May 2, 2016

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Appeal – is an Airbnb guest a sub-tenant?

An appeal has been filed in the Supreme Court from the VCAT decision in Swan v Uecker (Residential Tenancies) [2016] VCAT 483 and should be heard later this year.

In Swan v Uecker a residential tenant put the leased property on Airbnb without the landlord’s consent. The landlord then served a notice to vacate on the basis that the tenant had wrongly sub-let the property. The Tribunal held that the notice was ineffective because the arrangements between the tenant and the Airbnb guests did not amount to a sub-lease.  Reference was made to the Airbnb standard terms and conditions.

There has been some recent press over the decision and I have received inquiries about it, so it appears that the outcome of the appeal will be significant.

That significance is amplified by:

  1. the Victorian Supreme Court decision in Janusauskas v Director of Housing [2014] VSC 650, which upheld a decision from the Tribunal in Director of Housing v Janusaukas (Residential Tenancies) [2014] VCAT 42 to make a possession order when a public housing tenant had used his apartment on a similar website known as ‘Couchsurfing’.  In that case, the Tribunal found that the arrangements between the tenant and the ‘couch surfers’ constituted a sub-lease;  and
  2. the recent VCAT decision of Alex Taxis Pty Ltd v Knight (Residential Tenancies) [2016] VCAT 528 in which VCAT held that guests from Airbnb did not occupy the residence as sub-tenants (see paras [30] to [31]).

Follow my blog for further updates as they emerge.

March 24, 2016

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A hidden trap in s 28 notices

Readers should be aware of a hidden trap in the operation of s 28(2)(a) of the RLA 2003.

The idea behind s 28 of the RLA 2003 is that:

  1. a retail tenant should have at least six months notice in writing of the last date to exercise its option; and
  2. if the notice is given late, both the lease and the last date for exercising option are extended by six months.

An issues arises when you need to draft a notice that is given late.

Section 28 of the RLA 2003 states that (emphasis added):

(1)       If a retail premises lease contains an option exercisable by the tenant to renew the lease for a further term, the landlord must notify the tenant in writing of the date after which the option is no longer exercisable—

(a)      at least 6 months; and

(b)       no more than 12 months—

before that date but is not required to do so if the tenant exercises, or purports to exercise, the option before being notified of the date.

(2)       If subsection (1) requires the landlord to notify the tenant but the landlord fails to do so within the time specified by that subsection—

(a)       the retail premises lease is taken to provide that the date after which the option is no longer exercisable is instead 6 months after the landlord notifies the tenant as required; and

(b)       if that date is after the term of the lease ends, the lease continues until that date (on the same terms and conditions as applied immediately before the lease term ends); and

There is an unresolved issue over what is required in a s 28(2)(a) notice. In particular, it is unclear which date it needs to state – the date in the lease deed or the last date for the exercise of the option as extended by sub-s (2)(a).

In Beds for Backs v Palace Pty Ltd (Retail Tenancies) [2006] VCAT 2677, Deputy President Macnamara (as he was then) held that:

… The notice which sub-section 2(a) deals with has a number of features necessary, first, it must be a notice that is late and out of time. If it were on time it would be in compliance with sub-section (1). Secondly, however, the notice must be ‘as required’ to adopt the phrase which appears at the end of the paragraph. What does ‘as required’ mean. In my view, it means that it must be in accordance with sub-section (1) in all respects save that it is late. What sub-section (1) requires is a notice which faithfully records the contractual terms of the lease. The letter of 22 September 2005 does that. It is in all respects the notice required by sub-section (1) except, that it is late. Sub-section (2)(a) assumes that the notice will be as required except that it is a notice that is late. The counter argument to this would reside in the phrase which begins paragraph (a) of sub-section (2) ‘the retail premises lease is taken to provide …’. That is there is an effective statutory amendment to the lease. It might be said that that statutory amendment introducing the further six month period is supportive of the view put by Mr Piraino. The matter is I think far from clear. With some hesitation however I conclude that the proper construction of the sub-section is that the words ‘as required’ refer back to sub-section (1) hence the notice or the letter of 22 September 2005 is an effective notice for Section 28(2)(a) and the fact of it being late extends the period during which the option to renew may be exercised to a date being six months thereafter presumably to 22 March 2006. I am not concerned for the moment to distinguish whether one counts the first day, the last day, whether it is the 21st or the 22nd of March because it is clear that on no day in March or thereabouts was any notice of exercise of option given. It would follow from that conclusion as to the correct meaning of Section 28 that the contractual term of the lease is about to expire and there is no entitlement on the part of Mr Piraino to exercise an option to renew. ….

This decision suggests that the s 28(2)(a) notice need not specify the extended last date for exercising an option and need only state the date specified in the lease deed for exercising an option.

However, in Xiao v Perpetual Trustee Company Ltd [2008] VSC 412, Vickery J in the Supreme Court of Victoria held that (emphasis added):

80       Under s.28(2)(a) of the RLA, which operates in this case, the retail premises lease is taken to provide that the date after which the option is no longer exercisable is to be six months after the landlord notifies the tenant “as required”. The requirement is for a notice under s.28(2)(a) to comply with the critical twin requirements of s.28(1) I have identified, that is the notice must be in writing and specify the date after which the option is no longer exercisable. It is only a notice in this form which would trigger the running of the six month period under s.28(2)(a) of the RLA.

81       It would follow that in this case, the date after which the option is no longer exercisable is the date implied in the Lease by operation of s.28(1)(a), that is six months after the landlord notifies the tenant as required. Section 44 of the ILA relevantly provides that:

(a) In an Act, unless the contrary intention expressly appears:

(b) a reference to a month shall be construed as a reference to a calendar month.

82       Accordingly, in this case, if the date of notification of the tenant Mr Xiao was either 6 or 7 December 2007, six calendar months from those dates would be either 6 or 7 June 2008, in which case the notice should have specified either of those dates as being the dates after which the option was no longer exercisable. However, the notice did no such thing. It incorrectly specified that the option was “not capable of being exercised after 3 June 2008. After that the option lapses.” [Underlining added]

83       In the circumstances, only one conclusion is open – the 4 December 2007 letter was fundamentally defective as a notice under s.28 and did not constitute notification “as required” for the purposes of subs.(2)(a) of that section.

This decision suggests that a sub-s 28(2)(a) notice will only be valid if it states the last date for exercising an option as extended by operation of that sub-section.

The decision in Beds for Backs was recently followed by Senior Member Lothian in LEGFIN Pty Ltd v Anthony (Building and Property) [2015] VCAT 986 at [60] to [63].

Unfortunately, Vickery J does not appear to have been made aware of the decision in Beds for Backs, nor does Senior Member Lothian appear to have been made aware of Xiao.

Consequently, it remains unclear which date a sub-s 28(2)(a) notice needs to state and it is prudent to include both dates when drafting a notice.

However, sub-s 28(2)(a) extends the last date for exercising an option by six months, so if you need to specify the extended day, you should ensure that the tenant is notified on a day that is precisely six months before the expiry date.

One solution may be to serve a notice that says that the extended last date for exercising an option is 6 months after the tenant is given the notice (rather than specifying the actual date). It is unclear at this stage whether such a notice would satisfy the test in Xiao, so practitioners should be cautious in serving such a notice.

The implications of a defective s 28(2)(a) notice can be significant, particularly if the landlord has plans to redevelop or re-let the premises – if the notice is found to be invalid, then the tenant’s option can still be exercised and the tenant can remain in possession.

 

 

October 6, 2015

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Standard of repair under s 52 of the RLA 2003 and repudiation by a landlord

Justice Croft’s recent decision in Versus (Aus) Pty Ltd v ANH Nominees Pty Ltd [2015] VSC 515 contains two interesting findings for the leasing community:

  1. a landlord of a retail premises lease cannot avoid liability to repair and maintain the retail premises under sub-s 52(2) of the RLA 2003 because the tenant has exercised an option to renew. This finding is significant, as it addresses a perceived loop-hole in the RLA 2003; and
  2. the landlord repudiated the lease by failing to repair and maintain the premises, leading to the tenant being dispossessed for a period of time. This is the only decision of a superior court that I am aware of in which the landlord (and not the tenant) repudiated a lease.

The operation of s 52(2) of the RLA 2003

Understanding the significance of the decision requires a bit of background. Section 52(2) of the RLA 2003 states that:

(1) A retail premises lease is taken to provide as set out in this section.

(2) The landlord is responsible for maintaining in a condition consistent with the condition of the premises when the retail premises lease was entered into:

(a) the structure of, and fixtures in, the retail premises; and

(b) plant and equipment at the retail premises; and

(c) the appliances, fittings and fixtures provided under the lease by the landlord relating to the gas, electricity, water, drainage or other services.

This is referred to as a ‘keep in repair covenant’. Before a keep in repair covenant can be enforced, there must be a date to which the condition of the property can be compared, known as the ‘comparator date’. Section 52(2) of the RLA 2003 makes the comparator date the date on which the retail premises lease was ‘entered into’.  The date on which a retail premises lease is entered into is regulated by s 7 of the RLA 2003.

The exercise of an option creates a new lease. Consequently, the exercise of an option creates a new comparator date for the purposes of s 52(2) of the RLA 2003 and the new term.  His Honour held that this occurs either when the new lease is signed or when the new lease term starts (see paras [51] to [54]).

A similar issue was considered by Deputy President Macnamara (as he was then) in Ross-Hunt Pty Ltd v Cianjan Pty Ltd [2009] VCAT 829, when the Tribunal held that (emphasis added):

[30] For the purposes of Section 52, he submitted the relevant retail lease was to be taken to have been entered into when the initial term was created in 1996 not when it was renewed from effect from 1 August 2007.

[32] Since until 1 August 2007 Ross-Hunt was in possession and was paying rent ‘under’ the previous lease term and not the now current lease term neither paragraphs (b) and (c) of Section 7 can have the effect of bringing the date upon which the relevant lease was entered into forward until before 1 August. Had the parties executed a new lease for the new term it may be that paragraph (c) would have had some operation and would have brought forward the date upon which the current lease could be regarded as having been entered into. Since no such new lease deed was executed paragraph (c) has no operation. The result then is that for the purposes of applying Section 52 the relevant lease is the current lease and it was entered into on 1 August 2007.

[33] Mr Strang sought to avoid this conclusion by arguing that the Retail Leases Act in general and Section 52 in particular should be regarded as ‘beneficial’ legislation and therefore given the benevolent construction in favour of the tenant. He referred to the well known authorities on ‘beneficial’ legislation. In my view this is not the appropriate approach to construing a provision such as Section 52. The Retail Leases Act and cognate legislation regulates the rights and liabilities between one another of landlords and tenants; it is a zero sum game. A right given to a tenant is an obligation imposed on the landlord. An immunity given to a landlord is a right removed from the tenant. The policy of a statute such as the Retail Leases Act is to draw what Parliament regards as a proper balance between the rights and liabilities of landlords and tenants in the particular area regulated by the Retail Leases Act. There is no broad outer area from which ‘beneficial’ principles can be drawn. The only way in which it can be determined exactly how the balance between the rights and liabilities of landlords and tenants has been struck by Parliament is to analyse in accordance with normal statutory maxims the words which Parliament has used. Carrying out that process leads me to the view that Mr Williams’ construction of Section 52 should be adopted. Hence it is only if it can be demonstrated on the balance of probabilities that there has been a deterioration of the state of these air-conditioning appliance since 1 August that the applicant Ross-Hunt will be entitled to any relief under Section 52.

Many people thought that this decision creates problems for tenants when a landlord has failed to repair and maintain the property in accordance with s 52 of the RLA 2003 and the tenant subsequently exercises its option for a new term.

This is a common situation that arises in practice:

  1. the landlord and the tenant enter an agreement that the tenant has a lease for 5 years with three further terms of 5 years each (being a total of 20 years);
  2. at the start of the first 5 year term, the leased building is old but watertight. However, during the first term, the roof develops a leak. The leak gets worse during the lease, the tenant complains and the landlord fails to fix the problem;
  3. after 5 years, the tenant remains unhappy, but has invested substantially in the fitout and goodwill at the location (and cannot afford to re-locate in any event), so exercises its option for a further 5 year term, despite the leaks; and
  4. when the tenant again complains about the leaking roof, the landlord points to s 52(2) of the RLA 2003 and the Ross-Hunt decision and says that it is only obliged to maintain the premises in a condition consistent with its condition when the lease was renewed. As the roof leaked when the lease was renewed, the landlord says that it is not obliged to repair the roof.

In the decision of Versus (Aus) Pty Ltd v A.N.H. Nominees Pty Ltd (No2) (REVISED) (Retail Tenancies) [2014] VCAT 454, Senior Member Riegler considered a claim by a tenant in similar (but more complicated) circumstances.

The landlord relied on the Ross-Hunt case and sought to avoid liability for damages caused by dilapidations to the property for the period after the tenant exercised its option for a further term. Senior Member Riegler held that:

[38] It would appear that s 52 of the Act was the basis, in part, upon which the Tribunal found the Landlord liable in the Earlier Proceeding. In particular, s 52 of the Act imported a contractual obligation into the Lease, which required the Landlord to maintain the Premises in a condition consistent with the condition of the Premises when the Lease was first entered into. As indicated above, in 2010 the Premises suffered from significant flooding, which ultimately resulted in considerable remedial work being undertaken by the Landlord. However, the circumstances are somewhat different in the present proceeding. In particular, it is common ground that the current Lease was renewed on 18 May 2011. This is confirmed in a declaration made by the Tribunal in the Earlier Proceeding.

[39] In Ross-Hunt Pty Ltd v Cianjan Pty Ltd, Deputy President Macnamara (as he then was) confirmed that the comparator for the purposes of s 52, is the most recent renewal of the Lease and not the date of commencement of the first term of the lease. In my view, that approach is correct. It is inconceivable that Parliament would have intended for the Landlord to remain responsible for maintaining retail premises in a condition consistent with the condition at the commencement of the original lease term in circumstances where the lease may provide for multiple terms extending over many years. Therefore, the comparator in relation to the present Lease is the condition that the Premises were in as at 18 May 2011. In that respect, the Tenant’s case concedes that the Premises suffered from moisture problems and were infested with unhealthy levels of mould prior to that date.

Justice Croft overturned the Tribunal’s decision on this issue and held that:

[49] … Section 52 imposes what has been described as a “minimum obligation on a landlord.”[1] It does not prevent the parties from agreeing to a more extensive obligation on a landlord,[2] and such agreements have been enforced.[3] Moreover, s 94 does not cause s 52 to operate as a cap on the extent of a landlord’s responsibility.[4]

[50] Section 52 of the Act now imposes on landlords a “keep in repair” covenant; as distinct from its imposition of a “put in repair” covenant prior to amendments made by the Retail Leases (Amendment) Act 2005.[5] The condition of repair which s 52 obliges the landlord to maintain is, in the terms of the section, “a condition consistent with the condition of the premises when the retail premises lease was entered into”.[6] This, in turn, requires consideration of the meaning of the expression “entered into” in the context of the provisions of the Act.

[55] For the reasons which follow, it is incorrect to state—as some have done—that the condition of the premises by reference to which s 52 operates during a renewed term is necessarily the condition at the commencement of the renewed term. That is to ignore the operation of s 7 and is an interpretation that would defeat the evident purpose of s 52 in the case of damage to the premises that arises between the date of exercise of the option and the commencement of the renewed terms as a result of the failure of the landlord to comply with the provisions of that section during the original term, other than due to the tenant’s misuse.

[56] Where damage to the premises for which a landlord is responsible under s 52, or other obligations under the provisions of that section, arises during the original term of the lease, this may lead to liability for loss suffered during the renewed term in the following ways.

[57] First, for the preceding reasons, the condition of the premises by reference to which s 52 operates during a renewed term is the condition at the time the renewed term is “entered into”. A landlord’s failure during the renewed term to maintain the premises in a condition consistent with their condition at that time and perhaps at the time of exercise of the tenant’s option, depending on the interpretation of s 7 with respect to paragraph (c), leads directly to liability under s 52, despite the existence of the damage at the commencement of the renewed term.

[58] Second, liability may arise for loss suffered by a tenant after the premises have been restored to the condition required by s 52.[7] If such a loss is caused by the landlord’s breach of the covenant imported by s 52 into the original lease, and if the test in Hadley v Baxendale is satisfied,[8] the tenant will be entitled to compensation, even if the loss is not suffered until after the end of the term of the original lease.

[59] Third, liability may arise directly by the operation of s 52 on the renewed lease. This follows because:

(1) The landlord will not be heard to contend that the condition of the premises is the condition when the renewed lease was entered into, if that condition is due to the landlord’s failure to fulfil the covenant imported by s 52 into the original lease. Putting it another way, when s 52 refers to the condition of the premises when the lease was entered into it is to be taken, in the case of a renewed lease, to be referring to the condition in which the landlord has been responsible for maintaining them. To interpret these provisions otherwise would be to permit the landlord to take advantage of its own wrongdoing. As submitted by the Plaintiff, this is a principle of general application that a person will not be permitted to take advantage of his or her own wrongdoing.[9] The principle has been applied in the context of leases,[10] including under the Act.[11] It applies to the construction of contracts[12] and of statutes.[13] Moreover, this interpretation of these provisions and the application of this principle is consistent with the approach of the Court to the Act as being ameliorating or remedial legislation.[14]

(2) By application of the principle recognised in Di & Li Australia Pty Ltd v Jin Dun Pty Ltd,[15] Jin Dun Pty Ltd v Di & Li Australia Pty Ltd,[16] and Computers & Parts Land Pty Ltd v Aust-China Yan Tai Pty Ltd,[17] the original lease—which by s 52 obliged the landlord to maintain the premises in a condition consistent with their condition when the original lease was entered into—constituted a prior agreement as to the condition in which the landlord was to keep the premises. That agreement sets the condition, consistent with which s 52 then obliges the landlord to maintain the premises during the renewed term.

[60] For the preceding reasons and for some further, more particular, reasons, Senior Member Riegler’s statement that “[i]t is inconceivable that Parliament would have intended for the Landlord to remain responsible for maintaining retail premises in a condition consistent with the condition at the commencement of the original lease term in circumstances where the lease may provide for multiple terms extending over many years” is not sustainable.[18] The further, particular, reasons are that—

(1) there is no limit on the length of the original term of a lease. The parties are free to choose between, say, a 5 x 5 year lease and a 10 year lease with no option. It seems unlikely that Parliament would have intended the operation of s 52 to differ between these two situations; and

(2) if the obligation imposed by s 52 on the landlord during the original term is fulfilled, then the condition at the end of the original term—which is likely to be the same as the condition when the renewed lease is entered into—will be consistent with the condition when the original lease was entered into, save for fair wear and tear, which would generally not sound in liability for any party. Consequently, there is no inconceivability or absurdity about this outcome at all.

[61] Applying these principles to the facts of this case, the Plaintiff submits that the Defendant’s failure to remediate the mould infestation in the premises was not only a breach of the covenant of the original lease imposed by s 52, but that the Defendant’s continuing failure to remediate the premises during the term of the renewed lease was a breach of the covenant imported by s 52 into the renewed lease. Thus, it is said that breach was a repudiation of the lease by the landlord which entitled the tenant to terminate the lease by accepting the repudiation, which it did by its letter dated 27 March 2013.

The upshot is that the landlord of a retail premises lease will usually be required to maintain the premises under s 52(2) of the RLA 2003 in a condition consistent with the condition when the first lease term commenced (although there may be some variations if the first term pre-dated the operation of s 52(2) of the RLA 2003).

Repudiation by the landlord

It has been relatively common-place in recent years for a Court or Tribunal to find that a tenant has repudiated a lease. However, until now I am only aware of one VCAT decision holding that the landlord (not the tenant) repudiated a lease.

This appears to be because:

  1. courts are generally reluctant to infer repudiation of a contract (including a lease);
  2. in most cases in which a tenant was found to have repudiated a lease, the tenant has breached an agreed fundamental or essential covenant. However, while most leases define certain obligations on the tenant to be essential, I have never seen a lease that defines a landlord’s obligation as being essential; and
  3. historically, the fundamentals of the landlord’s bargain is to provide exclusive possession, which will not be breached by a failure to repair or maintain.

In the Versus case, Croft J held that the landlord had breached its obligation to repair and maintain the premises, causing the tenant to be dispossessed for a period of time. Justice Croft held that:

135      In my opinion, the Tribunal made errors of law with respect to the first, second and fourth propositions advanced by the Plaintiff in this context and thereby failed to find that the Defendant had repudiated the lease. …

The only other case of which I am aware in which a landlord was held to have repudiated a lease was Hann-Woodlock v ADMR Pty Ltd [2011] VCAT 1776, in which Senior Member Walker held that a landlord had repudiated a lease by failing to undertake work that it had agreed to do before the tenant took possession (see paras [41] to [44]).

Commentators have long been alive to the possibility of a landlord repudiating a lease for failing to adequately repair and maintain (see, for example, Bradbrook, Croft and Hay, Commercial Tenancy Law, 3rd ed, 2009 at p 259), so the finding is not out of the blue. However, the risk of a finding that a landlord has repudiated by failing to repair and maintain has been viewed in some quarters as more theoretical than real.

A finding in a superior court of repudiation by a landlord in these circumstances could be a significant bargaining tool for tenants who have vacated dilapidated premises. In particular:

  1. it could be used by an aggrieved tenant who wishes to sue their landlord for relocation costs after it vacates; and
  2. perhaps more significantly, a tenant who abandons a dilapidated premises is often willing to walk away, but finds itself subsequently sued by the landlord for rent arrears and damages until the property can be re-let. His Honour’s decision adds significant weight to a counterclaim by a tenant that can be used defensively against the landlord’s rent and damages claim. It is in this context that, in my view, this aspect of the decision is likely to have significant commercial consequences.

[1] Di & Li Australia Pty Ltd v Jin Dun Pty Ltd [2014] VCAT 349, [20]. See also Savers Inc v Herosy Nominees Pty Ltd [2011] VCAT 1160, [120]–[123]; Jin Dun Pty Ltd v Di & Li Australia Pty Ltd [2014] VSC 562, [24], [32]–[35].

[2] Di & Li Australia Pty Ltd v Jin Dun Pty Ltd [2014] VCAT 349, [21]; Jin Dun Pty Ltd v Di & Li Australia Pty Ltd [2014] VSC 562, [31]–[35].

[3] Computers & Parts Land Pty Ltd v Aust-China Yan Tai Pty Ltd [2010] VCAT 2054; Di & Li Australia Pty Ltd v Jin Dun Pty Ltd [2014] VCAT 349; Jin Dun Pty Ltd v Di & Li Australia Pty Ltd [2014] VSC 562.

[4] Jin Dun Pty Ltd v Di & Li Australia Pty Ltd [2014] VSC 562, [30]–[35].

[5] Computers & Parts Land Pty Ltd v Aust-China Yan Tai Pty Ltd [2010] VCAT 2054, [84].

[6] Retail Leases Act 2003, s 52(2).

[7] See, eg, Di & Li Australia Pty Ltd v Jin Dun Pty Ltd [2014] VCAT 349.

[8] (1854) 156 ER 145.

[9] See, eg, Morgan v Lake Macquarie City Council [1993] NSWCA 184.

[10] See, eg, Alghussein Establishment v Eton College [1988] 1 WLR 587 at 591, 594; Newmarket Corp Pty Ltd v Kee-Vee Properties Pty Ltd [2003] WASC 157, [326]; World Best Holdings Ltd v Sarker (2010) 14 BPR 27,549; Gnych v Polish Club Ltd (2015) 89 ALJR 658.

[11] Computers & Parts Land Pty Ltd v Aust-China Yan Tai Pty Ltd [2010] VCAT 2054, [108]. See also Savers Inc v Herosy Nominees Pty Ltd [2011] VCAT 1160, [141]–[142].

[12] Suttor v Gundowda Pty Ltd (1950) 81 CLR 418 at 440–1; Newmarket Corp Pty Ltd v Kee-Vee Properties Pty Ltd [2003] WASC 157; Hope Island Resort Holdings Pty Ltd v Jefferson Properties (Qld) Pty Ltd [2005] QCA 315, [49].

[13] Grozier v Tate (1946) 64 WN (NSW) 1 at 3; Nash v Stielow [1950] VLR 39 at 42; Steedman v Baulkham Hills Shire Council (No 2) (1993) 31 NSWLR 562 at 570, 580; Allen v Bega Valley Shire Council (1994) 85 LGERA 364 at 369; Gnych v Polish Club Ltd (2015) 89 ALJR 658 at 664 [33].

[14] See Peppercorn Nominees Pty Ltd v Loizou (1997) V ConvR 54–560; Fitzroy Dental Pty Ltd v Metropole Management Pty Ltd [2013] VSC 344. See also Clyde E Croft, Robert S Hay and Luke A Virgona, Retail Leases Victoria (LexisNexis, Loose-leaf) [10,030].

[15] [2014] VCAT 349.

[16] [2014] VSC 562, [31]–[35].

[17] [2010] VCAT 2054.

[18] Versus (Aus) Pty Ltd v A.N.H. Nominees Pty Ltd (No 2) [2014] VCAT 454, [39].

August 27, 2015

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Serene Hotels Pty Ltd v Epping Hotels Pty Ltd appeal dismissed

The Court of Appeal today dismissed an appeal from Croft J’s decision in Epping Hotels Pty Ltd v Serene Hotels Pty Ltd [2015] VSC 104.

The decision at first instance and the appeal before Croft J are discussed here and here.

The first decision from VCAT held that the use of the profits method to determine rent during a rent review was prohibited by s 37(2) of the RLA 2003.

During the appeal before Croft J and in the Court of Appeal, the tenant argued that the profits method was not prohibited by the RLA 2003, but that s 37(2) of that Act required the specialist retail valuer to adjust the figures that he considered to account for the costs of acquiring gaming machines and gaming entitlements.

Both Croft J and the Court of Appeal rejected those arguments, finding that the way in which the specialist retail valuer used the profits method was not prohibited by s 37(2) of the RLA 2003.

This decision is significant because:

  1. the methodology used by the specialist retail valuer in this case is used widely by valuers who specialise in the hotel and gaming industries;
  2. the text of s 37(2) of the RLA 2003 is substantially replicated in interstate retail leasing legislation and in a large number of Victorian leases that are not governed by the RLA 2003;  and
  3. consequently, a significant number of rental determinations could have been challenged if the appeal was successful.

A copy of the Court of Appeal’s reasons is available here.

August 25, 2015

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Hopeless proceeding can result in a cost order under Retail Leases Act 2003 (Vic)

My friend Robert Hay has recently published here a useful summary of the recent Court of Appeal in 24 Hour Fitness Pty Ltd v W & B Investment Group Pty Ltd [2015] VSCA 216.

The Court of Appeal upheld a decision by Judge Jenkins, sitting as a Vice President of VCAT, to order costs against an applicant who brought a case that the Tribunal found was hopeless.  See here or a discussion about the decision at first instance.

Section 92 of the RLA 2003 means costs orders in retail tenancies disputes are very difficult to obtain.  Many retail tenancies disputes settle because the cost of obtaining judgment exceed the potential benefits to litigants.

This, in turn, increases the leverage that can be exerted in negotiations by a claimant with a weak case.  The conversation in a mediation often unfolds something like this:

Your claim is for $50,000.  I have a weak counterclaim for $100,000.  It will cost you more than $50,000 to run your case and defend my counterclaim, so you will not see a net return from the litigation, even if you win.

Unsurprisingly, this often prompts a settlement that is favourable to the person with the weak counterclaim.

It often arises where a landlord has a simple claim for rent arrears against a tenant who brings a complex and expensive counterclaim for damages.

One way to mitigate the impact of the ‘no cost‘ rule is to serve a well-crafted Calderbank-style letter (see here).

For the Calderbank-style letter to work, there needs to be substance to the threat than the Tribunal will award costs in a hopeless case.

The Court of Appeal’s decision adds weight to that threat, as it provides a real example, sanctioned by a superior court, of a costs award being made against a litigant pressing a hopeless case.

Consequently, the decision could potentially impact settlement negotiations when one litigant is pressing a very weak case.

July 3, 2015

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Epping Hotel v Serene Hotels appeal

For those following the Epping Hotel v Serene Hotels rent determination case (see here), an application for leave to appeal the decision the decision of Croft J has been filed in the Court of Appeal.

The application for leave to appeal and the hearing of any appeal (if leave is granted) will be heard on 31 July 2015.

May 15, 2015

1 Comment

Retail tenant wins VCAT fight but gets nil damages and an adverse costs order

Here is an interesting post about a retail leasing case by my friend Paul Duggan.

The case illustrates problems that can be caused by a tenant’s unconventional corporate structure.

The case also has a useful list of considerations for the Tribunal in determining whether a party’s conduct was vexatious for the purposes of costs under s 92 of the RLA 2003.

Paul Duggan

VCAT’s no costs presumption is more elastic in some parts of the tribunal than in others.

In building cases, the losers commonly pay the winners’ costs. In retail tenancies disputes the losers very rarely do. But the winner paying the loser’s costs? Calderbanks and their equivalents aside, it is almost unheard of  anywhere at VCAT or beyond it.

So imagine the winner’s chagrin in the retail tenancies case of 24 Hour Fitness Pty Ltd v W & B Investment Group Pty Ltd [2015] VCAT 596 when it won the liability stoush, produced an expert report seeking just over $3m in damages and then received nothing but an order to pay the ostensible loser’s costs.

The case is an illustration of one of the hazards of compartmentalising a single business within separate corporate vehicles.

24 Hour Fitness Pty Ltd was the tenant. A gym operated on the premises. Unremarkably, the landlord understood that…

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May 8, 2015

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More on outgoings …

There has been a lot of debate in the leasing community over the effect of the President’s opinion discussed in my earlier post here.

A copy of the President’s opinion is now available on AustLii here.

Here are my thoughts on a few things that have emerged from the last fortnight’s discussions.

Summary of the opinion

In summary, the main points in the President’s opinion are:

  1. if a land owner is required to undertake work or do a thing under the Building Act or associated regulations (including essential safety measures), the cost of undertaking that work or doing that thing must be born by the landlord;
  2. whether the act of compliance with the Building Act or associated regulations can be delegated to a tenant (although still at the landlord’s cost) is a matter of statutory interpretation;  and
  3. the landlord is responsible for the cost of complying with s 52 of the RLA 2003.

Allens Linkaters have posted a useful summary of the decision here.

Another excellent summary has been prepared by Madgwicks here.

Both summaries are excellent and I recommend them to readers.

Gross leases?

There has been a lot of talk about landlords switching to ‘gross leases’.  Allens Linklaters end their summary by suggesting that landlord should consider moving to gross leases in Victoria.

The President’s opinion does not substantially affect a landlord’s ability to recover outgoings for consumables (water, electricity, gas, etc), council rates and other items, so a gross lease may be going too far.

However, I agree that landlords should consider bargaining on leases for which the landlord pays repair and maintenance cost.

How to determine whether outgoings are recoverable?

The President found that all compliance costs under the Building Act and the associated regulations must be born by the landlord (whether or not the act of compliance can be delegated).

The President also suggested a formula for determining whether outgoings are recoverable under a retail premises lease (see paragraphs [60] to [64] of the opinion).

Here is a checklist of questions and answers that practitioners might want to use to determine whether a particular expense is a recoverable outgoing based on the President’s opinion (with a few extra considerations added by me):

  1. Does the text of the lease deed allow recovery?  Yes.
  2. Is the outgoing an ESM or other requirement placed on the landlord under the Building Act or Regs?  No.
  3. Is it a retail lease?  No, then stop here and recover the expense.  Yes, then continue.
  4. Has s 39 of the RLA 2003 been complied with? Yes.
  5. Have the requirements of the Retail Leases Regulations 2013 (Vic) been complied with (as required under s 39(1)(b) of the RLA 2003 )? Yes.
  6. Is it a capital cost under s 41 of the RLA 2003?  No.
  7. It is an amount in respect of depreciation under s 42 of the RLA 2003? No.
  8. Is it a contribution to a sinking fund under s 43 of the RLA 2003? No.
  9. Is it interest on the landlord’s borrowings under s 44 of the RLA 2003? No.
  10. Is it rent under the head lease or rent or other costs associated with other land under s 45 of the RLA 2003? No.
  11. Has an estimate been provided under s 46 of the RLA 2003?  Yes.
  12. Is it a legal or other expense under s 51(1) of the RLA 2003?  No.
  13. Is it a cost of repair and maintenance under s 52(2) of the RLA 2003?  No.
  14. If yes to 13, is the cost excluded by s 52(3) of the RLA 2003?  Yes.

Other considerations may affect the landlord’s ability to recover outgoings, which will need to be considered on a case-by-case basis.

Can the act of compliance be delegated?

Whether the act of compliance can be delegated is a matter of statutory construction.

I expect that it will be too costly and too uncertain to undertake a legal analysis of each liability and it may be more practical to assume that the task is non-delegable unless a significant issue arises over a particular act.

Recovery of outgoings by tenants

Tenants may have substantial claims for outgoings that have been wrongly paid.

Tenants should be looking at their outgoings history to determine whether they have paid significant:

  1. ESM or other Building Act compliance costs; and
  2. s 52(2) repair and maintenance costs.

At the same times, retail tenants should consider whether they have paid:

  1. capital costs;
  2. legal or other costs;  and
  3. land tax.

Tenants should also consider whether the landlord has complied with the requirements of s 39 of the RLA and the Retail Leases Regulations 2013 (Vic).

However, landlords should not be hasty to repay any amounts claimed. There are a number of issues to be considered in any recovery action, including:

  1. whether it is commercially viable to make a claim (depending on the sums involved);
  2. whether the tenant can set-off the claim against their rent (the presence of a clause in the lease prohibiting set-off will be significant);
  3. the effect of the statute of limitations;
  4. the effect of delay in making the claim and whether the landlord has materially changed its circumstances in reliance on the payment;
  5. the extent of any benefit received by the tenant for the payments made (see Ovidio Carrideo Nominees Pty Ltd v The Dog Depot Pty Ltd [2006] VSCA 6 and Richmond Football Club Limited v Verraty Pty Ltd (ACN 076 360 079) (Retail Tenancies) [2011] VCAT 2104).  An interesting question arises if the rent was expressly bargained for and set on the assumption that the tenant would undertake work that affected by the opinion;
  6. whether the lease or agreement to lease was agreed to on a mistaken understanding of the law;
  7. the possibility of amendments to either or both statutes; and
  8. the possibility that the President’s opinion will not be adopted by a subsequent court or Tribunal (especially on appeal).

The validity and weight of these considerations, and whether they provide a defence or defences to landlords, will be tested in the fullness of time.

The resolution of some issues will also depend on the particular circumstances of the landlord and the tenant.

Tenants and their lawyers considering making a claim for the recovery of outgoings paid, and landlords and their lawyers facing those claims, should consider obtaining specialist advice.

Status of the opinion

There has also been recent discussion of the extent to which the President’s opinion creates a binding precedent.

While it does not create a binding precedent in the strict sense, it effectively has the status of a Supreme Court decision for most purposes because:

  1. it is the decision of a Justice of the Supreme Court and President of VCAT exercising statutory power in a case argued by counsel, including two contradictors;
  2. the opinion vindicates the decisions of Deputy President Macnamara in Chen v Panmure and Café Dansk and Senior Member Riegler in McIntyre v Kucminska;
  3. the President refers to providing an ‘answer to the questions definitively’ (at [16]), so did not view the opinion as a mere guideline;
  4. the decision in relation to the recovery of s 52(2) costs is broadly similar to the published views of Croft J that were followed in Chen v Panmure; and
  5. consequently, it is likely to be followed by VCAT members at first instance and a Judge hearing an appeal is likely to view the opinion as persuasive. A Judge on appeal is not strictly bound by the decision of another single Judge in any event, so the opinion should be treated as having the same standing as a decision from a single Judge in the Supreme Court.

Implications for renegotiating leases and for valuers determining rent

The parties should approach their negotiations on the footing that s 52 RLA 2003 costs and the costs of ESMs and other requirements of the Building Act and regulations are not recoverable and set the rent accordingly.

If they cannot agree, the valuer reviewing the rent should consider whether the rent should be ‘grossed up‘ on the assumption that compliance costs cannot be recovered.

Other obligations under the Building Act and Regulations

It is also important to remember that s 251 of the Building Act applies to all obligations placed on the owner under the Building Act or the Regulations.

Although the President’s opinion does not address this directly, the prohibition on recovery may extend to the cost of compliance with a Building Order or Building Notice.

May 1, 2015

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Landlords’ ability to recover outgoings curtailed

Justice Garde, the President of VCAT, today handed down his advice to the Small Business Commissioner about the operation of s 251 of the Building Act 1993 (Vic) and s 52 of the Retail Leases Act 2003 (Vic).

A copy of his Honour’s opinions and reasons are available here: Small Business Commissioner reference for advisory opinion (Building and Property) – [2015] VCAT 478.

The orders, which operate as a summary of the findings, are contained in the first four pages of the decision.

In short, in the President’s opinion:

  1. both s 52 of the RLA 2003 and s 251of the Building Act prevent a landlord from passing on compliance costs;  and
  2. whether the landlord can require the tenant to undertake Building Act compliance work will depend on the wording of the provision creating the obligation.

The orders themselves take over three pages and the President’s reasons take almost 40.  Much will be written about the details of the decision in the coming weeks.

The debate leading up to this opinion has a long history. For background, refer to earlier posts here, here, here, here and here.

The resolution of the issues has been described to me as one of the most important current issue in the law of landlord and tenant.  The main issue is that rent is generally set on the basis that landlords can recover certain outgoings from their tenants.  This decision suggests that an amount of outgoings in fact cannot be recovered.  However, the decision only applies to costs of compliance with the Building Act and s 52 of the RLA 2003.  How large those sums are and, as a result, the true significance of the opinion remains to be seen.

Also, the legal effect of the opinion is not clear.  The opinion does not arise from a contested case in the usual sense, so would not normally be considered to create a precedent.  However, the opinion followed vigorous submissions from two contradictors, so it is likely to be considered highly persuasive by a court or Tribunal considering the same issues (probably more persuasive than an extra-judicial article).  The opinion is, however, expected to carry significant weight in commercial negotiations.

Lawyers acting for tenants should ask whether they have paid significant outgoings to their landlords for the costs of the landlord’s compliance with s 52 of the RLA and/or the Building Act and consider whether recovery action is feasible.

The ability to recover compliance costs may also be relevant to tenants who are facing re-entry for rent arrears.  A tenant in rent arrears may be able to use claim for recovery of compliance costs as part of a counterclaim and set-off against rent arrears, even if the sums claimed are not high enough to otherwise justify the costs of litigation.

Lawyers reviewing leases should also consider the decision when reviewing the repair and maintenance and outgoings provisions.

April 29, 2015

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Epping Hotel Pty Ltd v Serene Hotels Pty Ltd decision – the profits method and consideration of supplementary report approved

Justice Croft in the Supreme Court yesterday overturned the controversial decision in Serene Hotels Pty Ltd v Epping Hotels Pty Ltd (Retail Tenancies) [2014] VCAT 97.

The decision at first instance had two important aspects:

  1. it suggested that the ‘profits method’ of determining the rent was prohibited by s 37(2) of the Retail Leases Act 2003 (Vic), at least in the context of a gaming venue; and
  2. the Tribunal found that it was entitled to disregard a supplementary report by the specialist retail valuer elaborating on his reasons.

The decision at first instance is discussed in more detail in an earlier post here.

In his Honour’s decision handed down yesterday, a copy of which is available at Epping Hotels Pty Ltd v Serene Hotels Pty Ltd [2015] VSC 104, the Court found that:

  1. the ‘profits method’ did not offend s 37(2) of the RLA 2003; and
  2. the Tribunal erred by refusing to consider the supplementary report.

The argument in relation to the profits method was based on whether the methodology offended the requirements to disregard the value of the tenant’s fittings and fixtures and to assume that the retail premises was unoccupied and available for rent. It did not consider other aspects of the profits method that have been controversial in the past, particularly the mechanism for disregarding the value of the tenant’s goodwill. However, his Honour rehearsed a large amount of caselaw supporting the use of the profits method generally and did not criticise the treatment of tenant’s goodwill in the determination.

His Honour also made some other interesting observations.

First, there is an ongoing question over whether s 148 of the VCAT Act allows the Court to hear an appeal from the Tribunal only on a pure question of law or whether it extends to a mixed question of fact and law. The Court of Appeal recently declined to resolve the issue (see See Cosmopolitan Hotel (Vic) Pty Ltd v Crown Melbourne Ltd [2014] VSCA 353 at [52], [171]).

On this issue, Justice Croft made the following remarks (footnotes omitted):

67.    For the sake of completeness, I note a possible argument that Question 2 raises a mixed question of fact and law. This possibility was raised in passing by the parties but taken no further. This leads me to observe, simply, that it is suggested that the question of whether s 148(1) of the VCAT Act allows appeals on mixed questions of fact and law is unsettled. Had it been necessary to decide this point, I would have been disinclined to curtail the operation of s 148(1) of the VCAT Act by finding that mixed questions of fact and law cannot form grounds of appeal. As the authorities indicate, there is no “bright line” between questions of law and questions of fact and in many cases these questions will not be pure in their elements — law or fact. In the context of the provisions of s 148(1) of the VCAT Act, I do not regard such authorities as transcending the clear language and purpose of these provisions, which is to provide an effective appeal mechanism to this Court to correct errors of law — whether or not arising out of a mixed question of fact and law — without crossing the line into something in the nature of a merits appeal which would, as indicated previously, be at odds with Parliament’s intention to establish a specialist tribunal. Moreover, the purpose of s 148(1) of the VCAT Act in providing an effective appeal mechanism with respect to questions of law is likely to be subverted if mixed questions are excluded and wasted time and expense flows from the need to search for a non-existent “bright line” for the purpose of isolating “pure” questions of law.

Secondly, s 37(2) of the RLA 2003 and the text of the lease together set out all assumptions that the valuer must make and the things that the valuer must have regard to or disregard (Croft J refers to this combination as the valuer’s ‘charter’).

I often see rental determinations in which the determining valuer has simply recited the text of the valuer’s charter and confirmed compliance, but has not elaborated on the consideration given to one or more of the items.

It is common for a party trying to impugn a determination to say that the valuer has not given due consideration to elements of the valuer’s charter and has merely ‘paid lip service’ to them, relying on the following passage from Salem Enterprises Pty Ltd v CSJ Food Enterprises Pty Ltd [2008] VCAT 320 (emphasis added):

26.   Relatedly there is the further matter of compliance with s 37(6). The provisions of s 37(2)(b) are also mandatory in my view. Why specify them, unless not? Yet in furtherance of the issue concerning s 37(2)(b) I am unable to detect where [the determining valuer] says he had regard to s 37(2)(b). Merely to recite it is to pay it lip service . His determination in paragraph 8 (his “Basis of Determination”) does not specifically mention this. Why should I regard this as something so unimportant it can be overlooked as a mere error of process? In my view I cannot so overlook it. I do not consider it a mere technicality – to be disregarded as if it counts for nothing.

In the Epping Hotels case, Croft J found that (emphasis added):

78.   At paragraph 2.2 of the Rental Determination, under the heading “Basis of Determination”, the Valuer recites s 37(2) and states that these requirements were complied with in the preparation of the Rental Determination. The matters set out in sub-s (2)(d) are not mentioned elsewhere in the Valuation; however, this is consistent with the Valuer’s statement in the Supplementary Report that the rental evidence considered as part of the Valuation was not affected by concessions or other benefits offered to prospective tenants, rather than an indication that these matters were disregarded.

79.   Nevertheless, having regard to the requirement in s 37(6)(c) of the Act, that the valuation “specify the matters to which the valuer had regard in making the determination”, it may be that a general reference of the kind found in the Rental Determination may in some instances be insufficient. Nevertheless, in the present circumstances a reading of the Rental Determination as a whole would indicate to a reasonable reader that all relevant matters as required by the Act had been addressed. In any event, the fact that Epping requested the Supplementary Report and sought to have it considered by the Tribunal suggests that Epping considered the absence of a specific reference to the matters set out in sub-s (2)(d) might have been, at least, problematic. It is on this basis then that I proceed to determine the question of whether the Tribunal should have had regard to the Supplementary Report.

This suggests that reciting the terms of the valuer’s charter and confirming compliance may, in the right circumstances, be sufficient.

Thirdly, his Honour did not find that a supplementary report must be taken into account in all circumstances, providing the following caution:

100.   This is not to say that a tribunal or a court must have regard to supplementary correspondence, or material provided outside the timeframe set by s 37(7)(a), in every case. Indeed, there may be cases where the supplementary material is provided so late that to consider it would deprive a party of procedural fairness. This is, however, not such a case. …

The second and third points above give rise to the following comments for practitioners:

  1. valuers conducting a rental determination should ensure that their report describes the consideration given to every item in the valuer’s charter and avoid merely reciting its terms and confirming compliance;
  2. practitioners seeking to either impugn or defend a rental determination where the determining valuer has merely recited the terms of the valuer’s charter and confirmed compliance without elaborating on one or more item should consider:
    1. writing to the valuer at the earliest opportunity to request a supplementary report (if they are seeking to defend the report); and
    2. whether a reading of the determination as a whole would indicate to a reasonable reader that all relevant matters as required by the valuer’s charter had been addressed.
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