Breach notices – Recent case setting out some of the rules
Dunn & others v Shivsai Pty Ltd  VCAT 9711
This case in the Victorian Civil and Administrative Tribunal (VCAT) was brought by the landlord of a supermarket premises in Murrumbeena, Victoria. The landlord had terminated the lease after serving a breach notice under section 146 of the Property Law Act (Vic) 1958. The landlord sought damages of approximately $100,000 from the tenant for breach of the lease.
The tenant's defence was that the landlord had terminated the lease wrongfully, breached the covenant for quiet enjoyment, acted unconscionably and caused the tenant losses of approximately $500,000. The tenant also claimed that in the event the termination was valid, the landlord had failed to mitigate its losses, and as such the damages payable to the landlord should be reduced.
The tribunal decided that the breach notice was valid and the landlord was entitled to terminate the lease by re-entry.
However, the landlord failed to mitigate its losses and the landlord failed to allow the tenant to remove its equipment and all its stock from the premises.
After establishing the losses that each party was allowed to claim from the other, the result of the case was that the landlord owed the tenant $28,319.39, calculated as follows:
The tenant owed the landlord $31,389.26 calculated as follows:
- $32,915.06: arrears of rent and outgoings
- $5,027: make good costs
- $76,792.24: damages for future rent and outgoings
- $1 for damages for trespass
- Less pre-payments made by the tenant: $64,095.54
- Less the security deposit: $19,250.50
The landlord owed the tenant $59,708.65 calculated as follows:
- $9,040.80: damages for loss of equipment;
- $50,667.85: damages for loss of stock.
The case provides a good summary of law surrounding the following issues:
- Requirements for breach notices
- Landlords' duties to mitigate losses
- Unconscionable conduct as it relates to terminating a lease for breach
- A landlord's obligations in relation to the tenant's stock and equipment
Requirements for breach notices
The section 146 Property Law Breach Notice served by the landlord specified five breaches of the lease:
- Failure to pay council rates: $4,562.15 plus GST
- Failure to pay the landlord's reasonable costs: $4,675.00 (agent's fees)
- Failure to pay rent: $14,300
- Failure to pay interest on arrears: $2,260.87 (incl GST); and
- Consultancy fees: $369.
The tenant accepted that when the notice was served, items 1 and 3 were correct. The tenant disputed that it owed the amount claimed under item 2 (landlord's reasonable costs) on the basis that it was not clear how the amount claimed was calculated.
The landlord withdrew its claim for the items specified as 4 and 5.
VCAT found that the amount claimed under item 2 (landlord's reasonable costs) could not be a breach of the lease as it was not clear how the amount was calculated and it was not clear that it related to a clause of the lease.
This meant that only items 1 (Council rates) and 3 (rent arrears) were valid breaches.
Was the s146 breach notice invalid because it specified incorrect breaches?
VCAT stated: "It is settled law that where a notice under s 146 of the Property Law Act 1958 (Vic) relies upon more than one breach of the lease, the notice is not invalidated because one of the breaches relied upon is in fact not a breach of the lease at all or has been misdescribed." (para 35)
The notice was valid in relation to breaches 1 and 3, even though breach number 2 was not correct and the landlord withdrew its claim in relation to breaches 4 and 5.
The tenant did not pay the council rates and rent arrears in full before the expiry date of the s146 breach notice, and as such the landlord was entitled to terminate the lease.
Landlords' duties to mitigate losses
As the lease was terminated by the landlord due to the tenant's breach, the landlord was entitled to claim damages for losses suffered as a result. The following table sets out the landlord's claims and VCAT's decision:
|Landlord's Claim||VCAT Decision|
|Arrears of rent and outgoings up to the date of termination: $32,915.06||These were not disputed and the tenant was ordered to pay these|
|The cost of make good /reinstatement at premises $5,027||These were not disputed and the tenant was ordered to pay these|
|Alleged Trespass for trading from premises on 15 November 2018 $2,000||The tenant was granted access to the premises to
remove its goods, however the tenant opened for trade (in a limited
way). This was stopped within 30 minutes.
VCAT found that this was a trespass. The tenant had no entitlement to trade from the premises after the lease had been terminated.
However, the landlord could not demonstrate its loss resulting from this trespass, so nominal damages of $1 were awarded.
|Damages for breach of contract being the equivalent of rent and outgoings from 3 July 2018 to 8 March 2019 made up of $123,954.41 for rent and $6,579.67 for outgoings||The lease was terminated on 3 July 2018.
Prior to termination, the tenant was attempting to assign the lease. Once the lease was terminated, the process of assignment also ended. VCAT found that the landlord was under no obligation to facilitate the sale of the lessee's business.
6 weeks after the lease was terminated, the landlord decided to put the property on the market for sale. The Auction occurred on 8 Match 2019 – approximately 8 months after the lease was terminated.
VCAT found that 6 weeks was a reasonable time to consider options and decide to sell, however the landlord could have proceeded with the sale or re-let the premises within 90 days. Evidence of this timeframe was provided by a real estate agent called by the tenant.
Based on this evidence, the landlord was only entitled to future rent from 3 July 2018 to 31 October 2018, being an amount of $76,792.24.
|Costs owing under the Lease (The agent's 2 invoices of $4,675 and $14,465.65 respectively) of $19,140.65||These were agents' costs associated with reviewing applications from potential replacement tenants. The landlord was entitled to its reasonable re-letting costs, however VCAT found these costs to be unreasonable, and were not recoverable from the lessee.|
Unconscionable conduct as it relates to terminating a lease for breach
The tenant claimed that the landlord acted unconscionably by terminating the lease while negotiations were on-going about the tenant's request to assign the lease.
The landlord was aware of the tenant's negotiations to sell its business, and the landlord was involved in some aspects of that negotiation, including negotiating the terms of a possible new lease with a longer term. Once the lease was terminated – the tenant's attempts to sell its business ended. The tenant claimed it was unconscionable for the landlord to terminate the lease in these circumstances.
VCAT found that validly exercising a legal right to terminate a lease due to breach is not unconscionable. "The RLA (Retail Leases Act) does not prohibit a party to a lease exercising its legal rights thereunder and neither does the concept of unconscionable conduct." (para 158)2
A landlord's obligations in relation to the tenant's stock and equipment
The lease provided that when the lease ended, the tenant was to remove all its property and make good. Anything left was to be considered abandoned.
VCAT stated that the tenant's goods could not be considered to be abandoned until the tenant had been given an opportunity to access the premises and remove them.
After the lease was terminated, the tenant requested access to remove its property and make good. Access was granted on two occasions in November 2018.
The tenant was granted access to remove stock, but was not permitted to remove shelving, checkouts and a roller shutter from the premises. VCAT found that the tenant did not abandon these items and awarded some compensation to the tenant for the loss of these items.
VCAT also accepted evidence that the landlord removed some stock from the premises (two car boots full of cigarettes, alcohol and snacks). The landlord had to compensate the tenant for this stock – approximately $50,000.
Some stock at the premises perished in between the date of termination of the lease and the date the tenant was permitted to access the premises. VCAT found that the tenant could have done more to gain access to the premises earlier – stock losses were not the responsibility of the landlord.
This part of the decision highlights the importance for considering how a tenant's goods are dealt with following termination of a lease, and that improperly dealing with those goods might result in liabilities for the landlord.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.