Notices of default under a retail lease: some things to know
A landlord seeking to regain possession of retail premises where a tenant has breached the terms of the lease is required to follow certain steps in first giving notice to the tenant. Landlords should give proper notice not only in the interests of fairness to a tenant but also in order to avoid regaining possession of premises unlawfully.
The recent decision in CB Buffett (Burwood) Pty Ltd v Delloyd Pty Ltd (Building and Property)[1] involved an application for relief against forfeiture and illustrates the importance of a landlord giving proper notice to a tenant. The decision also demonstrates that a notice which specifies multiple defaults cannot be struck down as invalid simply because the landlord fails to substantiate some of those defaults.
The facts
The applicant tenant operated an Italian restaurant at premises owned by the respondent landlord. With the arrival of the COVID-19 pandemic in early 2020, the applicant’s business suffered. By February that year, the applicant’s business ceased trading.
In March 2020, the respondent issued a notice of default under the provisions of the Property Law Act 1958 (Vic). The notice claimed payment, lest the landlord effect re-entry, of sums for:
rent;
other outgoings relating to the premises;
‘[p]enalty interest due on monies outstanding for longer than 7 days after becoming due and payable’; and
‘[l]andlord’s legal costs’.
The applicant failed to comply with the notice of default. In late March 2020, the respondent retook possession of the premises. Subsequent negotiations with the respondent failed. Ultimately, the applicant applied to the Victorian Civil and Administrative Tribunal for injunctive relief seeking to restore it to possession of the premises and, alternatively, for relief against forfeiture.
The Tribunal’s decision
In its application to the Tribunal, the applicant alleged that the notice of default was invalid because, of the defaults alleged in the notice, the landlord had not alleged any prior breach in respect to the landlord’s claim for penalty interest and legal costs. Instead, the applicant argued, the notice of default simply sought payment of those amounts without alleging any previous breach in relation to them.
The Tribunal found merit in the applicant’s argument. This particularly was the case given the requirement in the terms of the lease that the applicant need only pay interest and legal costs ‘within 7 days of a request’ and that unless and until the landlord had first made such a request the applicant could not be in breach. The Tribunal also noted the common — and, the Tribunal observed, potentially legally dubious — practice of a landlord seeking the legal costs of a notice of default in the notice itself; the Tribunal stated:
It may be that in respect of leases containing terms identical to those in the subject lease, a difficulty will be encountered in respect of the notorious practice of also claiming the legal costs associated with the preparation of the very notice of default in which they are claimed and where, logically, no such prior ‘request’ for payment could have been made.[2]
Notwithstanding the merits of these arguments, the Tribunal held that the notice of default was still valid because other breaches which had been alleged in the notice had been substantiated. The Tribunal stated:
There is a long line of authority … to the effect that a notice of default which requires a tenant to do something which the tenant is not liable to do, but which otherwise properly refers to breaches by the tenant that have otherwise occurred, is good.[3]
The Tribunal cited, as authority for that proposition, a number of cases including a recent decision of the Tribunal in Australian Fearless Sports Pty Ltd v Casey Shopping Centre Pty Ltd.[4] In that case, the Tribunal held that ‘[i]t is not necessary that all defaults specified in a notice of default are able to be substantiated’.[5]
In both instances, the Tribunal cited the Supreme Court decision in Gair v Smith.[6] That case involved a contract of sale of land, rather than a retail lease. There, the parties agreed that that the purchaser could complete the purchase by instalments. The parties also agreed that the purchaser must pay an insurance premium for the land.
When the purchaser defaulted, the vendor issued a notice of default. The notice alleged that the purchaser had breached both the above obligations. As the evidence bore out, however, the purchaser had only defaulted with respect to the obligation to pay the insurance premium and not the obligation to pay the purchase price by instalments.
The matter was heard before Gowans J. His Honour held that although the notice of default only alleged one default which could be established, the notice nonetheless was valid. His Honour noted:
‘[T]he answer is that … non-payment [of an amount for which default had not been established] was not a default upon which the vendor relied. He was not bound to rely upon and therefore to specify it. He cannot be required to rely upon all defaults …’ [7]
On the basis of this authority, the Tribunal in the present case rejected the applicant’s claim that the notice of default was invalid. Nonetheless, the Tribunal was satisfied that the applicant should obtain relief against forfeiture on the proviso that outstanding rent and outgoings be paid. This was so in circumstances where ‘there [was no] sufficient evidence as may fairly lead to the inference that, even if relief be given, there [would be] a reasonable likelihood that rent will not be paid by the applicant in the future’.[8]
Comment
The Tribunal’s decision in CB Buffett (Burwood) Pty Ltd v Delloyd Pty Ltd (Building and Property) raises two key reminders for landlords and tenants alike:
A notice of default under a retail lease which specifies multiple defaults arguably is not invalid simply because some of those defaults cannot be established — provided at least one default can be established.
The practice of a landlord in a notice of default claiming payment of legal costs where such costs relate to preparation of the notice itself, and in circumstances where the landlord has not previously requested payment of those costs despite it being a requirement in the terms of the lease, could be subject to challenge.
[1]: [2020] VCAT 1234.
[2]: Ibid [41].
[3]: Ibid [42].
[4]: [2017] VCAT 1808.
[5]: Ibid [48].
[6]: [1964] VR 814.
[7]: Ibid 817. See also Pannell v City of London Brewery Company [1900] 1 Ch 496 where Buckley J held that ‘[i]f a lessor gives a notice specifying two breaches, and specifying a third thing which is not a breach, he has given notice specifying the breach complained of’: at 500.
[8]: CB Buffett (Burwood) Pty Ltd v Delloyd Pty Ltd (Building and Property) [2020] VCAT 1234, [65].