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Property Law News, June 2010
When does the landlord have to give the tenant notice before terminating a commercial or retail lease? The court reviews the law on the rights of the parties to terminate a lease for a breach.
Understanding Leases
A Lease is both a contract, and an interest in land. The decision of Neave AJ in Natwest Markets Australia Pty Ltd v tenth Vandy Pty Ltd [2008] VSCA 207 considered the issues that flow from this ‘dual’ character of a Lease.
The relevant Lease in the Natwest case included a term dealing with the landlord’s right of re-entry in the event of the tenant’s failure to pay rent (Clause 12.01), along with a term that made the obligation to pay rent a fundamental and essential term of the Lease (Clause 12.05), breach of which would amount to a fundamental breach of the Lease itself giving rise to the rights of the landlord under Clause 12.01. On appeal, Neave AJ held that each of the two clauses served a distinct purpose and were not difficult to reconcile, and held that no notice was required to be given to the defaulting tenant.
Terms of a Lease vary in their import. Where a condition of a Lease is breached by either party, this breach will amount to a repudiation of the Lease by the party in default, entitling the innocent party to terminate the Lease. Alternatively, the breach of a covenant or non-fundamental term of a Lease may give rise to the right to a remedy for the innocent party, but will not entitle that party to terminate the Lease. As the law stands in Australia, it is possible for a term of a Lease to provide that breach of a particular term or covenant of the Lease by a tenant will entitle the landlord to terminate the Lease and re-enter on the premises without providing notice to the tenant.
Statute in NSW provides that a landlord must provide written notice to a tenant of any breach of a covenant (non-fundamental term) contained in the Lease, and must give the tenant a particular timeframe in which to remedy the breach (Conveyancing Act 1919 (NSW) s129). The decision of Neave AJ in Natwest, however, erodes this statutory protection for tenants. Natwest builds on earlier authority which holds that a landlord need not give notice to a tenant before terminating the Lease and exercising the right of re-entry where the landlord relies upon a fundamental or ‘repudiatory’ breach of the Lease by the tenant. By drafting the Lease such that a covenant is impressed by another term of the Lease with the character of a condition or fundamental term of the Lease, the landlord may terminate the lease and exercise the right of re-entry without providing the notice to the tenant that would otherwise be required by the Conveyancing Act.
This decision underscores the importance of seeking legal advice before entering into a Lease agreement, in order that key terms of the agreement may be properly explained and their overall import understood. Tenants in particular need to be aware of their rights and responsibilities in respect of the provisions of a Lease agreement.
For assistance with negotiating a Lease, or for any other property matters, please do not hesitate to contact Chris Owens or Annette Fontana on (02) 9560 3388 for specialised, quality advice. We can also assist you with our friendly and cost-effective conveyancing services.