When a landlord can resist the exercise of an option by a retail tenant

November 9, 2012

Property / leasing

The recent decision of Senior Member Steele at VCAT in Computer & Parts Land Pty Ltd v Property Sunrise Pty Ltd (Retail Tenancies) [2012] VCAT 1522 gives some guidance on when a landlord can resist exercise of an option by the tenant of a retail premises lease.

Section 27(2) of the Retail Leases Act 2003 (Vic) states that (emphasis added):

 (2) If a retail premises lease contains an option exercisable by the tenant to renew the lease for a further term, the only circumstances in which the option is not exercisable is if—

(a) the tenant has not remedied any default under the lease about which the landlord has given the tenant written notice; or

(b) the tenant has persistently defaulted under the lease throughout its term and the landlord has given the tenant written notice of the defaults.

Whenever a landlord wants to resist the exercise of an option by a tenant for breaches throughout the term, there is an issue over whether the tenant has ‘persistently’ defaulted.

Senior Member Steele held that:

14. For the Landlord, Mr Sam Wallace gave evidence (in his statement dated 20 July 2012) alleging that the tenant defaulted on nine occasions, in that in nine different months the rent was paid late, in varying degrees up to 5 weeks. The Tenant’s evidence amounted to admission that the rent was indeed late on eight of those occasions, but the Tenant contended that there were good reasons.

15. The Tenant (in the statement of Mr Jin Wang dated 29 June 2012) said this was on some occasions because the Landlord’s agent had allocated payments wrongly to some item other than rent. Further, Mr Wang said that in early 2011 the rent was late because the Landlord’s agent had sent inaccurate invoices which failed to take into account the 35% rebate ordered by the Tribunal on 11 February 2011. The months in which it appeared rent was late, whatever the reason were: February to May 2010 and February, March and May to July 2011.

16. The Tenant contended that its defaults in rental payment were not persistent and did not occur throughout the term and that the landlord had not properly given written notice of the defaults.

17. For the meaning of “persistent” in this context the Landlord referred to Westgate Battery Company Pty Ltd v G.C.A. Pty Ltd [2005] VCAT 2080. It appeared from the evidence described in that case (at paragraph 50 of the reasons given by Senior Member Lothian) that there had been 22 months in which the rent was paid late and that on average it was 25 days late. In considering whether this was a “persistent” default, the learned senior member said:

“54. Mr Hanak referred me to definitions of “persistent” and “persist” in the Macquarie Dictionary and the New Shorter Oxford English Dictionary. From the Macquarie he directed me to “persisting, esp. in spite of opposition, etc; persevering”. The third definition in the Macquarie is “continued; constantly repeated.” It is a precise description of the tenant’s behaviour. Further, the repeated failure to pay rent on time persisted beyond the date upon which the tenant purported to exercise the option. The breach of the obligation to pay persisted throughout the term of the lease since transfer of the lease to the tenant, up to and beyond the purported exercise of the option.”

18. It follows that the learned senior member considered in that case that the number or frequency of late payments of rent amounted to “persistent” breaches.

19. The parties also referred to the helpful comments of Senior Member Davis in Westside Real Estate Investments Pty Ltd (ACN 073 019 416) v Nguyen and Ors [2011] VCAT 1830. He noted the definitions of “persistent” referred to by Senior Member Lothian in the above case and said (at paragraph 22):

“In this particular instance, there had been many incidents of the tenant failing to pay rent on the time prescribed by the lease. The fact that the tenant believed it was entitled to a tax invoice, in my view is not relevant. The tenant has an obligation to seek out its creditor, in this case the landlord, whether invoices are provided or not. Even if the tenant, who is an estate agent, actually believed that it needed to be supplied with a tax invoice, it does not take the matter any further. The fact is that the tenant should have been aware of its obligations. If it was not aware of its obligations, the landlord cannot be held responsible. Being late with the rent over many months going into years, is something that in my view is caught by the provision of s.27(2)(b) and Clause 12.1.2 of the lease. That is the tenant’s rent payments were persistently late.”

20. At paragraph 26, the learned senior member said “the breach in paying the rent had occurred so often and with such frequency that it must come within the meaning of persistent”. It appeared from the evidence recited earlier in the senior member’s reasons for decision that there had been sixteen occasions when the rent was paid late and that on some of those occasions it was over a year late.

21. In the present case the rent was late on at most nine occasions. On none of those occasions was it more than five weeks late. The term of the lease was 48 months, albeit the respondent had at the time when the Tenant purported to exercise the option been Landlord for only for perhaps 24 of those. The nine occasions on which rent was late occurred over two particular stretches. Otherwise, the rent was apparently paid on time. In those circumstances, I was not persuaded that the late payments could be described as “persistent” (in the sense of “persevering” or “constantly repeated”), nor that they occurred “throughout” the term of the lease.

22. There was a dispute before me as to whether the Landlord had given the notices required by s27 (2)(b) concerning rental payments. Since the breaches in rental payments do not fall within the description in section 27(2)(b), it is unnecessary for me to decide whether the Landlord gave the Tenant written notice as the section requires.

This decision highlights that:

1. it is essential for landlords to give defaulting tenants notice in writing each time they default and ensure that records of delivery are kept;

2. whether a particular tenant’s breaches are enough to satisfy the test of ‘persistently default[ing] under the lease throughout its term …’ will depend on the facts of each case, the most important of which appear at this stage to be:

(a) the number of defaults;

(b) the extent of the default (in the case of late payment of rent, the duration of the default);

(c) whether the breaches occurred ‘throughout’ the term or over a discrete period or periods;  and

(d) the length of the lease term;  and

3. bearing 2 above in mind, some guidance on whether a tenant’s defaults are likely to be considered to be ‘persistent’ can be obtained from the following:

(a) tenants have been held to have persistently defaulted when rent was paid on average 25 days late over 22 months during the term and when rent was paid late on 16 occasions and on some of those occasions it was over a year late;  and

(b) a tenant was held not to be persistently in default when rent was paid late on at most 9 occasions, none of those payments were more than 5 weeks late, in a term of 48 months, each breach occurred over two particular stretches and otherwise the rent was apparently paid on time.

About Sam Hopper

Sam is a property and insolvency barrister.

View all posts by Sam Hopper

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