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

October 6, 2015

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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].

About Sam Hopper

Sam is a property and insolvency barrister.

View all posts by Sam Hopper

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