Can the costs of repair and maintenance be recovered as an outgoing?

Until the decision of Deputy President Macnamara in Café Dansk Pty Ltd v Shiel & Ors [2009] VCAT 36, it was widely believed that landlords were responsible for conducting repair and maintenance at leased premises but that those costs could be passed on to tenants as outgoings under the terms of the lease. The belief was based on:

1. the definition of “outgoings” in the RLA including costs for “maintenance and repair”;  and
2. the note to s. 52, which refers to those costs being recovered as an outgoing.

This belief was overturned in the Café Dansk case, in which Deputy President Macnamara expressed the view that:

[41] When the section was initially enacted with effect from 1 May 2003, it obliged a landlord to maintain structures, fixtures, plant, equipment, appliances and so forth “in good repair”. Act No 82 of 2005 made a number of retrospective amendments to the 2003 Act including an amendment to s 52 which scaled back the landlord’s liability to maintaining the relevant items “in a condition consistent with the condition of the premises when the retail premises lease was entered into”. The note at the end of the section was also added by the 2005 amendment and the addition of the note was also made retrospectively.

[42] Mr Langevad drew my attention to provisions on the website of the Victorian Small Business Commissioner. The effect of the addition of the note according to the website was that it would –

clarify that while the landlord is responsible to arrange and carry out the repairs under s 52(2), the cost of those repairs, other than capital cost and the cost of urgent repairs may be passed on to the tenant if they had been specified in the lease as recoverable outgoings under the lease.

[43] Mr Shiel in his evidence said that he attended a seminar conducted by the Real Estate Institute of Victoria which advocated this same view. It was apparently in reliance upon this view that Mr Shiel in the early version of the disclosure statement included an estimated outgoing of $2000 per annum for repairs and maintenance to the property. In his work Retail Leases Victoria, Dr Croft does not appear to refer to the note added to s 52 in 2005. On the suggestion that the landlord’s cost of complying with s 52 may be recovered by the landlord as an outgoing, Dr Croft said:

Prior to the amendments effected by the 2005 amending Act, it had been suggested that a landlord may be able to recover the costs for his repair obligations under subs 52(2) from the tenant, but this suggestion would appear to face at least two reasonably substantial difficulties. The first is that under para 51(1)(c) a landlord is not able to claim from any person (including the tenant) the landlord’s legal or other expenses relating to the landlord’s compliance with the 2003 Act. The other difficulty is that even if the landlord’s expenses in complying with subs 52(2) are regarded as falling within the definition of “outgoings” under s 3 of the Act, recovery of outgoings as defined depends upon the operation of ss 29 and 39 which, in turn, depends upon the lease provisions which comply with 39. As the provisions of subs 52(2) are ‘implied terms’, implied by force of statute and also expressly protected by the provisions of s 94 (which, in subs 94(1) expressly prevents contracting out with respect to ‘anything that the lease has taken to include or provide because of the provisions of this Act’ …), the difficulty appears to be substantial.

[44] I find Dr Croft’s sceptical views on this point compelling. It would, in my view, make a mockery of s 52 if Parliament having allocated the responsibility for certain repairs to the landlord, the landlord could then send the bill to the tenant for the cost of carrying out those repairs. To attempt to reach this unlikely result by reliance on the note at the end of the section is, to quote Lord Salmon, “like trying to suspend a 3 tonne truck from a cobweb” (Broome v Cassell & Co [1971] 2 QB 354, 390). Even if I were wrong on this point, the strategy for a landlord to recover the cost of compliance with his s 52 obligations from the tenant would depend upon there being a covenant in the lease making these amounts recoverable as outgoings. There is no such clause in this lease. The covenants requiring the tenant to carry out the repairs itself do not deal with any outgoings issue.

The above statement is probably obiter given that the lease did not permit the landlord to recover repair costs as outgoings (see paragraph [44] above).  However, the view expressed by Deputy President Macnamara should not be lightly dismissed given that:

1. it is a reasoned opinion expressed by a very highly regarded member of the Tribunal with extensive retail leasing experience;  and
2. it refers to and relies upon extra-judicial comment by a Supreme Court Judge.

That being said, in my view, that decision may be open to challenge.  The Explanatory Memorandum to the 2005 amending act states that:

Clause 25.

Sub-clause (6) inserts a note at the foot of section 52(5) of the Principal Act regarding sections 39 and 41.  The effect of the note is to highlight other provisions in the Act which, together with the application of section 52 of the Act, clarify that while the landlord is responsible to arrange and carry out the repairs under sub-section (2), the cost of those repairs other than capital costs and the cost of urgent repairs, may be passed on to the tenant if they have been specified in the lease as recoverable outgoings under the lease. 

It appears that this Explanatory Memorandum was not provided to the Deputy President.

Solicitors advising landlords or tenants entering new leases should be aware that:

1. as the law presently stands, repair and maintenance costs cannot be recovered by a landlord;  and
2. that may change if the Café Dansk decision is challenged.