Earlier last year you may have read my piece on one of the key NSW property law cases of the year. That case was in the matter of Fearndale Holdings Pty Limited [2019] NSWSC 645, which found the termination by Fearndale Holdings Pty Limited (the landlord or lessor) of its lease of a clay and shale quarry at Luddenham to Drama Unit Pty Ltd (the tenant or lessee) for Drama Unit’s failure to obtain the relevant mining approvals and licences to be lawful.
However, Drama Unit appealed to the Court of Appeal, with the decision delivered at the very end of last year, in Drama Unit Pty Ltd v Fearndale Holdings Pty Ltd (Administrator Appointed) & Anor [2019] NSWCA 312 which was successful in part. Before you read on for my breakdown of the appeal, you may want to read my analysis of the prior hearing to remind you of the background of the case.
The Issues in the Appeal
The 3 issues considered in the appeal were:
- Whether the landlord was entitled to recover rent and outgoings where it had refused to deliver possession of leased premises to the tenant;
- Whether the tenant was in breach of the lease for failing to hold the relevant consents and approvals in January 2019, and failing to provide copies of them to the landlord; and,
- Whether notices of breach of covenant under section 129(1) of the Conveyancing Act 1919 (NSW) (the Act) must specify the reasonable time within which the tenant must remedy the purported breach.
The issue of the landlord’s alleged entitlement to recover rent in light of its eviction of the tenant:
The commencement date of the lease and first date of payment of rent was stated to be March 2017, however the parties agreed to defer commencement of the term of the lease until the right to possession of the previous tenant, Epic Mining Pty Ltd, had been terminated. This took place on around 25 June 2018. Drama Unit therefore took the view that it was entitled to possession from 1 July 2018, with the first payment of rent due on that date.
However, since the appointment of the administrator for Fearndale in May 2018, Mr Cook took the view that Drama Unit was not entitled to possession because it did not comply with its obligations under the lease to obtain the necessary mining and environmental licences.
The Court of Appeal found that Drama Unit was correct in its view that it was entitled to possession of the premises on 1 July 2018 and that this entitlement was not conditional upon its compliance with its obligation to obtain the necessary mining and environmental licences. The lease did not entitle Fearndale to withhold possession from Drama Unit in the manner it did. Fearndale’s refusal of possession and erecting of fencing and locked gates to enforce this refusal, constituted an “eviction” which suspended Drama Unit’s obligation to pay rent under the lease. Accordingly, the prior judgment in favour of Fearndale for rent was set aside.
So, what about the outgoings?
Although Fearndale’s wrongful eviction suspended Drama Unit’s obligation to pay rent, it did not terminate the tenancy. Since the lease remained in progress, the tenant was not discharged from its obligation to perform its other covenants under the lease. The question then was if Drama Unit’s obligation to pay outgoings was separate to its obligation to pay rent.
The court found that Drama Unit’s obligation to pay outgoings was not within the nature of rent as the lease did not express that it was part of the rent, which is supported by the circumstance that the payment of outgoings was payable at a different time then that for the payment of rent. It was therefore found to be a separate obligation in and of itself under the lease.
Was the tenant in breach of the lease for failing to hold the consents and authorities in January 2019, and for not providing relevant copies to the landlord?
Drama Unit took the view that its obligations under the lease to obtain and maintain the relevant mining and environmental consents and authorities, as well as provide copies to Fearndale were only required to be complied with when it actually took possession and was about to commence a mining or other activity. It was assumed that since it never took possession, it was never required to obtain and provide copies of such consents and approvals.
That is half correct.
The court found that Drama Unit was correct in its view that its obligation to provide copies of consents and approvals prior to occupation concerned consents that were obtained. Since no consents or approvals were actually obtained and Drama Unit never went into occupation, there was no breach, and so the termination notices regarding those purported breaches were invalid.
However, the court found that Drama Unit was required from the deferred commencement date to have had obtained mining and environmental consents and approvals, and for the duration of the term, maintain those consents and approvals and comply with the requirements of such. That obligation was therefore in force when the notices of breach of covenant regarding obtainment of consents and approvals were served. Since Drama Unit did not hold an authorisation under the Mining Act, nor any licence under the Protection of the Environment Operations Act, and did not obtain either after notice from Fearndale to remedy this breach, Drama Unit remained in breach of the lease.
Does a notice of breach of covenant under section 129(1) of the Conveyancing Act 1919 (NSW) need to specify the reasonable time within which the tenant must remedy the alleged breach?
Each of the relevant notices of breach served by Fearndale complied with the express requirements of section 129 and was in the form set out in Schedule 6 of the Act. In particular, each notice specified the alleged breach and required the tenant to remedy that breach and stated that the landlord would be entitled to re-enter or forfeit the lease if the tenant failed to comply “within a reasonable time”.
The Court of Appeal found that the primary judge was correct in their finding that a notice of breach of the covenant did not have to specify the “reasonable time” for remedy in order to conform with section 129(1) and the body of the notice in Schedule 6 of the Act. The language in section 129(1) is clear in not requiring a date to be specified, and merely requires that a reasonable time elapses in which the tenant failed to remedy the breach before the landlord asserts their purported right to termination.
Key takeaways
This case is particularly significant as prior to this case, there was virtually no case which specifically considered whether an eviction suspends a tenant’s obligation to pay the landlord’s outgoings alongside the suspension of the tenant’s obligation to pay rent.
Importantly, landlords should bear in mind that:
- withholding or refusal of possession after the commencement date constitutes eviction and suspends the tenant’s obligation to pay rent. The lease remains in progress and the tenant is entitled to pursue a remedy in damages if the eviction is a wrongful exclusion; and,
- when serving a notice of breach of covenant, it must comply with section 129 of the Act in order to be effective. A reasonable time must be allowed for the tenant to attempt to remedy the breach before asserting a purported right to termination.
Tips to avoid costly litigation
- commercial and retail tenants should ensure that they obtain the relevant consents or authorities to legally operate their business at a leased premise if they are required to do so by law or contract;
- all parties should ensure that they understand their rights and obligations under a lease before signing the dotted line! Doing so would help you avoid a tricky situation where your actions, or lack thereof, are found to be in breach later down the track.
If you need assistance in reviewing your lease or need advice in relation to your rights and obligations under your lease, or wish to negotiate the terms of your lease prior to signing, please do not hesitate to get in touch with a member of Coleman Greig’s Commercial Property team.
