Generally, if a landlord intends to terminate a lease due to a tenant’s breach of the lease,  the landlord must first serve a notice (Breach Notice) on the tenant that:

  1. specifies the particular breach;
  2. if the breach is capable of remedy, requires the tenant to remedy the breach; and
  3. if the landlord claims monetary compensation for the breach, requires the tenant to pay.

The landlord must then grant the tenant a “reasonable time” after service of the Breach Notice to remedy the breach, if it is capable of remedy, and pay any money that is required to be paid as compensation to the landlord’s reasonable satisfaction. It is only if the tenant fails to remedy the breach within that “reasonable time” that the landlord can exercise its right to re-enter or forfeit the lease.

What is a “reasonable time”?

What is considered to be a “reasonable time” is determined objectively on a case by case basis with regard to the nature and extent of the breach.

The recent case of Drama Unit Pty Ltd v Fearndale Holdings Pty Ltd (administrator apptd) [2018] NSWSC 1895 (Drama Unit v Fearndale Holdings) gives us some guidance about what constitutes “reasonable time” in this context. The key point to remember is that there is no fixed “reasonable time” – it can be different in every case and will depend on the specific circumstances of the breach.

Case example: Drama Unit v Fearndale Holdings

The parties entered into a lease. The lease contained a covenant that the tenant would, prior to entering into the lease, obtain and comply with any consents or approvals required to carry out the permitted use. There was already a development approval in place for a quarry, but the tenant failed to obtain any authority to conduct mining operations on the land, required under the Mining Act 1992 (NSW), in breach of the lease. Over a year after the lease commenced the landlord (by that stage in voluntary administration) served a Breach Notice on the tenant that specified the breach and allowed the tenant 14 days to obtain the required mining approvals. After the tenant failed to do so within a fortnight, the landlord served a notice terminating the lease.

The tenant successfully challenged the validity of the purported termination in court. The Judge found that the landlord’s Breach Notice complied with s 129(1) of the Conveyancing Act 1919 (NSW) in all respects other than the requirement to give the tenant a reasonable time to remedy its breach. His Honour sympathised with the landlord, acknowledging that it would be commercially attractive for the voluntary administrator to terminate the lease – it would be easier to sell the land if it was vacant. However, two weeks was clearly not a reasonable time to obtain mining approvals. The landlord’s right of forfeiture was not enforceable and the purported termination of lease was ineffective.

The Judge compared this case to Cashquash Pty Ltd v NSW Squash Ltd (No 2) [2012] NSWSC 522. In that case 14 days was found to be a reasonable time to allow a tenant to make outstanding outgoings payments, in circumstances where the tenant’s breach was wilful and the tenant had made it clear that it would not voluntarily remedy the breach.  In those circumstances there was no utility in allowing the tenant extra time – doing so would only cause further inconvenience and disadvantage to the landlord.

Key take-away points

  1. Every case is different: a “reasonable time” to remedy a breach of lease cannot be determined with a simple formula. It depends on the circumstances of the case – what is reasonable in one case will not necessarily be reasonable in another. The landlord must give the tenant a reasonable time to remedy the specific breach being complained of in the prevailing circumstances.
  2. If you are considering serving a Breach Notice on a tenant – when determining what is a reasonable time to set out in the notice, carefully consider how long is likely to be required for the tenant to do whatever needs to be done to remedy the breach, in the commercial reality of the case. If the time expressed to remedy a default is not reasonable, the Court may determine that any subsequent termination is invalid.

Alternatively, in the absence of an express requirement to specify the period in which a breach must be remedied, you may consider not expressly defining the time period in which the tenant must remedy its breach provided that it is clear that the tenant is required to remedy the breach within an objective “reasonable time”.

  1. If you have received a Breach Notice from a landlord – if you are unable to remedy the breach in the time set out in the Breach Notice using reasonable endeavours, that timeframe may be unreasonable. If the landlord purports to terminate your lease, that termination may be ineffective.
  2. The Tenant’s behaviour need not be faultless: the tenant in Drama Unit v Fearndale Holdings was successful even though it had failed to obtain mining approvals over a year after they were required to be obtained under the Lease. If the time allowed by the landlord is patently unreasonable a court will likely still provide the tenant with relief, even if the tenant’s conduct has not been exemplary. However, the court will not unfairly prejudice the landlord. As noted by the Judge in Drama Unit v Fearndale Holdings, if after the court proceedings were finalised the tenant was still in breach of the lease, what would be a “reasonable time” under any subsequent Breach Notice would be considered in light of the significant time the tenant had already been afforded from the time of the original Breach Notice and throughout the court proceedings.

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There are some exceptional circumstances that are carved out by the relevant legislation when such a notice and time allowance are not required.  If you have any questions please reach out to your HSF contact, who will be happy to discuss.