A recent NSW case has considered whether a “Notification to Vacate” issued by a landlord can be treated as effective termination of a lease. The case illustrates the importance of using clear language when the intention of the landlord is to terminate a lease.

Facts

The property in question was a commercial laundry located on the Central Coast of New South Wales.

The tenant of the laundry held a five-year lease from 1 February 2000 due to expire on 21 January 2005. The lease contained three options to renew, each for a period of three years. The tenant exercised two options to renew, thereby creating two successive three year terms from 1 February 2005 until 31 January 2011.

On 1 February 2007 the landlord served a notice of breach under s 129 of the Conveyancing Act 1919 alleging that the tenant had breached a term of the lease which required it to take out and maintain insurance policies for the premises and requiring it to remedy the breach (the First Notice).

Section 129 of the Conveyancing Act 1919 provides that a right of re-entry may not be exercised unless the landlord has first issued a notice specifying the breach and requiring that the tenant remedy the breach.

In addition, in this case the lease stipulated that:

  • If the landlord wished to terminate the lease, it was to do so either by re-entering the premises or giving the tenant a notice of termination; and
  • If the tenant received notification of termination from the landlord, it had to vacate the premises that same day.

On 26 February 2007, the landlord’s real estate agent issued a further notice to the tenant (Second Notice). This notice stated that the tenant was in breach of the lease and that the current rental arrears stood at $24,584.51. This notice did not specifically refer to the failure to maintain insurance or to the First Notice but only to the fact that the tenant was merely “in breach of the lease.” The Second Notice also stated that the real estate agent had been “instructed to terminate this current lease” and that the landlord’s solicitors had requested that the tenant vacate the premises by 1 May 2007.

On 2 April 2007 the landlord’s real estate agent wrote to the tenant again requesting payment of the rental arrears within two weeks and stating that failure to do this would result in the real estate agent taking possession of the premises on behalf of the landlord.

Proceedings

On 30 April 2007 the NSW Supreme Court made interim orders (by consent) restraining the landlord from taking possession of the premises or otherwise terminating the lease. On 6 October 2007, the tenant exercised its option to renew the lease for a further three years from 1 February 2008.

In May 2008 the tenant filed a statement of claim seeking a declaration that it had validly exercised its option to renew the lease. In December 2008, the landlord responded with a cross-claim seeking an order for possession of the premises based on its termination of the lease by the Second Notice. The landlord argued that the requirement to insure the premises was an essential term of the lease and that its breach gave rise to a right to terminate the lease.

The Supreme Court dismissed the tenant’s claim and made an order for possession in favour of the landlord based on the landlord’s entitlement to exercise its contractual right to terminate for breach of an essential term. The tenant then appealed to the New South Wales Court of Appeal.

The question on appeal was whether the landlord had validly terminated the lease by the Second Notice.

Outcome

The Court of Appeal allowed the appeal and held that the lease had not been validly terminated.

In reaching his decision, Sackville AJA (who delivered the judgment of the Court of Appeal) noted the following:

  • recent decisions of the High Court had established that the principles of contract law apply to contractual leases;
  • an election to terminate a contract for breach of an essential term must be communicated by an unequivocal act or statement that the innocent party is treating the contract as at an end ; and
  • there was nothing in the language of the lease to suggest that a notice of termination issued by the landlord was relieved from complying with this common law rule.

As the landlord was seeking to rely on the Second Notice as communicating the termination of the lease for breach of an essential term, it was necessary that it comply with s129 of the Conveyancing Act NSW 1919. This requirement was held to be satisfied in the present case since the primary judge found (and it was not overturned on appeal) that the landlord had served a valid s129 notice in the form of the First Notice.

Sackville AJA held that there had been no unequivocal communication of a termination of the lease. He noted that the Second Notice:

  • was formatted and composed in a way that was more suited to the termination of a periodic tenancy than to a termination for the breach of an essential term;
  • did not say that the lease was terminated, only that the agent had been “instructed to terminate this current lease”;
  • did not give a precise date for such termination to be effective or say that the lease was terminated effective forthwith (the language of the lease suggested that a notice terminating the lease for breach of an essential term must have immediate effect); and
  • did not contain any demand for immediate possession of the premises.

His Honour also noted (by way of obiter) that another obstacle the landlord would have to overcome was the issue of the further letter sent on 2 April 2007. This letter could arguably be construed as an election to keep the lease on foot and as a waiver of any existing breach by the tenant in relation to the failure to maintain insurance, thereby making a claim for breach of lease unsuccessful.

Sackville AJA noted both parties had failed to identify the central issue in the case being whether the termination of the lease by the Second Notice was in fact valid. The tenant had failed at trial to correctly identify this issue and this issue only arose during the course of oral submission at the appeal at which time the Court of Appeal granted leave to the tenant to file an Amended Notice of Appeal.

The fact that the tenant lost on all issues at first instance and had not raised the point of the invalid termination of the lease until it was brought to its attention by the appeal court resulted in the Court of Appeal making an order that each party bear their own costs of the proceedings at first instance and an order that the landlord only pay 20% of the tenant’s costs of the appeal.

Comment

The decision of the Court of Appeal is a timely reminder that a notice of termination of a lease must comply with the terms of the lease and general contractual principles, and must unequivocally communicate that the party serving the notice is treating the lease as at an end.