff:

(a) a notice pursuant to s.146(1) of the Property Law Act 1958 (Vic);

(b) a notice pursuant to clause 12.05 of the Lease?

1. Did the letter dated 22 December 1993 to the plaintiff from the defendant's agent, Retail Realty Pty Ltd, constitute a notice complying with s.146(1) of the Property Law Act 1958 (Vic)?
2. Does clause 3.04 of the lease on its proper construction preclude the plaintiff from relying on the facts and matters assumed in paragraphs 12 to 25 of the FASC as an equitable set-off against the unpaid rent?
3. Is clause 3.04 of the Lease void by reason of s 24(2) of the Retail Tenancies Act 1986 (Vic) as alleged in paragraph 55 of the FASC?

5 At the outset, in response to my enquiry, I was told by counsel for each of the parties that this is not a case where the Court is deprived of jurisdiction by reason of the Retail Tenancies Act. I proceed on that basis.

Was the Defendant entitled to re-enter the premises described in the Lease for non-payment of rent on 24 January 1994 ("the re-entry") without first serving on the Plaintiff:

(a) a notice pursuant to s.146(1) of the Property Law Act 1958 (Vic);

6 It seems that in January 1994 the indebtedness of the lessee to the lessor was not only for arrears of rental. The letters of demand speak of other charges, such as interest and for outgoings, which were payable to the lessor under the lease. According to the solicitor's letter of demand of 19 January 1994, the amount payable under the lease was then $13,634.05, so that about $2,000 was claimed for non-rental items.

7 Section 146(1) of the Property Law Act is in these terms:

1. Restrictions and relief against forfeiture of leases and under-leases

(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.

This subsection shall not extend to a breach of any covenant or condition whereby or by means whereof either alone or with other circumstances any licence or permit under the Liquor Control Reform Act 1998 is or may be endangered or is or may be liable to expire or be forfeited, surrendered, taken away or refused.

(12) This section shall not, save as otherwise mentioned, affect the law relating to re-entry or forfeiture or relief in case of non-payment of rent whether or not such a breach amounts to repudiation.

8 It was put on behalf of the lessor that the requirement for notice under s 146(1) had no application because the lessor was entitled to re-enter for non-payment of rent. Reliance was placed on the decision of Beach J in Piazza Grande Pty Ltd v Portis Pty Ltd[1]:

If a tenant has breached a number of covenants in his lease, including a covenant to pay rent, despite what correspondence may pass between the parties in relation to the matter, I consider the landlord is entitled to re-enter the premises relying upon the breach of the covenant to pay rent, and by virtue of the provisions of sub-section (12) of s. 146 is not required to give notice pursuant to sub-s. (1) of the section.

9 No authority to the contrary was brought to my attention. The wording of sub-s (12), "forfeiture... in case of non-payment of rent" is consistent with his Honour's analysis with which I am in respectful agreement. The lessor does not lose the right to forfeit the lease for non-payment of rent by reason of the fact that the lessee is in breach of other terms of the lease.

10 The terms of the question are as to the entitlement of the lessor to re-enter for non-payment of rent. I conclude that such an entitlement is not lost by reason of the fact that no section 146 notice was given.

Was the Defendant entitled to re-enter the premises described in the Lease for non-payment of rent on 24 January 1994 ("the re-entry") without first serving on the Plaintiff:

(b) a notice pursuant to clause 12.05 of the Lease?

11 This question raises difficult questions as to the interpretation of cl 12.01 and cl 12.05 of the lease. They are in the following terms:

(a) the rent hereby reserved or any part thereof or any other moneys payable by the Lessee hereunder shall be in arrear and unpaid for a period of seven days after any of the days on which the same ought to have been paid whether formally demanded or not, or

(b) the Lessee shall at any time fail or neglect to perform or observe any of the covenants conditions or agreements herein contained and on the Lessee's part to be performed and observed and if such default is continued for fourteen days after notice in writing calling on the Lessee to remedy such default shall have been given by or on behalf of the Lessor, or

(c) the Lessee while the said demised premises or any part thereof shall remain vested in a Company shall enter into liquidation whether compulsory or voluntary (not being a voluntary liquidation for the purpose of amalgamation or reconstruction) or enter into any arrangement or composition for the benefit of its creditors, or

(d) the Lessee while the said demised premises or any part thereof shall remain vested in a person not being a Company shall assign his estate or enter into a deed of arrangement for the benefit of his creditors (provided always that any deed of assignment or a deed of arrangement made under the Bankruptcy Act 1966 and any suit or action by or against the Lessee or his property which is or may be deemed to be an act of bankruptcy under the said Act shall be excluded from the operation of this clause), or

(e) any execution either by writ or warrant or by appointment of a Receiver be levied on or against any of the property or assets of the Lessee -

Then and in any one or more of such events the Lessor at any time or times thereafter shall have the right to re-enter into and upon the demised premises or any part thereof in the name of the whole to have again repossess and enjoy the same as its former estate anything herein contained to the contrary notwithstanding and thereupon this Lease and the term hereby created shall absolutely determine but without prejudice to any action or other remedy which the Lessor has or might or otherwise could have for arrears of rent or breach of covenants or for damages as a result of any such event and thereupon the Lessor shall be freed and discharged from any action suit claim or demand by or obligation to the Lessee under or by virtue of this Lease.

12.05 The Lessor and the Lessee hereby acknowledge and declare that the obligation of the Lessee to pay the rent hereby reserved and the obligation to make other payments of money are fundamental and essential provision of this Lease and that upon the happening of any default by the Lessee in respect of such obligations the default may be treated by the Lessor, upon notice to the Lessee, as being a fundamental breach of the Lease by the Lessee entitling the Lessor to the rights conferred by Clause 12.01 and also the right to recover from the Lessee all damages and losses which may be occasioned by such breach.

12 The submission put on behalf of the tenant was that these provisions should be read together. The power of re-entry conferred by cl 12.01 must, in the case of non-payment of rent, be subject to the procedures set out in cl 12.05. If, in such a case, the lessor re-entered without first giving notice under cl 12.05, the lease would not be determined. Indeed, the re-entry would constitute a trespass.

13 Since the High Court decision in The Progressive Mailing House Pty Ltd v Tabali Pty Ltd[2] it is clear that a lease, like any contract might be terminated prematurely for breach of a term in any of a number of ways:

(a) where the term is a fundamental term and the innocent party elects to accept the breach as terminating the agreement;

(b) where by its conduct the wrongdoer evinces an intention not to be bound by the lease or to be bound only on terms which are inconsistent with the terms of the lease, and the innocent party elects to accept this as a repudiation of the contract; and

(c) where there is a term in the lease which confers upon the innocent party a right of re-entry for the breach.

14 In the present case, counsel for the lessor accepted that the termination in this case was based only on the right of re-entry conferred by cl 12.01. He asserted no other basis for the termination of the lease. Furthermore, he accepted that no notice under cl 12.05 had been given.

15 The lease contains two covenants on the part of the lessee to pay the agreed rental.[3] The admitted failure of the lessee to pay rental for November, December 1993 and January 1994 was a breach of those covenants. It is well-established that such a breach would not warrant forfeiture of the lease as a breach of a fundamental term unless the lease so provides. In this case, there is such a provision in the first part of cl 12.05 down to the words "money are fundamental" but, it would seem, the clause immediately qualifies or even removes the common law rights of the lessor to forfeit the term arising from this. In accordance with ordinary contract principles, the breach of a fundamental term does not itself bring the lease to an end; it is necessary for the innocent party to elect to terminate.

16 There are, therefore, a number of important differences between the procedures set out in cl 12.01 and cl 12.05:

• The rights of the lessor under cl 12.05 arise immediately when there is a default of the lessee to pay rent. In the case of cl 12.01 the right of re-entry only arises where the rental is in arrear for seven days.
• Under cl 12.01 the lessor may, without notice, re-enter; under cl 12.05 the lessor is required to give a notice. The required terms of such a notice and its function are not altogether clear. The terminology of the provision suggests that the lessor must inform the lessee that the lessor treats the default as being a "fundamental breach of the lease[4] entitling the lessor to the rights conferred by cl 12.01".
• When the lessor re-enters pursuant to cl 12.01 the lease and the terms thereby created are terminated. If cl 12.05 provides a true alternative forfeiture procedure as counsel for the lessor contends, the notice to which I have referred may, depending upon its terms, amount to an election to terminate the lease for breach of a fundamental term. If that be the case, or if there is some other act of election, the lease is thereupon determined. Any subsequent re-entry is that of an owner evicting a trespasser.

17 The difficulty in reconciling cll 12.01 and 12.05 lies in the provisions of cl 12.05 which give to the lessor, upon giving the notice, certain rights flowing from the failure to pay the rental. These rights are, first, the right to treat the failure as a breach of a fundamental term. Second, this breach of a fundamental term entitles the lessor to the rights conferred by cl 12.01. Third, the lessor is given the right to recover from the lessee "all damages and losses which may be occasioned by such breach".

18 The second of these rights is that conferred by cl 12.01. Turning now to cl 12.01, it appears that it gives to the lessor certain rights in the event that one or other of the five stipulated events referred to in paragraphs (a) to (e) has occurred. Leaving for a moment what those rights might be, it seems that the first of these events which trigger the lessor's entitlement to them is the fact that rental is in arrear for seven days. It should be noted that in cl 12.01(a) this is not described as a breach although it would amount to a breach of cl 3.01 and cl 3.04. Under cl 12.01, upon the happening of this event, the lessor might forthwith re-enter and the term is determined. Under cl 12.05 the same fact may, upon notice, be treated as a breach of a fundamental term entitling the lessor to re-enter pursuant to cl 12.01 and thereupon the term is determined, unless perhaps the terms of the notice amount to an election to terminate for breach of a fundamental term. In such a case the re-entry is little more than a property owner's self-help to eject a trespasser.

19 What, then, are the rights conferred by cl 12.01? First, there is the right of re-entry and the consequent termination of the lease. Second, there is the right to recover arrears of rent. Third, there is a release from all claims by the lessee. All of these rights, it seems, become the entitlement of the lessor under cl 12.05 after giving the required notice. Furthermore, the lessor is given under the last part of cl 12.05 the right which in 1990 had been recently denied by the High Court in Shevill v The Builders Licensing Board,[5] namely, the right to damages for loss of the benefits which attached to the determined lease.

20 This may seem to be of little moment in a case such as the present where the lessor asserts no reliance upon cl 12.05 and seeks no damages for loss of the lease. Its importance, however, lies in explaining the obscurities and reconciling the apparent inconsistencies in the drafting of these two clauses.

21 Counsel for the lessor sought to reconcile and explain the two clauses in this way. There are two procedures for terminating the lease where rental is unpaid. That prescribed by cl 12.01 has the advantage that it might be exercised summarily by re-entry without notice, provided that the rental was seven days in arrear. Its disadvantage is that the consequential rights which are given to the lessor to seek arrears of rental and to be released from the lessee's claims do not include a right to damages for loss of the lease. The procedure prescribed by cl 12.05 has the disadvantage that notice must be given. Its advantage is that the lease is brought to an end upon notice to that effect without a requirement of re-entry or its equivalent. Further advantages, namely, the right to sue for arrears of rent and a lessee's release are given to the lessor and, in addition, there is a right to damages for loss of the lease.

22 Such an analysis, as counsel for the lessee pointed out, ignores the fact that cl 12.05 provides that, after notice, the lessor has "the rights conferred by cl 12.01" and also the right to damages. The important right conferred by cl 12.01 is that to re-enter and thereby to determine the lease. The submission put on behalf of the lessor requires the expression "the rights conferred by cl 12.01" to be read as referring to some only of those rights and, further, to a right to recover arrears of rental which a lessor terminating for breach of a fundamental term would have anyway. If cl 12.05 is given the meaning contended for by the lessor, so that it provides for an independent means of termination by the lessor for the lessee's breach of a fundamental term for the payment of rent, the requirement for notice which it contains and all that follows is denied any significance. Even the right to recover damages occasioned by the breach is probably a right which such a lessor would have anyway.

23 In Shevill's case,[6] Gibbs CJ mentioned in passing that it may be that the express right of re-entry in that case, which resembled the present cl 12.01, might have excluded "the rights that would ordinarily flow from an accepted repudiation of the contract". Such a conclusion would appear to be implicit in the contentions offered on behalf of the lessee.

24 The lessee's contention, however, raises its own inconsistencies and difficulties. First, cl 12.05 gives to the lessor upon notice the right to treat the default as a "fundamental breach of the lease". The legal consequence of this is that the lessor, as innocent party, might elect to put an end to the lease by notice or other act. But the clause immediately withdraws that consequence by requiring the lessor to forfeit by re-entry. Second, if the lessor might move to forfeiture for non-payment of rent only by cl 12.05, this is inconsistent with the terms of cl 12.01 which gives the lessor a right "at any time or times thereafter" to re-enter because there is a further pre-condition to the right of re-entry, namely, the giving of a cl 12.05 notice. There are, also, one and perhaps two conceptual inconsistencies. The event which triggers cl 12.01 is not a breach of a covenant, but the fact that rent is in arrears; that which triggers cl 12.05 is the default of the lessee in respect of its contractual obligation to pay rent. Furthermore, if the cl 12.05 notice amounts to an acceptance of the lessee's breach of a fundamental term so that it brings the lease to an end, the right of re-entry conferred by cl 12.01 is superfluous.

25 Neither analysis is wholly satisfactory but, on balance, I favour that offered on behalf of the lessee. I am mindful that we are here concerned with a forfeiture provision in a lease which appears, on its face, to have been prepared and presented by the lessor. I am resistant to an interpretation[7] which would have the effect of rendering the words in the latter part of cl 12.05 otiose. I am unable to construe cl 12.05 so that the expression "the rights conferred by cl 12.01" is to be understood as referring to certain only of those rights. The right to recover arrears of rental would, in any event, be available to a lessor which accepted the lessee's breach of its rental obligation as a repudiation. Moreover, the other benefit conferred by cl 12.01, the lessee's release, is not easily described as a right. The construction which counsel for the lessor would give to the clauses in question would effectively deprive cl 12.05 of any meaning. I construe cl 12.05 as providing a procedure which, upon notice, permits the lessor to act under cl 12.01 where the event relied upon is the non-payment of rent. This clause, therefore, imposes a restriction upon the right of the lessor to re-enter pursuant to cl 12.01 where rental is in arrear. In such a case the lessor may not forfeit the lease by re-entry under cl 12.01 without first complying with cl 12.05 and may not terminate for breach of a fundamental term at all.

26 Accordingly, there being in this case no notice given under cl 12.05, the lessor was not entitled to re-enter on 24 January 1994. Question 1(b) should be answered in the negative.

Did the letter dated 22 December 1993 to the plaintiff from the defendant's agent, Retail Realty Pty Ltd, constitute a notice complying with s.146(1) of the Property Law Act 1958 (Vic)?

27 This question was inserted in the course of the hearing in order to dispose of all questions as to the lessor's right of re-entry having regard to s 146 of the Property Law Act. It is, of course, not necessary that I answer this question given my answers to questions 1(a) and 1(b). Nevertheless, in case this matter should go further and in deference to the arguments of counsel, I shall do so.

28 The letter dated 22 December 1993 was the only document which was suggested to meet the requirements of s 146(1). It is a letter sent by the lessor's agent to the lessee. I pass over the introductory paragraph and the acknowledgement of receipt of certain payments. The letter continues:

Our records indicate that in breach of your lease the following amounts remain unpaid.

Then follows a list of amounts totalling $9,452.93. The letter then concludes with the following sentence:

We request that you deliver your cheque for $9,452.93 payable to [the agent] to Central Management by 12 noon Friday 24 December, 1993 to finalise the matter.

29 The relevant requirements of a notice under s 146(1) are simply that the lessor specify the breach and that the notice require the lessee to remedy the breach. I am satisfied that this notice contains both of these matters. The difficulty is that it also requires that the lessee remedy the breach in two days. This would not cause me to reject the letter as a valid notice if it were not for the fact that the letter risks thereby misleading the lessee.

30 Section 146(1) does not require the lessor to specify the time for the lessee to remedy the breach. It simply provides that, if the lessee fails to remedy the breach within a reasonable time, the lessor may exercise the right of re-entry or forfeiture. The section also contemplates the parties agreeing to fix what is a reasonable time.

31 Clause 12.01(a) does not fix a time for compliance. Clause 12.01(b) which permits re-entry for breach including, perhaps, a breach of the covenant to pay rent, does specify the lapse of a period of 14 days after notice to remedy as a pre-condition to re-entry.

32 Accepting, contrary to my view, that s 146(1) applies to this case, its effect is that the lessee has 14 days after notice to remedy the default before the lessee may re-enter. The terms of the letter are such that the lessee is required to remedy the breach in only two days. It was contended on behalf of the lessee that, upon a fair reading of the notice, the lessee might think that the lessor might enforce its rights, including that of re-entry, after only two days have passed. It was said that, at that time of the year, the lessee may well have not sought to find the money since the stipulated period was so short. Had the notice specified 14 days or even remained silent on this point, the lessee might have acted otherwise. There is, of course, no evidence of this.

33 In my view, the terms of the letter are not such that a recipient, being aware of the provisions of the lease and of the provisions of s 146, would have been mislead. The letter requires payment in two days. It does not specify or even hint at the consequence of non-compliance. I am satisfied that the letter meets the requirements of a notice under s 146(1).

Does clause 3.04 of the lease on its proper construction preclude the plaintiff from relying on the facts and matters assumed in paragraphs 12 to 25 of the FASC as an equitable set-off against the unpaid rent?

34 The facts and matters contained in paragraphs 12 to 25 of the statement of claim are broadly summarised above.[8] Clause 3.04 contains a covenant to pay rental "without prior demand therefor and without any abatement, deduction or set-off whatsoever".

35 In the face of that term, counsel for the lessee argued that his client was entitled to abate the rental by setting off the unliquidated and unspecified damages which it might seek for the lessor's breaches and other conduct specified in paragraphs 12 to 25.

36 In his written submissions, this argument appeared to be based, not upon the terms of cl 3.05 as the question requires, but rather upon a contention that, whatever be the meaning of that clause, the lessor was or should be, by reason of its unconscientious conduct, precluded from exercising its legal rights under the clause.

37 Doing the best I can in the circumstances, I accept the submission of counsel for the lessor that cl 3.04 means what it says. The lessee is obliged to pay the rental in full notwithstanding complaints and claims it might have against the lessor.

Is clause 3.04 of the Lease void by reason of s24(2) of the Retail Tenancies Act 1986 (Vic) as alleged in paragraph 55 of the FASC?

38 The point here is that the provisions of cl 3.04 which do not permit abatement or a set-off are inconsistent with s 17(1)(b) of the Retail Tenancies Act and, to that extent, it is void pursuant to s 24(2).

39 This point may be shortly resolved. Section 17(1) provides the lessee of retail premises with the right to recover for loss and damage suffered by reason of the lessor's conduct, reasonable compensation as agreed or otherwise determined by VCAT under Part 3. The removal of the right to abate rental or to set-off does not affect the lessee's right to compensation or to have compensation determined by agreement or under Part 3. There is no substance in the point.

40 Accordingly, I answer the questions the subject of the preliminary trial as follows.

Q1. Was the Defendant entitled to re-enter the premises described in the Lease for non-payment of rent on 24 January 1994 ("the re-entry") without first serving on the Plaintiff:

(a) a notice pursuant to s.146(1) of the Property Law Act 1958 (Vic);

(b) a notice pursuant to clause 12.05 of the Lease?

Q2. Did the letter dated 22 December 1993 to the plaintiff from the defendant's agent, Retail Realty Pty Ltd, constitute a notice complying with s.146(1) of the Property Law Act 1958 (Vic)?

Q3. Does clause 3.04 of the lease on its proper construction preclude the plaintiff from relying on the facts and matters assumed in paragraphs 12 to 25 of the FASC as an equitable set-off against the unpaid rent?

Q4. Is clause 3.04 of the Lease void by reason of s 24(2) of the Retail Tenancies Act 1986 (Vic) as alleged in paragraph 55 of the FASC?

[2] [1985] HCA 14; (1985) 157 CLR 17.

[4] Given the controversy as to the suggested distinction between a breach of a fundamental term and a fundamental breach, it is not altogether clear how such a notice sits with the opening lines of cl 12.05.

[5] [1982] HCA 47; (1982) 149 CLR 620.

[6] [1982] HCA 47; (1982) 149 CLR 620 at 629.

[8] See paragraph [3] above.