What a difference a day makes - the consequences of a landlord not terminating a lease correctly

The New Zealand Supreme Court’s (NZSC) decision in Ingram and ors v Patcroft Properties Limited [2011] NZSC 49 (Ingram) was handed down in 2011 but is especially relevant in the current rental climate in Western Australia.  This case serves as a reminder to landlords to take extra care when terminating a lease for breach. 

In the Ingram case, an error of one day cost the landlord over a year’s rent, and then some.  The NZSC (being the highest court in New Zealand) found in favour of the tenants whose landlord had retaken possession of the premises a day before it was permissible under the terms of the lease.  The NZSC awarded the tenant costs of $15,000 and their reasonable disbursements. 

Facts of the case

The tenants, Ingram, Knee and Kip Investment Limited ran a hostel business at the premises leased from Patcroft Properties Limited. 

The lease provided the landlord with a right of re-entry where rent money is 14 days overdue. Relevantly, the lease also provides that rent must be paid monthly in advance “without set off or deduction whatsoever”.

The parties had a troubled relationship and on 1 June 2005, the tenants were only able to pay approximately a third of the rent and operating expenses that fell due on that date. $22,592.75 remained payable.  It was not disputed that the tenants had a cross claim for $36,597.55, having previously overpaid their obligations in regards to operating expenses for lift maintenance.  However, the tenants were still obliged to pay the outstanding rent without any set off or any deduction pursuant to the lease.

Under the lease, the landlord could not exercise its rights before 15 June 2005, being 14 days after the rent fell due.  The landlord jumped the gun on the morning of 14 June 2005, retaking possession by entering the premises, changing the locks and posting on the entrance three notices – a notice of re-entry and termination of lease, trespass and distraint.

Nailing the coffin shut, the landlord’s solicitor wrote to the tenants on the same day purporting to terminate the lease and stating that any attempt to seek relief against forfeiture will be defended.  The tenants’ solicitor responded by reserving their position in relation to the lawfulness of the re-entry.  The landlord’s miscalculation was brought to its attention, however this mistake was never retracted and the landlord’s position remained unchanged.

Over a year passed without incident.  On 11 September 2006, the landlord claimed for damages and over a year’s worth of unpaid rent.  The tenants responded with their own claims.

Decision

It was found that the landlord’s premature re-entry was unlawful and the exclusion of the tenant from the premises constituted a repudiation of the lease by the landlord.  

As this act of repudiation occurred on 14 June 2005, the landlord cannot purport to terminate the lease, even after the 14 days expired on the next day.  The landlord’s repudiation continued for over a year, as it was then for the tenant to accept the repudiation and cancel the lease.  This did not occur until the tenants responded by counter claim to the landlord’s action for damages. 

The tenants could not be expected to pay arrears of rent where the landlord’s ongoing repudiation prevented them from carrying on their business at the premises.  The court found the landlord had essentially represented, by its repudiation, that any remedial action taken by the tenants would be futile and that it was “entirely justifiable” in this circumstance for the tenant to not make rent payments.

It is a basic principle that the party seeking to terminate a contract must be ready, willing and able to perform its duties under the contract.  The landlord cannot complain of the non-payment of rent and at the same time benefit from its own repudiation.

Lavan Legal comment

Without more, a failure by a tenant to pay an instalment of rent does not give rise to a repudiation of the lease.  Rather, the landlord’s claim is that of recovery of a debt or unpaid money (being the outstanding instalments of rent).

A tenant’s breach of a lease only amounts to repudiation of the lease if the breach goes to the very heart of the lease – that is, a fundamental breach of the lease.

The parties to the lease can agree which terms are “fundamental” or “essential” terms of the lease (Shevill v The Builders Licensing Board (1982) 142 CLR 620).  This is why all well drawn leases specify what are the essential terms of a lease.

Breach of an essential term of the lease by a tenant constitutes a repudiation of the lease by the tenant which can be accepted by the landlord.  On acceptance of this repudiation, the landlord is entitled to recover (among other things) damages.  These damages include the rent in respect of the balance of the term of the lease (subject to the landlord’s duty to mitigate its loss).

However, as the Ingram case demonstrates, the landlord must be very careful in exercising its rights where the landlord needs to end the lease by accepting the tenant’s repudiation of the lease (evidenced by the tenant’s breach of an essential term of the lease).

The landlord’s actions in the Ingram case resulted in the positions being reversed – the landlord’s premature retaking of possession of the premises constituted a repudiation of the lease by the landlord (rather than repudiation by the tenant for breach of an essential term of the lease).

The Ingram  case is especially relevant now given the current economic climate where some tenants are unable or unwilling to pay their rent.  Landlords seeking to terminate a lease must pay very close attention to the contract and the laws that govern a lease.