In Primary
RE Ltd v Great Southern Property Holdings Pty Ltd [2011] VSC 242 Judd J of the Supreme Court of Victoria looks
in some detail at notices under section 146 of the Property Law Act, 1958.
Background
This case arose out of the collapse of the Great Southern
Group in May 2009. The Group, among other things,
managed a number of forestry projects.
Judd J describes the relevant part of the Group in
paragraphs 6 and 7 in this way:
[6] There were approximately 4000
investors in the scheme. The land employed in the 2007 Scheme was divided into
43,989 woodlots of approximately one third of a hectare each. The investors
had, by May 2009, invested approximately $132 million in pursuit of the objects
of the scheme. The relationship between the tenant, as Responsible Entity of
the 2007 Scheme, and the investors was defined by a Product Disclosure
Statement, a scheme constitution, the terms of each sub-lease or sub-licence,
and a management agreement pursuant to which each grower engaged the tenant to
prepare, establish, maintain and ultimately harvest trees.
[7] Following the collapse of the
Group the tenant was unable to continue to perform its management functions,
which included an obligation under each lease and forestry agreement, to “tend
and maintain the Plantation Crop in a proper and skilful manner and in
accordance with sound silvicultural and environmental practices adopted within
the forestry industry”. It was insolvent, and in the absence of an injection of
funds, did not have the money to discharge its obligations. Limited protective
maintenance was carried out by the receivers for a limited time.
Notices of default
As a result of
the tenant being unable to perform its duties under the various leases, from
April 2010, the landlords served notices of default on the tenant alleging a
breach of lease.
The notices of
default required the alleged breaches to be remedied within 30 days. In
addition to alleging a breach of a specific clause, each notice gave
particulars of the breach, by stating the respect in which the tenants failure
to perform its management obligations required remediation. For example, some
notices alleged a failure to fertilise plantations or to control weeds.
Following
service of the notices of default, the tenant took no steps to recommence
management of the plantations, or to remedy any particular breach, or to make
application for relief against forfeiture. The notices of default required
payment of compensation. None was offered or paid.
Termination /
re-entry
At various
times after service of the notices of default, the landlords served notices of
termination or re-entry.
Sale
On 17 December
2010, the landlords exchanged contracts of sale of the land with a third party
purchaser. The plaintiff, Primary RE Ltd, was the new Responsible Entity for
the 2007 Scheme, having been appointed to replace the tenant on 24 December
2010.
The court action
Primary
challenged the validity of the notices of default and terminations by alleging
that the management obligations in each lease and forestry agreement were
ambiguous or uncertain; that the recitation of the breach in each notice of default
was inadequate; that the notices did not allow reasonable time to remedy the
breaches, or between service of the notices and termination, that the notices
failed to specify compensation.
Judd J’s
decision is 92 pages and 210 paragraphs long. I am focusing solely
on his analysis of the requirements for a valid section 146 notice, which begins at paragraph 76.
Section 146 of the
Property Law Act
Section 146(1)
and (2) of the Property Law Act 1958 is the relevant provision.
Judd J decided
at paragraph 104 that the overarching breach (the insolvency of the tenant),
and its consequences on particular plantations, was proved by the landlords on
the balance of probabilities.
Validity of notices of default
His Honour
then went on to consider the Validity of notices of default. First, he looked
at the useful summary of legal principles applicable to the construction of the
relevant statutory requirements in the judgment of Hodgson JA in Macquarie International Health Clinic Pty
Ltd v Sydney South West Area Health Service [2010] NSWCA 268. His Honour
said:
308. The purpose of s [146] is to give the
lessee an opportunity to remedy any alleged breaches before the lessor
exercises its legal right of forfeiture: Fletcher v Nokes [1897] 1 Ch 271 at
274; Horsey Estate Ltd v Steiger [1899] 2 QB 79 at 91; Ex parte Dally-Watkins;
Re Wilson (1956) 72 WN (NSW) 454 at 456.
309. In my opinion, a proper opportunity
is not afforded unless the lessee is alerted to the particular breaches on which
the lessor proposes to rely and what the lessor requires in order to bring
about a position where termination would not occur.
310. The reported cases are concerned with
notices issued pursuant to alleged breaches of covenants to repair. In Fletcher
v Nokes, a notice was issued under s 14 of the Conveyancing and Law of Property
Act 1881 in which the lessor alleged generally that the lessee had “broken the
covenants for repairing the inside and outside” of the demised premises, and
required the lessee to repair “in accordance with the said covenants”. This
notice was held insufficient because the lease was over six houses and the
notice did not indicate in which of the houses the default was made. North J
said (at 274):
I think the notice … ought to be such a
notice as will enable the tenant to understand with reasonable certainty what
it is which he is required to do. I do not mean that the landlord need go
through every room in a house and point out every defect. But the notice ought
to be so distinct as to direct the attention of the tenant to the particular
things of which the landlord complains, so that the tenant may have an
opportunity of remedying them before an action to enforce a forfeiture of the
lease is brought against him. In my opinion, the notice which the plaintiff has
given to the defendant is not sufficiently specific. Sect. [146] says that it
is to be a notice “specifying the particular breach complained of.” I do not
think that is met by a notice which simply says, “You have broken the covenants
for repairing.” The plaintiff has not condescended upon any details, and, in my
opinion, the notice is not sufficient under s 14[6].
311. To similar effect are the statements
of Collins LJ in Penton v Barnett [1898] 1 QB 276 and Lord Russell CJ in Horsey
Estate Ltd v Steiger [1899] 2 QB 79. Collins LJ said ( [1898] 1 QB 276 at 281):
I think, however, that we ought to
construe the words “particular breach” in the section according to the obvious
intention of the Legislature, which was that the tenant should be informed of
the particular condition of the premises which he was required to remedy. The
expression “breach” means the neglect to deal with the condition of the
premises so pointed out, and not merely failure to comply with the covenants of
the lease. The common sense of the matter is, that the tenant is to have full
notice of what he is required to do. He has had notice, and has failed to act
on it; and with regard to that the physical condition of the premises which he
was required to make good was the same when the action was brought as when the
notice was given.
312. Lord Russell CJ said ([1899] 2 QB 79
at 91):
To
determine the character of the required notice, what it shall contain and when
it ought to be given, it is necessary to consider the scope of s 14[6] of the
Act … as a whole. The object seems to be to require in the defined cases (1.)
that a notice shall precede any proceeding to enforce a forfeiture, (2.) that
the notice shall be such as to give the tenant precise information of what is
alleged against him and what is demanded from him, and (3.) that a reasonable
time shall after notice be allowed the tenant to act before an action is
brought. The reason is clear: he ought to have the opportunity of considering
whether he can admit the breach alleged; whether it is capable of remedy;
whether he ought to offer any, and, if so, what, compensation; and, finally, if
the case is one for relief, whether he ought or ought not promptly to apply for
such relief. In short, the notice is intended to give to the person whose
interest it is sought to forfeit the opportunity of considering his position
before an action is brought against him.
313. The statements in Fletcher v Nokes,
Penton v Barnett and Horsey Estate v Steiger were quoted with approval in the leading case of Fox v Jolly [1916]
1 AC 1. Lord Buckmaster LC saw no reason to depart from the statement of North
J in Fletcher v Nokes, “except so far as it seeks to establish the standard —
often fluctuating and uncertain — of particulars in an action as a test of the
sufficiency of the notice” (at 13). His Lordship went on to say that the
particulars required for a notice in respect of a covenant to repair “would not
necessarily be as detailed and minute” as the particulars required in respect
of a claim for damages for breach of covenant (at 14).
314. Lord
Atkinson was “quite willing” to accept the statement of North J, but said that
it is to be borne in mind that the notice is addressed to a person who knows,
or ought to know, the nature and condition of the premises, “so that a
statement might be sufficient to draw his attention to the things of which the
landlord complains, which might be insufficient so to do in the case of a
stranger” (at 18).
315. Lord Parmoor said (at 22):
My
Lords, in my opinion a notice is sufficient to comply with s 14[6] if it
specifies to the lessee the breach complained of, with such particularity, as
fairly to tell him what it is he is required to remedy, if it is capable of
remedy, and what it is for which he is required to make compensation in money.
To determine whether a notice complies with this test depends on the
information which the notice, as a whole, may be fairly said to give.
316. The impugned notice in Fox v Jolly
was served by the lessor of six small houses. Annexed to the notice was a
schedule of dilapidations, including, for example, “Make good all cement
fillets and all flashings” and “Repair landings and other woodwork”. Lord
Buckmaster LC held that the notice sufficiently specified the landlord’s
complaints and gave the tenant adequate notice of what he was required to do.
…
317. The Australian position reflects the
above authorities. …
318. In Gerraty v McGavin [1914] HCA 23 ; (1914) 18 CLR 152 at 160 (decided
before Fox v Jolly), Griffith CJ quoted with approval the statement that
Collins LJ made in Penton v Barnett, and held that a notice merely quoting the
covenant was insufficient. Isaacs J agreed in the result with Griffith CJ,
saying that a lessor (at 164–165):
[M]ust
then do what he would have to do if he had brought an action, namely, specify
what he says is “the particular breach,” and not merely state that there has
been “a breach.” If he does that, he is not bound to go further and instruct
the tenant how to repair it. That would not only be an undue burden on the
landlord, but, if effectual at all, would tie the tenant down to one particular
mode of repairing his fault.
319. In Dogan v Morton (1935) 35 SR (NSW)
142 at 148, Davidson J (with whom Stephen and Street JJ agreed) referred to the
English authorities and concluded:
The landlord must give the kind of
particulars which will draw the attention of the lessee to the particular
defect in the premises which he desires to have rectified in accordance with
the covenant. The indication need only be such as would enable the lessee to
understand with reasonable certainty what it is that he is required to remedy.
320. In Ex parte Dally-Watkins; Re Wilson
(1956) 72 WN (NSW) 454 at 456, Street CJ (with the concurrence of Roper CJ in
Eq and Sugerman J) said that the object of the notice is to bring to the
attention of the lessee the matters which are complained of and to give him the
opportunity of rectifying what has taken place in the past, if it be capable of
rectification. To do so, the “vital thing” is to alert the tenant to the term
of the lease alleged to have been broken and the manner in which it has been
broken. Street CJ also held that the form set out in Sch 6 is not “a piece of
sacramental ritual”.
321. In Johnson v Senes & Berger
(1961) 78 WN (NSW) 861 at 864, Wallace J said (referring to Horsey Estate v
Steiger):
The object of this legislation includes
not only the placing of restrictions on and the giving of relief against
forfeiture and re-entry, but the placing of the lessee in a completely informed
position so as to enable him to elect what shall be his subsequent conduct.
322. Finally, in Visser v Jacobs (1987)
NSW ConvR 55-350 at 57,164, Bryson J explained that:
The underlying mechanism achieved by the
working of sec [146] is that provisions of leases which create rights of
re-entry are not employed to deprive lessees of valuable leasehold interests if
other measures are available to bring about the desirable result that covenants
of leases are complied with and breaches of them are remedied.
Bryson J acknowledged that the “degree of
specificity must vary with the circumstances and with the facts already known
or manifest to the lessee”. One of the bases on which the notice in Visser was
held invalid was that it contained no specification of particular breaches
(only the general subject of the breaches).
His Honour
concluded:
323. In my opinion, the above authorities
clearly indicate that a notice under s [146] must not only allege breach, but
must also describe the particular acts or omissions constituting the alleged
breach; and the notice must indicate the acts of the tenant which the landlord
would consider sufficient for the lease to continue, and upon completion of
which the landlord would abandon its claim to forfeit. The standard of
particulars or degree of specificity depends upon the circumstances, including
the nature of the covenant alleged to be breached, the tenant’s actual or
constructive knowledge, and whether the landlord claims reasonable compensation.
To use the example of Lord Buckmaster LC, where there are several options open
to a tenant to waterproof a leaking ceiling, then that choice is at the
tenant’s discretion. Thus s [146] is, in my opinion, directed at allowing the
tenant to bring about (within a reasonable time) a state of affairs under which
the landlord would not pursue forfeiture.
324. In particular, the lessee should not
be left to speculate as to whether, if it took whatever action it could to
remedy the specified breaches, the lessor might nevertheless proceed to
terminate the lease on the basis that the breaches were not capable of remedy
or that, because what the lessee did was insufficient to eliminate loss caused
to the lessor by the late performance of the lessee’s obligations, the lessee
was still in breach.16
Judd J noted
(at paragraph 106) that the landlords submitted that the tenant was not
required, in a statutory notice, to specify the means by which a breach was to
be remedied. In Fox v Jolly [1916] AC
1 Lord Buckmaster LC said:
Now the schedule is attacked on several
grounds. It is said that it does not tell the tenant what it is he ought to do
in order to remedy the breach of which the complaint is made. I am not prepared to accede to that view of
the schedule. But even if it did not, I can find nowhere in the section any
words which cast upon the landlord the obligation of telling the tenant what it
is that he must do. All that the landlord is bound to do is to state
particulars of the breaches of covenants of which he complains and call upon
the lessee to remedy them. The means by which the breach is to be remedied is a
matter for the lessee and not for the lessor. In many cases specification
of the breach will of itself suggest the only possible remedy. For example,
complaint that a covenant to paint or to paper has been broken can only be met
by painting and papering. But it does not follow that this is always so. A
particular covenant to keep the roof watertight, if broken, would be
sufficiently defined by a reference to the covenant, a statement that the roof
had not been kept watertight, and that the tenant was required to remedy the
omission; the means by which this could be accomplished would be for the tenant
to determine.
The landlords in
Primary submitted that the notices specified the covenants in the leases which
the landlord alleged to have been breached by the tenant, and the manner in
which the breach had occurred. They argued that they were not required to spell
out how the tenant was to respond. They submitted that the tenant could not
claim the status as a stranger which knew nothing of the land, and leases.
Judd J
concluded that Primary’s complaint concerning the lack of specificity of the
breaches in each of the s 146 notices was without substance. It was not for the
landlord to prescribe the way in which the tenant was to remedy the breach.
Nothing was being done by the tenant to tend and manage the plantations.
The decision (although quite lengthy) provides some useful insights into the
requirements needed for a notice under section 146 of the Property Law Act, 1958 to be valid.
W G Stark
Hayden Starke Chambers
