Australia: Termination For Breach Of "Essential" Terms – Who´s The Sarker Now?

On 12 March 2008 the Administrative Decisions Tribunals in New South Wales (Tribunal) handed down a decision likely to become an important point of reference where retail landlords terminate a lease without first issuing a notice under section 129 of the Conveyancing Act 1919 (Section 129 Notice).

In Sarker & Anor v World Best Holdings Limited & Anor [2008] NSW ADT 75, World Best Holdings Limited (Landlord) granted a 3 year lease of a shop in Minto Mall Shopping Centre (Premises) to Mr Sarker (Tenant) to conduct an Asian groceries business.

The Lease required the Tenant to install a local council approved "premium quality" fit-out to a value of not less than $40,000, in accordance with the Tenancy Fit-Out Guide in the first month of its term (being June 2003). However, when it came to fitting out, he preferred not to trouble himself with council approval or the standard and minimum cost requirements.

The neighbouring tenants were not amused and complained to the Landlord.

Section 129 of the Conveyancing Act 1919 requires a landlord, prior to terminating a lease for breach by the tenant other than the covenant to pay rent, to give the tenant written notice of the breach and a reasonable time in which to rectify it. On about 25 July 2003, without first issuing a Section 129 Notice, the Landlord terminated the lease by notice and subsequently locked out the tenant.

In its termination notice, the Landlord alleged a number of breaches of the Lease. A number were found to invalid. Those that survived, included:

• fastening items to the walls of the Premises without obtaining permission;

• commencing the fit-out without council consent; and

• failure to use approved contractors in the fit-out operations.

The Lease expressly provided that the covenants breached were "essential terms".

The Tenant commenced proceedings in the Supreme Court seeking relief from forfeiture, a declaration that the Landlord's notice purporting to terminate the Lease was invalid and an award for damages for the losses suffered in consequence of the Landlord's repudiation.

The Supreme Court granted relief from forfeiture and referred the matter to the Tribunal.

Well prior to the dispute being determined, the Tenant was permitted back into the Premises (on a without admission basis). He recommenced trading. However his business never recovered. The financial pressures and distraction of the litigation, the loss of stock resulting from the lock-out and actions of the Landlord, held by the Tribunal to be unconscionable, had dealt a terminal blow. The Tenant shut his doors permanently a little more than a month later.

Decision

Was a section 129 notice required?

The Tribunal was asked to determine whether the Landlord was required to issue a section 129 notice to the Tenant before it could issue the termination notice.

Section 129 of the Conveyancing Act 1919 provides that a right of re-entry in a lease for breach of a covenant or condition (other than the covenant to pay rent) is not enforceable unless the landlord serves the tenant with a notice that states:

• the breach complained of;

• (if the breach can be remedied), that the tenant is required to remedy the breach; and

• (if the landlord claims money as compensation for the breach) that the tenant is required to pay the landlord compensation for the breach.

The Landlord argued that a section 129 notice was not required as the tenant's failure to comply with a covenant identified in a lease as an "essential term" constituted a repudiation of the Lease, being a ground for termination for which no section 129 notice was required.

The Tribunal disagreed and found:

• proof that a tenant has breached a term identified in a lease as "an essential term" is not necessarily proof that the tenant has 'repudiated' the lease such that a landlord may 'accept' repudiation, terminate the lease and re‑enter the premises without issuing a section 129 notice;

• the breaches of the fit-out requirements (designated as "essential" terms under the Lease) alleged in the termination notice, were insufficient to amount to repudiation as they did not 'evince' an intention by the Tenant to no longer be bound by the Lease.

Accordingly the Tribunal held that a Section 129 notice was required, the termination notice was therefore invalid and the Tenant entitled to damages.

Measure of damages

The Landlord argued, unsuccessfully, that:

• the Tenant should only be entitled to damages that put the Tenant in the position he would have been in had the Landlord not repudiated the Lease;

• the only loss suffered by the Tenant was the profit he would have made from his business on the 50 days he would, but for the Landlord's wrongful conduct, have been able to trade from the Premises. At an average profit of $107.14 per day, this resulted in a loss of $5,357.

The Tribunal found that the very limited period in which the Tenant traded gave no reliable measure as to how profitable his business would have been had the lease not been wrongfully terminated. It was however appropriate to assume that the Tenant would have recovered his expenditure on the business had the Lease been performed.

The Tribunal assessed the Tenant's expenditure reasonably incurred under the Lease, including his security deposit, stamp duty, registration fee, legal fees, insurance, rent, trading stock, costs associated with a business trip, development approval application costs and telephone and fuel costs as totalling $72,000.

Lessons for retail landlords and their agents

• a section 129 notice may be dispensed with when terminating consequent upon the tenant's repudiation, but the repudiation bar is a high hurdle to clear

• repudiation requires the tenant to demonstrate 'an intention no longer to be bound' by the lease or an intention to fulfil the lease 'only in a manner substantially inconsistent with the obligations set out in it'

• labelling a lease term "essential" will not be decisive as to whether a breach of that term is a repudiation of the lease. Indeed it may not even be relevant

• if the landlord intends to terminate the lease for breach by a tenant of a term other than the covenant to pay rent, good risk management will involve the service and expiration of a section 129 notice

• when terminating for failure to pay rent, although a section 129 notice is not required, be sure to check that the terms of the default provision in the lease do not make provision of a notice mandatory

• a tenant with no material trading history may quantify its losses by reference to the expenses directly incurred in connection with the lease.

The Tribunal's website indicates (as at July 2008) that the Sarker decision is being appealed to the Tribunal's Appeal Panel. Nevertheless, the case is now a leading point of reference where retail landlords terminate a lease without first issuing a Section 129 Notice. The case also presents a case study of unconscionable conduct in the retail leasing context. An update for another day!

Robert Riddell is a Partner of Gadens Lawyers, Sydney specialising in Building and Construction law.

This publication is provided to clients and correspondents for their information on a complimentary basis. It represents a brief summary of the law applicable as at the date of publication and should not be relied on as a definitive or complete statement of the relevant laws.

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