Another decision from VCAT about the CTRS Regs

VCAT has recently handed down another decision about the CTRS that readers should be aware of.

The first thing to note is that the decision was on an application for an interlocutory injunction.  That means that the applicant (in this case, the tenant) needs to show an arguable case (also known as a serious question to be tried or a triable issue) in order to be entitled to an interlocutory injunction.   Once that is established, the Tribunal makes orders to preserve the status quo and final determination of the triable issue is put off to a later date (usually 6 to 12 months away).  Consequently, as far as arguments under the CTRS are concerned, a decision in an application for an interlocutory injunction will only determine whether a particular case is arguable or unarguable.  At this stage, the Tribunal will usually not determine whether or not an argument is correct.

So, bearing that short lecture in mind, the recent case is Karting Madness Pty Ltd v Daniel Terrence Pty Ltd (Building and Property) [2021] VCAT 159, was heard and determined by Member Kincaid at VCAT, with reasons published on 26 February 2021.  In that case, the landlord served a default notice and attempted to re-enter the premises on the basis of:

1. rent arrears that accrued during the operation of the CTRS;  and
2. alterations to the leased premises that the landlord said breached planning laws.

The tenant argued that:

1. the tenant’s protections from re-entry for non-payment of rent under regs 9(2) and (3) of the Principal Regulations was an accrued right that survived the amendment of the Regulations on 29 September 2020 and was not extinguished by those amendments;
2. the landlord and tenant had entered into an agreement for rent relief during the first version of the CTRS Regs that operated between 29 March 2020 and 29 September 2020 (referred to in the reasons as the Principal Regulations) and was continuing to comply with that agreement.  As a result, the tenant argued that it was entitled to protection from re-entry during the COVID period under regs 9(2) and (3) for any default, including termination for the alleged breaches of planning rules;
3. it was unclear on the evidence whether the works that were alleged to breach the planning restrictions were the tenant’s fitout or the landlord’s works and there were defects in the landlord’s default notices that prevented the landlord from re-entering in reliance on those notices;  and
4. it was unconscionable conduct in breach of s 77 of the RLA 2003 for the landlord to re-enter in the particular circumstances of this case (discussed further below).

The Tribunal made orders for an interlocutory injunction and included the following interesting findings.

First, the Member held that it was arguable that the tenant’s protection from re-entry under the Principal Regulations survived the subsequent amendments to those Regulations. Member Kincaid provided the following reasons (footnote from original):

111.     I note however, that it is clear that Parliament may by an Act of Parliament, in respect of the promulgation of delegated legislation under that Act, as it has done in respect of any regulations made under the Act, grant a power for such regulations (whether amending or otherwise) having a retrospective effect, such as may (in the case of amending regulations) affect rights and obligations acquired under previous iterations of those regulations.[1]  

112.     Pursuant to section 15(4) of the Act, regulations made under section 15 of the Act may “[have] retrospective effect to a day not earlier than 29 March 2020”.

113.     Moreover, regulation 3 of the Principal Regulations’ Amendments, demonstrating a clear statement against an assumption that may otherwise be made against any retrospective operation of the Principal Regulations’ Amendments, imposes a retrospective operation of the Principal Regulations’ Amendments, as follows:

3   Commencement

These Regulations are taken to have come into operation on 29 March 2020.

114.     This provision is of course exactly the same provision as appeared in the Principal Regulations.

115.     Section 3 of the Principal Regulations’ Amendments must be presumed to have been intended by Parliament, but to what end, it may be considered. It is difficult to accept, for instance, that Parliament intended for tenants, having entered into an agreement under regulation 10(6) of the Principal Regulations, and having complied with regulations 10(1)–(5) of the Principal Regulations, to be required to enter into a new agreement for the same “relevant period” under the materially different provisions contained in regulations 10(1)–(5) of the Principal Regulations’ Amendments.[2]

116.     It is also difficult to consider that the law is other than that if, as I suggest, a tenant has a right under regulation 9(1) of the Principal Regulations not to be considered in breach of the eligible lease if, having complied with regulations 10(1)–(5) of the Principal Regulations, it pays the amount of rent otherwise required to be paid under the eligible lease during the relevant period, the tenant’s right not to be evicted under regulations 9(2) and 9(3) of the Principal Regulations, as properly construed, also subsists. To have the benefit of one of the rights conferred by the Principal Regulations — regulation 9(1) — by having complied with regulations 10(1)–(5) of the Principal Regulations, and not to also have the benefit of the concomitant rights granted by regulations 9(2) and 9(3) of the Principal regulations (both of which must be taken to refer to regulations 10(1)–(5) of the Principal Regulations), might be thought to be illogical.

117.     Against this, however, it may be contended that given the expressed retrospective nature of the Principal Regulations’ Amendments, the seemingly broader rights granted in favour of a landlord by regulations 9(2) and 9(3) of the Principal Regulations’ Amendments to evict a tenant or to otherwise re-enter or recover premises (that is to say, a landlord is expressly entitled to evict or recover premises for reasons other than the “non-payment of rent or outgoings”) enure to the benefit of the landlord from 29 March 2020.  

118.     I have concluded that, on the basis of the legislation and authorities, there is a serious question for hearing as to the proposition that the right accruing to the tenant under regulations 9(2)–(3) of the Principal Regulations, however that right is to be construed, subsists in favour of the tenant, by reason of the tenant having complied with regulations 10(1) to (5) the Principal Regulations, and notwithstanding the promulgation of the Principal Regulations’ Amendments by which regulations 9(2)–(3) of the Principal Regulations were amended.

It appears that the tenant did not make an application for rent relief for the period 30 September 2020 to 31 December 2020, or for the period 1 January 2021 to 28 March 2021, so the decision only considers whether the moratorium created by the Principal Regulations survived the amendment of the Regulations and the Tribunal was not required to consider any further issues about retrospectivity of the CTRS Regulations or their extended application.

Sub-regs 9(2) and (3) were amended from 29 September 2020 to expressly limit the moratorium to the prevention of re-entry for non-payment of rent or outgoings, so the tenant’s argument does not arise after those amendments.

Secondly, the Tribunal held that the moratorium on re-entry in the Principal Regulations only applied to rent arrears and did not prevent re-entry for any other alleged default.

Reg 9 of the CTRS Regs states that:

9            Non-payment of rent during relevant period

(1)          A tenant under an eligible lease is not in breach of the eligible lease if they do not pay the amount of rent required to be paid under the eligible lease during the relevant period and only if they—

(a)          comply with regulation 10(1) to (5) during the relevant period; or

Note

A tenant under an eligible lease will also need to comply with regulation 10(1) to (5) during the relevant period every time they request rent relief in the circumstances provided for under regulation 11.

(b)          during the relevant period, pay an amount of rent in accordance with—

(i)           any variation to the eligible lease mentioned in regulation 10(6)(a); or

(ii)          any other agreement mentioned in regulation 10(6)(b).

Note

An eligible lease has effect subject to subregulation (1)—see section 17(1) of the Act.

(2)          A landlord under an eligible lease must not evict or attempt to evict a tenant under the eligible lease to whom subregulation (1) applies.

Penalty: 20 penalty units.

(3)          A landlord under an eligible lease must not re‑enter or otherwise recover, or attempt to re‑enter or otherwise recover, the premises under an eligible lease if the tenant under the eligible lease is a tenant to whom subregulation (1) applies.

Penalty: 20 penalty units.

The tenant argued that the literal meaning of sub-reg 9(2) and (3) means that a landlord is not entitled to terminate a lease for any reason, provided that the lease satisfies sub-reg 9(1).

The Tribunal rejected that construction of the lease as unarguable and provided the following reasons (emphasis added, footnote from original):

123.     The only act by a tenant of an eligible lease which would otherwise be a breach of the eligible lease, but in respect of which the tenant is expressly given statutory protection by regulation 9(1) is, therefore, the non-paying of rent otherwise required under an eligible lease. In my view, it follows that the preventing of a landlord from evicting a tenant or re-entering premises imposed by regulations 9(2) and 9(3) respectively extends only to the circumstance that a tenant has not paid the amount of rent required under an eligible lease. The proposition that the effect of regulation 9(2) and (3) is to extend, by implication, a statutory protection to a tenant against eviction and re-entry respectively in respect of all breaches of an eligible lease, whether it is in respect of the non-paying of rent or otherwise, is not in my view reasonably arguable. 

124.     I also consider that a literal construction of regulations 9(2) and (3), without reading it in the context to which I have referred would, in the case of a tenant of an eligible lease who, having complied with regulation 9(1) of the Principal Regulations, would obtain a statutory right not to be evicted for any other breach, no matter how gross or repugnant. I am of the view that a literal construction of regulations 9(2) and (3), as propounded by the tenant, would be modified so as to avoid that absurdity.^[3]

125.     It follows, from my preferred construction of these provisions, that where a tenant pays the rent and outgoings required to be paid under an agreement pursuant to regulation 10(6)(b) of the Principal Regulations, but otherwise breaches a term of the lease for which eviction or re-entry is prescribed under the lease or allowed at law, there is no serious question to be tried as to whether regulations 9(2) or 9(3) of the Principal Regulations prevent eviction or re-entry consequent upon such breach. 

Thirdly, the Tribunal held that the tenant established a triable issue over whether the works alleged to be in breach of planning laws were the result of the tenant’s fitout or landlord’s works and that the landlord’s default notice failed to describe the alleged breaches with sufficient particularity.  

It is beyond the scope of this post to detail those arguments, but interested readers are referred to paragraphs [126] to [135] of the judgment.

Fourthly, the Tribunal held that the tenant had established an arguable case that the landlord was engaging in unconscionable conduct, stating that:

150.     It is plain from the evidence, therefore, that between 24 September 2020, when the landlord agreed in principle to the tenant adopting a course which may have achieved compliance with the Building Order and 14 October 2020, when the landlord serving the default notices, the landlord’s position towards the tenant had changed.

151.     The tenant contends that there is a serious question for hearing whether the real reason that the landlord wished to forfeit the lease was not primarily because of the reasons expressed in the default notices, but because it wished to rid itself of a tenant with whom Covid-19 rent relief negotiations had stalled, and because it latterly decided that it wished to repair the roof of the premises without giving the requisite notice six months’ notice under the lease. Given also the obligation on the landlord, implied at law, to do all things necessary on its part to enable the tenant to have the benefit of the lease,^[4] I have concluded that there is a serious question to be tried whether such circumstances, if proved at the final hearing, is conduct that amounts to unconscionable conduct within the meaning of section 77 of the Retail Leases Act 2003, and within the meaning adopted by the Court of Appeal in Jams 2 Pty Ltd.

Summary.  The take-home points about the CTRS from this case are that the Tribunal held that:

1. the prohibitions on re-entry in regs 9(2) and (3) of the Principal Regulations (ie the CTRS Regulations that were in force between 29 March 2020 and 29 September 2020) only prevent re-entry for non-payment of rent and do not prevent re-entry for other breaches;  and
2. it is arguable that the moratorium on re-entry that accrued under the Principal Regulations is an accrued right that survives amendment of those regulations.

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^[1]        See Pearce and Geddes, Statutory Interpretation in Australia (LexisNexis Butterworths, 8^th ed, 2014) at [10.11].

^[2]            See observations of Senior Member Forde’s in Filomeno Nominees Pty Ltd v Crown Group Pty Ltd (Building and Property) [2021] VCAT 81 at [30].

^[3]        See Grey v Pearson (1857) 6 HLC 61 at 106; 10 ER 1216 at 1234 and Australian authorities referred to in Pearce and Geddes, Statutory Interpretation in Australia (Lexis Nexis Butterworths, 8^th ed, 2014) at [2.4].

^[4]            See Secured Income Real Estate (Aust) Ltd v St Martins Investments Pty Ltd (1997) 144 CLR 596 at 602, 606–7, and cases referred to in Cheshire and Fifoot Law of Contract, (LexisNexis Butterworths, 11^th ed (Australian), 2017) at [10.41].