Commercial leasing case update: Drama Unit Pty Ltd v Fearndale Holdings Pty Ltd (Administrator Appointed) & Anor [2019] NSWCA 312

On 17 December 2019, the New South Wales Court of Appeal (Court of Appeal) handed down its decision in the case of Drama Unit Pty Ltd v Fearndale Holdings Pty Ltd (Administrator Appointed) & Anor [2019] NSWCA 312.  This case clarified the formal requirements for notices issued under section 129 of the Conveyancing Act 1919 (NSW) (the Act) and also confirmed that the common law ‘suspension of rent rule’ applies in modern commercial leases in New South Wales.  This case has significant practical implications for commercial landlords and tenants in New South Wales.

The Facts

A summary of the relevant facts in this case is as follows:

1. Drama Unit (tenant) and Fearndale (landlord) entered into an undated lease for a clay and shale quarry site in Luddenham, New South Wales (the Premises). The lease included a commencement date of 23 March 2017.  The lease could not commence on that date because the Premises were subject to a prior lease, so the parties agreed that Drama Unit’s lease would not commence, and rent would not become payable, until the prior lease was terminated.
2. Clause 7.3(4) of the lease, in general terms, required Drama Unit to obtain, maintain and comply with consents or approvals of any authorities necessary or appropriate for Drama Unit’s business, and to provide copies of the consents and approvals to Fearndale prior to occupying the Premises.
3. Drama Unit did not at any stage obtain any of the consents and approvals required to operate its mining business on the Premises.
4. Fearndale was placed into administration in May 2018.
5. The prior lease was terminated on 25 June 2018. Drama Unit notified Fearndale’s administrator that it would take possession of the Premises on 1 July 2018 and provided a cheque for the first month’s rent.  The administrator returned the cheque and refused access to the Premises, on the basis that it had not determined whether the lease was valid and, later, on the basis of alleged breaches of clause 7.3(4).  Fearndale prevented Drama Unit from entering into occupation and possession of the premises by erecting fences and locking the gates.
6. On 29 January 2019, Fearndale served four notices (section 129 notices) on Drama Unit pursuant to section 129 of the Act. Fearndale’s section 129 notices required Drama Unit to remedy alleged failures to comply with clause 7.3(4) of the lease.  The section 129 notices did not state a time within which the alleged breaches of the lease must be remedied.
7. On 22 March 2019, Fearndale served six termination notices on Drama Unit, four of which related to the failure to remedy the alleged breaches of clause 7.3(4). The fifth termination notice was based on Drama Unit’s failure to pay rent for the period from 25 June 2018 until 22 March 2019.  The sixth notice related to Drama Unit’s failure to pay outgoings for the same period.
8. After serving the termination notices, Fearndale commenced proceedings in the New South Wales Supreme Court seeking a declaration that it had validly terminated the lease and seeking an order that Drama Unit must pay the rent and outgoings, which were in the amount of $280,000 for rent and $34,000 for outgoings. The judge at first instance found in favour of Fearndale.  Drama Unit then appealed to the Court of Appeal.

What were the grounds of the appeal?

Drama Unit argued that the lease had not been validly terminated and that it was not liable to pay either the rent or the outgoings on the following grounds:

1. Fearndale’s section 129 notices and termination notices were invalid because Drama Unit had not breached clause 7.3(4) of the lease. Drama Unit argued that the obligations in clause 7.3(4) of the lease did not yet apply because Drama Unit had not entered into occupation of the Premises.  Drama Unit raised this argument because clause 7.3(4) was poorly drafted and the timing of the obligations was unclear.  It is not intended in this article to go into these arguments in detail, as this was particular to the drafting errors made in this lease;
2. If Drama Unit was in breach of the lease, the section 129 notices were invalid as they did not specify the reasonable time within which the breach must be remedied; and
3. if Drama Unit was in breach of the lease and the section 129 notices and termination notices were valid, Fearndale was not entitled to payment of the rent and the outgoings because the rent and outgoings were suspended whilst Fearndale prevented Drama Unit from taking possession of the Premises.

Section 129 of the Conveyancing Act 1919 (NSW)

With some exceptions, section 129 of the Act requires that, before exercising a right of re-entry or forfeiture against a tenant due to breach of an obligation other than the obligation to pay rent, a landlord must serve a notice on the tenant substantially in the form of Schedule 6 to the Act specifying the nature of the breach and requiring the tenant to remedy the breach.  The landlord can then exercise their right of re-entry if the tenant fails to remedy the breach within a reasonable time.

What did the Court of Appeal decide?

The Court of Appeal allowed the appeal in part and reduced the amount of money payable by Drama Unit to Fearndale, but found that the lease had in fact been validly terminated.  The Court of Appeal found that:

1. Drama Unit was in breach of clause 7.3(4) of the lease, although each justice took a different approach to the construction of the clause 7.3(4) in reaching this conclusion;
2. There is no requirement for a notice issued under section 129 of the Act to specify a reasonable time in which to remedy a breach, because permitting the landlord to decide the timeframe would defeat the purpose of ensuring that a tenant is always given a time that is reasonable in the circumstances.
3. As a result of conclusions 1 and 2 above, the section 129 notices were valid and the termination notices based on those section 129 notices were also valid.
4. Fearndale was not entitled to payment of the rent because the common law ‘suspension of rent rule’ applies in modern New South Wales leases. The suspension of rent rule provides that the payment of rent is suspended during the period where a tenant is ‘evicted’ from leased premises by the landlord.  Meagher JA described an ‘eviction’ as being where the tenant is wrongfully excluded from the Premises and is denied the benefit of the enjoyment of the Premises by the landlord.  Fearndale’s refusal to allow Drama Unit to take possession of the Premises was an eviction because it denied Drama Unit the benefit of the Premises and this action was not permitted by the lease.
5. Although the rent was suspended, the outgoings of $34,000 were payable. The suspension of rent rule only applies to the payment of rent and not to other obligations under the lease.  The Court of Appeal agreed that the payment of outgoings is different in character to the obligation to pay rent, particularly in this case where outgoings were expressly stated to be payable ‘in addition to the rent’ and were payable annually, whereas the rent was payable monthly.

Lessons to be learned

This case highlights the importance for commercial landlords in New South Wales of ensuring, before they take action to take possession of a property from the tenant, that they have a valid legal ground for doing so and that any legislative requirements have been strictly satisfied.  Landlords need to be aware that if they take possession of a property away from the tenant without having a valid ground for doing so under law or under the lease, they will be unable to recover rent for the period that the tenant does not have the benefit of the property.

At Bryks Lawyers, we are experienced in drafting and negotiating commercial and retail leases for both lessors and lessees.  Contact us today to see how we can assist you!