Setting off costs of capital works

If a lease is silent, the common law does not imply against either a landlord or a tenant an obligation to perform capital works on leased property.

This has been the source of a significant dispute, as the tenant usually carries the immediate commercial risk if the building is run down, yet the landlord gains the long term benefits of the repairs.

The Retail Leases Act 2003 (Vic) addresses this to some extent by imposing on the landlord an obligation to maintain the premises in a condition consistent with the condition of the premises when the lease was entered into (see s 52). However, the exercise of an option starts a new lease, which can cause real problems for a tenant if the building needs repair around the time the tenant needs to exercise its option (see Ross-Hunt Pty Ltd v Cianjan Pty Ltd [2009] VCAT 829 at [30] to [32]).  Also, s 52 of the RLA does not address existing problems with the building.

Section 251 of the Building Act 1993 (Vic) says that:

(1) If the owner of a building or land is required under this Act or the regulations to carry out any work or do any other thing and the owner does not carry out the work or do the thing, the occupier of that building or land or any registered mortgagee of the land or the land on which the building is situated, may carry out the work or do the thing.

(2) An occupier may—

 (a) recover any expenses necessarily incurred under subsection (1) from the owner as a debt due to the occupier; or

(b) deduct those expenses from or set them off against any rent due or to become due to the owner.

…

(6) This section applies despite any covenant or agreement to the contrary.

Practitioners for both landlords and tenants should be aware that this may create a “back door” way of creating a repair covenant with respect to any repairs that have been the subject of a notice or order under the Building Act.