Landlord held to have repudiated a lease by not repairing a defective air conditioning unit

In the significant recent decision of S3 Sth Melb Pty Ltd v Red Pepper Property Group Pty Ltd [2018] VCAT 1684, Deputy President Riegler held that a landlord’s failure to repair an air conditioning unit was a repudiation of the lease by the landlord, allowing the tenant to accept that repudiation and terminate the lease. The tenant used the premises as a pilates and barre studio.

The Deputy President found that (emphasis added):

[70]     In the present case, I accept Mr Norris-Ongso’s evidence that air-conditioning was critical for the financial success of the Tenant’s business. He said that clients were moving to other premises because the Premises could not be properly warmed during the colder months of the year. Although no data was provided evidencing the migration of clients from one fitness centre to another, I accept that it is likely that customers of a fitness centre require and expect a comfortable ambient temperature in which to work out. Consequently, I find that the obligation to provide air-conditioning to service the Premises is a fundamental term of the Lease.

[71]     With that in mind, I further find that the refusal or failure to repair the air-conditioning system, if fallen into disrepair so that it cannot service the Premises, may constitute a repudiation of the Lease.

…

[83]     Although I accept that some time should be afforded to allow the Landlord to engage its technicians to inspect the air-conditioning system and carry out repairs, 10 weeks is an unreasonably excessive period, especially so when compared to other occasions when the Landlord arranged for its technicians to inspect air-conditioning system after complaints were raised by the Tenant.

…  

[86]     In my view, the failure on the part of the Landlord to do anything to make the air-conditioning system function, so that it serviced the Premises, after receiving written notice on 15 May 2017 until the Lease was eventually terminated on 1 August 2017, is a fundamental breach of the Lease. It meant that the Tenant was effectively left without air-conditioning to service the Premises for more than two and a half months, before eventually terminating the Lease. This was an intolerable situation and, according to Mr Norris-Ongso, led to customers migrating to other fitness centres.

[87]     In my view, the Landlord’s procrastination or non-performance would convey to a reasonable person in the shoes of the Tenant that the Landlord had disavowed itself of its obligation to repair the air-conditioning system, notwithstanding repeated requests being made by the Tenant for the Landlord to honour its obligations under the Lease.

[88]     Therefore, I find that the Landlord repudiated its obligations under the Lease and that the Tenant was entitled to accept that repudiation, which it did by correspondence dated 1 August 2017. I find that the Lease came to an end on that day.

This finding is significant because tenant’s faced with a landlord who refuses to repair a property are faced with an un-palatable choice between:

1. effecting the repairs themselves and suing for the repair costs;
2. suing for an order for specific performance of the landlord’s repair obligations; or
3. accepting the landlord’s repudiation, ending lease and suing for damages.

Options 1 and 2 are time consuming and expensive, particularly in a no-cost jurisdiction like VCAT. Option 2 also leaves the tenant in a defective premises until the repairs are completed.

Option 3 is risky and tenants have historically been slow to take that option because:

• there are very few reported cases where a landlord has been found to have repudiated a lease; and
• if the tenant cannot show that the landlord has repudiated the lease, then the tenant’s purported termination could itself be a repudiation of the lease and could expose the tenant to a significant damages claim from the landlord.

As an example of the Tribunal finding that a landlord repudiated a lease by failing to adequately repair and maintain the premises, the Tribunal’s decision in S3 Melb v Red Pepper offers some comfort to tenants who are considering that option.

#Note – the decision discussed in this note was overturned on appeal. A copy of a paper that I presented about the appeal and its impact for practitioners is available here: