Leases - Remedies

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This article is a topic within the subject Property, Equity and Trusts 2.

Contents

Required Reading

Edgeworth et all, Sackville and Neave's Property Law Cases and Materials, 8th edition, Lexis Nexis, 2008, pp. 813-849 [8.139-8.190].

Forfeiture of lease by landlord

Similarly to how a contract can be terminated under breach of a condition or repudiation, a lease may be forfeited by the landlord if the tenant is in breach of a covenant. This is referred to as the right to forfeiture of the lease (also, the right of 're-entry'), and operates similarly to contract with a few differences.

  • The tenant has no right to forfeiture.
  • The right to forfeiture is not a common law right. It is either expressly provided for in the lease, or, in some cases, implied by statute.
    • s 85 (1) (d) of the Conveyancing Act 1919 (NSW) implies a right of forfeiture in every lease on certain conditions (see below).
  • Note: forfeiture is permitted when a covenant is breached by the tenant. However, a lease is still a contract after all, which means it may also be terminated under the normal rules of contract law - ie, under a breach of a condition/intermediate term, or repudiation (see below).

The principles of how forfeiture is exercised differ depending on whether the breached covenant was a covenant to pay rent, or whether it was a covenant of another type.

Breach of non-rental covenants

[1] The landlord may have either an express or implied right to re-enter and forfeit for breach of a non-rental covenant:

  • Express right - arises as per the the express stipulation specifies (ie, after the breach has been ongoing for a week, two weeks etc)
  • Implied right - if there is no express right, the landlord nevertheless has an implied right under s 85 (1) (d) when:
    • The breach has continued for a period of two months OR
    • The landlord has served a notice to repair and repairs have not been carried out within a reasonable time.

In both cases, the right to forfeit is only enforceable if the landlord complies with the following principles:[2]

  1. The landlord must serve a notice. The notice must:
    1. Specify the breach;
    2. Require the tenant to remedy the breach (if this is possible);
    3. Require the tenant to pay compensation (if compensation is claimed).
  2. The tenant must have failed to remedy the breach (if remedy was possible) or failed to pay reasonable compensation (if claimed) within a reasonable time.
    • Reasonable time is usually 3 months.[3] However, it will vary according to circumstances, and will be especially short if there is no possibility of the tenant remedying the breach.[4]

This gives the tenant an opportunity to remedy the breach.

  • This applies also to equitable leases.[5]
  • However, it does not apply for crown leases or leases of less than one year (no notice needs to be given etc).[6]
  • It also does not apply to covenants to pay rent, as explained below.

Circumvention of the notice procedure

[7] There have been attempts by landlords to circumvent this procedure by various ways, but the courts often resist these attempts. Examples include:

  • In Plymouth Corp v Harvery,[8] a landlord made the tenant sign a deed of surrender which became active once a covenant is breached. This way, the lease is surrendered by the tenant as opposed to forfeited. The court ruled that it still counts as forfeiture and is therefore void for not complying with the notice provisions.
  • In Holden v Blaiklock,[9] the lease specified that upon a breach of the covenant, the lease becomes a weekly tenancy terminable by one week's notice. The court ruled that it still counts as forfeiture and is therefore void for not complying with the notice provisions.

Breach of covenant to pay rent

The right to forfeiture in the case of covenants to pay rent does not have to adhere to the process in s 127.[10] This means that there are two possible processes:

  • If there is an express right of forfeiture in the lease, the landlord will be entitled to re-enter and forfeit as the lease specifies (ie, immediately, after one month, after notice is given etc).
    • The landlord does not need to issue notice unless the lease requires it.
  • If there is no express right of forfeiture, the landlord will have an implied right to forfeit under s 85 (1) (d) if rent is in arrears for at least one month.
    • In such circumstances, the landlord may forfeit without giving notice.

No right to forfeit when breach is waived

[11] A landlord may lose his right to forfeit after a particular breach if he 'waives' that breach be continuing to recognise the lease. In other words, if the landlord does not exercise his right forfeit soon, it will be treated as extinguished.

  • A waiver of a breach occurs when a landlord is:
    1. Aware of the breach; and
    2. Performs an act clearly recognising the continuance of the tenancy (eg, accepting rent for a period after the breach[12]).
  • What the landlord needs to do in order not to waive the breach would be to unequivocally treat the lease as forfeited.

Note that a waiver of one breach does not generally waive all breaches and completely deprive the landlord of his right to forfeiture - it only extends to that particular breach.

The question of what constitutes an effective forfeiture (ie, what amounts to an unequivocal termination of the lease) was considered in Moore v Ullcoats Mining Co:

  • Two ways to effect forfeiture: peaceable re-entry (ie, actual re-entry of the land) or commencing an unequivocal action for the possession of the land.
  • A useful way to look at whether an action constitutes an unequivocal claim for possession is whether it is open for the Plaintiff to merely claim other remedies on the basis that the lease still exists, or whether the Plaintiff's claim for possession was final.
    • In other words, can the Plaintiff still change his mind about the existence of the lease? If yes, there was no effective forfeiture.
USG notes: All in all, this is very similar to election in contract. The landlord is entitled to terminate the lease upon a breach of covenant, and he must elect to the either terminate the agreement or continue it (thereby waiving the breach and losing his entitlement to terminate for that breach). The election to terminate must be unequivocal.

Mesne profits

[13] A lease is finished from the day that the landlord unequivocally elects to forfeit the lease, From that moment, the tenant is considered a trespasser, and is liable to pay mesne profits (which are damages for trespass).[14]

  • Note that when the lease is forfeited by commencing an action (as opposed to actual re-entry), the date of determination of the lease is when the claim is serviced as opposed to issued.[15]
  • A landlord is entitled to claim rent until the date of determination, and then mesne profits for the time after.
  • Mesne profits are calculated according to the market value of the rent.

Relief against forfeiture

[16] Sometimes, the court might decide to give the tenant relief against forfeiture - that is, revive the lease after it has been forfeited by the landlord.

  • The court may grant this under s 129 of the Conveyancing Act or under its inherent equitable jurisdiction (s 73 Supreme Court Act 1970 (NSW)).

Relief against forfeiture was discussed in Steiper v Deviot Pty Ltd:

  • Relief against forfeiture is an equity relief, meaning he who seeks it must do so with clean hands.
  • Whilst it is common practice to automatically grant relief in a case where a non-payment of a debt is finally paid, this can be refused if the conduct of the appellant warrants relief unjust.
  • Specific emphasis is put on the conduct of the claimant towards the actual property.

Limits of relief against forfeiture include:

  • Relief is possible until the landlord is granted an order for possession of the premises and has taken possession pursuant to that order.
  • However, relief may still be granted if the landlord has sought forfeiture by physical re-entry.
    • Still, the tenant must act sufficiently promptly to avoid being postponed in equity for delay.

The rules governing relief against forfeiture differ slightly according to whether there was a breach a covenant to pay rent or of a non-rental covenant.

Breach of a covenant to pay rent

The idea is that the right to forfeiture on the breach of a covenant to pay rent is collateral or security for that debt. Once the debt is paid, the tenant should be granted relief against forfeiture.[17]

  • However, as mentioned in Steiper v Deviot, relief against forfeiture must be justified. Besides the idea that the conduct of the tenant should not be such that disqualifies him from obtaining relief, the court should also consider whether:
    • The tenant truly compensated the landlord (ie, put the landlord in the position he would have been in if the breach had not occurred).[18]
    • Whether the lessee will suffer a disproportionate penalty (in comparison to his breaches) if relief was not granted.[19]

Breach of other covenants

In the case of a breach of non-rental covenants, relief is not considered as 'automatic' as in the case of repaid breaches of rental covenants. However, the court still has a wide discretion to award relief against forfeiture. Relevant considerations include:

  • Whether the tenant’s breach was willful.[20]
  • The disparity of the damage caused by the breaches and the value of the property.[21]

Third-parties

[22] The general rule is that relief against forfeiture will not be granted so as to prejudice the rights of innocent third-parties who have acquired an interest in the demised premises after forfeiture.


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Subleases

[23] The general principle that, when a head-lease falls the sub-leases also fall, leads to the rule that subtenants have a specific right to relief from forfeiture under s 130 (1) Conveyancing Act. They get a new lease for the same area, and for the same term.

Self-help

[24] At common law, a landlord was entitled to the self-help remedies of distress[25] and peaceable re-entry after the expiration or termination of a lease.

  • Distress has been abolished in NSW.
  • Peaceable re-entry has been abolished in all jurisdictions in the case of residential tenancies.

Rights of landlord and tenant in contract

A lease is a contractual agreement, which is also affected by the development of property law. Because of this, there was a great debate of how much do standard contractual principles apply to leases.

This was considered in Progressive Mailing House v Tabali:

  • A lease is a contract and contractual principles apply. Accordingly, a lease can be terminated (and expectation damages can be awarded) in the same circumstances as any other contract (ie, breach of a condition, serious breach of an intermediate term, or repudiation).
  • Normally, when a lease is forfeited merely for a breach of covenant, there are no expectation damages. However, if there were circumstances which allow termination of the lease (due to repudiation etc), expectation damages will be awarded.
    • What is important is not the manner the contract has ended (ie, whether the landlord forfeited or terminated), but whether the circumstances were such that termination was permitted (ie, if the landlord forfeited the lease, but there was repudiation/breach of a condition, he will still be entitled to expectation damages).
  • The breach of the covenant to pay rent is not a breach of a condition, and is not enough for repudiation. Repudiation requires the usual intention not to abide by the contract etc, and usually, the abandonment of the the property by the lessee (however, whilst this is important, it's absence is not fatal).

This case settled questions which began in Shevill v Builders' Licensing Board,[26] which started the line of authority which specified that mere forfeiture because of a covenant (as opposed to a breach of a condition or repudiation etc) does not entail expectation damages unless the lease says so.

  • As a result, landlords began to insert 'anti-Shevill' clauses into leases - these specified that certain covenants are conditions (essential terms) which would entitle the landlord to terminate and receive expectation damages if breached.
  • These are very common today.

Termination under contractual principles and whether notice must be given was discussed in Marshall v Council of the Shire of Snowy River:

  • A notice as per s 129 is only required where a lease is forfeited as per an express or implied right to forfeit, as opposed to when a lease is terminated because of normal contractual principles (since it is not forfeited, it is terminated).

Relief against forfeiture after termination

Where a lease has been terminated (as opposed to forfeited), there will be no relief against forfeiture.

This was discussed in Batiste v Lenin:

  • Usually, breaches of covenants for which no notice was served cannot be considered by the court in deciding whether to award/refuse relief against forfeiture.
  • However, where there has been repudiation of the lease, the court can consider those breaches in making its decision to refuse relief against forfeiture.

Set-off

The parties can set-off monies owing to one another. It is mainly used as a defence in a situation as follows:

  • It is sometimes difficult for a tenant in financial difficulties to commence an action against a landlord who has breached his covenants. The natural course of action would be withholding rent, but this opens him up to forfeiture (since it means breaching his own covenant).
  • Thus, in certain circumstances, he is entitled to 'set-off' any money which the landlord owes him (due to the breach of covenant) by deducting that amount from the rent he owes the landlord.

The laws governing the right to set-off are discussed in British Anzani (Felixstowe) v International Marine Mangement (UK):

  • Common law set-off - applies when tenant has paid a specific for repairs which the landlord had covenanted to do.
    • Notice to the landlord must be given.
    • If the repairs have not actually been paid for, or if the sum is not liquidated (ie, certain), there can be no set-off.
  • Equitable set-off - can only apply when:
    1. There is no common law set-off and:
    2. The breach (and the tenant's claim) goes to the root of/impeaches the plaintiff's demand.
      • This means it must be under the original lease or at least closely connected to the landlord's claim (so that it would be unjust for the landlord to be able to recover rent without it being set-off for the landlord's breach).

Bonds

[27] Bonds, or security deposits, are often required by landlords from the tenant as security in case the tenant fails to pay rent or observe the covenants.

  • A bond is neither a penalty not a liquidated sum, but 'an earnest of performance which, on default, may be retained and credited against the damage suffered'.[28]
  • Retaining the bond on default does not preclude the landlord from seeking further damages (if the bond wasn't enough to cover the damages).

End

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References

Textbook refers to Edgeworth et all, Sackville and Neave's Property Law Cases and Materials, 8th edition, Lexis Nexis, 2008.

  1. Textbook, pp. 815-6 [8.142-8.143].
  2. Conveyancing Act 1919 (NSW), s 129.
  3. Penton v Barnett [1898] 1 QB 276.
  4. Civil Service Co-operative Soceity Ltd v McGrigor's Trustee [1923] 2 QB 79.
  5. Conveyancing Act 1919 (NSW), s 128.
  6. Conveyancing Act 1919 (NSW), s 129 (6) (a).
  7. Textbook, pp. 816 [8.144].
  8. [1971] 1 WLR 549.
  9. [1974] 2 NSWLR 262.
  10. Conveyancing Act 1919 (NSW), s 129 (8) (a).
  11. Textbook, pp. 816-20 [8.145-8.151].
  12. Croft v Lumley (1858) 6 HLC 672.
  13. Textbook, pp. 820-1 [8.152].
  14. Elliott v Boynton [1924] 1 Ch 236.
  15. Canas Property Co Ltd v K L Television Services Ltd [1970] 2 QB 433.
  16. Textbook, pp. 821-8 [8.153-8.163].
  17. Chandless-Chandless v Nicholson [1942] 2 KB 321.
  18. Gill v Lewis [1956] 2 QB 1.
  19. Di Palma v Victoria Square Property Co Ltd (1983) 48 P & CR 140.
  20. Ladies Sanctuary v Parramatta (1997) 7 BPR 15, 156.
  21. Shiloh Spinners Ltd v Harding [1973] AC 691.
  22. Textbook, pp. 827-8 [8.162-8.163].
  23. Textbook, pp. 828-9 [8.164-8.166].
  24. Textbook, pp. 829 [8.167].
  25. Distress is when the landlord sells the personal property (chattel) of the tenant in order to recover arrears).
  26. (1982) 149 CLR 620.
  27. Textbook, pp. 849 [9.190].
  28. NLS Pty Ltd v Hughes (1966) 120 CLR 583.
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