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Nov 04

Better than studying Geotechnical Engineering

I’m currently studying the Leases part of the Property 2 course. I’m a little bored so I was thinking about what the situation is in this apartment. Forget exam hypotheticals, real life problems are much more interesting. I’ll write up an answer when I’ve finished revising… (Yeah yeah I know you probably aren’t doing law and aren’t interested, I don’t care.)

Fact scenario: David is a tenant who has entered into an oral agreement for a lease. He is an international university student and is expected to complete his degree in 5 years. Rent is to be payable every four weeks in advance. He has been in residence and paying rent with the owner’s consent for 4 years. It is understood that the lease can be terminated with two month’s notice by either party. Questions: (1) What type of lease is it and what is the status of the lease? (2) What happens if David has been late in paying rent for the last three times they were due by about 5 days each time? (3) What happens to David if the owner (registered proprietor) of the apartment sells it to another bona fide third party purchaser for value who registers their interest?

Answer (CA refers to the Conveyancing Act 1919 (NSW); RPA refers to the Real Property Act 1900 (NSW)):
1. An oral agreement for a lease of duration 3 years or less (including any time that may be added through an option to renew) will create a legal interest (CA s 23D(2)). However, this lease is clearly more than 4 years. No requirements have been met to form a legal lease at this stage. An oral agreement cannot create an equitable lease either (s 54A(1)), unless there is part performance (Bunny Industries). A tenant going into actual possession (and also paying rent) constitutes part performance, as has occurred in this instance. The agreement is one that is presumably specifically enforceable as well, and thus a Walsh v Lonsdale-type equitable lease is formed. This equitable lease does not seem to have an agreement as to its overall duration, so it seems to be a periodic lease. [I don’t know if you can have equitable periodic tenancies?]

At common law, an implied periodic tenancy may arise as a result of the pattern of rent payments. If the rent is paid in aliquots or by reference to a year, and if it is based on an equitable lease that is longer than one year, then a yearly periodic tenancy will be implied (Dockrill v Cavanagh). In this case, the rent is being paid every four weeks. It might be argued that these payments may be somehow referable to the whole 5 years period (Moore v Dimond), but this is a weak argument given these facts and that the 5 year period was not a part of the oral agreement at all. Therefore, it seems like there is an implied 4-weekly periodic tenancy at common law.

2. The lease has a covenant implied by s 85(1)(a) of the CA that rent will be paid when it is due. There is no express term which replaces this implied term. By paying rent late, David has breached this covenant. What the landlord can do depends on the nature of the breach. A covenant to pay rent in advance is not, by itself, an essential condition (J & C Reid v Abau Holdings). Breach only gives rise to a right to sue for damages (payment of the rent due). If we assume that paying rent on time has been made an essential condition of the lease, then the breach of this may give rise to a right for the landlord to rescind the lease contract, or forfeit the lease (Progressive Mailing House v Tabali) and sue for damages.

Forfeiture brings the lease to an end. Before forfeiture can be enacted by an act of re-entry, notice must normally be served under s 129 of the CA. Section 129 notice does not have to be given where the breach is of the covenant to pay rent (s 129(8)). Instead, a formal demand for rent must be made (unless the rent is more than one month in arrears (s 85(1)(d), which it is not in this case). The landlord must allow a reasonable time for David to respond. Assuming David fails to pay, the landlord may then re-enter the premises and forfeit the lease – either by peaceable re-entry or serving a writ with an unequivocal demand for possession (Moore v Ullcoats Mining). Even after forfeiture, if David ends up paying, relief against forfeiture may be available at the court’s discretion (Hayes v Gunbola). The payments, although consistently late, may just reflect forgetfulness instead of an inability to pay (cf Greenwood Village). As no other breaches have been committed, it is likely a court would grant relief.

In the alternative, the landlord could rescind the contract, which does not require notice and entitles the landlord to loss of bargain damages.

3. Registration gives immediate indefeasibility (RPA s 42; Frazer v Walker), absent of fraud. Even if the third party purchaser in this case had notice of David’s legal lease, this notice doesn’t vitiate the registration as it is not fraud (RPA s 43). David’s lease does not seem to come under any other exception to the rule of immediate indefeasibility (s 42(1)(d) does not apply as the current lease is not one of that nature) and thus the new registered proprietor takes free of that interest and David can be evicted. This would be true even if David had lodged a caveat.