In the recent decision of Club Fogolar Furlan Melbourne v Paramount Investments Group Pty Ltd [2024] VSC 208 in the Supreme Court of Victoria, Croft J considered whether a default notice alleging arrears of rent could be valid if it did not make an allowance for abatement of rent claimed by the tenant under s 57 of the Retail Leases Act 2003 (Vic) (RLA 2003).
The Court adopted a practical approach to default notices and held that (at least in the circumstances of that case) a notice that does not allow for a potential abatement claim is valid.
However, the case also raises the question of how a tenant should respond when leased premises is damaged, the landlord serves a default notice and the tenant has an abatement of rent claim. Although it can vary from case to case, payment of rent under protest is probably the safest approach, but tenants in that situation should seek specialist advice.
Background
The default notice in the Club Fogolar Furlan case alleged that the tenant was in default by failing to pay rent, calculated as the full amount of unpaid rent on the face of the lease. The tenant initially did nothing in response to the notice, and so on the expiration of the 14-day period the landlord sought to terminate the lease by way of a notice of re-entry.
The landlord issued an application for possession, and the tenant responded by filing its own application challenging the validity of the notice and seeking an interlocutory injunction to restrain the landlord from re-entering the premises. The tenant’s argument was that it had a claim for compensation arising out of damage to the leased premises that exceeded the rent claimed in the default notice. The Tribunal held that the notice was valid and that the lease had been terminated, and granted relief from forfeiture of the lease on condition that the tenant pay 65% of the arrears alleged in the notice and 80% of the rent that accrued between re-entry and the date of the Tribunal’s order.
The appeal
The tenant appealed the Tribunal’s order to the Supreme Court of Victoria and argued that the landlord’s notice was entirely invalid because it had not discounted the arrears on account of the tenant’s entitlement to abatement of rent under s 57 of the RLA 2003.
Section 57 of the RLA 2003 allows a tenant of retail premises to withhold all or part of the rent payable under the lease, stating that (relevantly):
(1) A retail premises lease is taken to provide the following if the retail premises, or the building in which the premises are located, is damaged—
(a) except where the tenant caused the damage, the tenant is not liable to pay rent, or any amount in respect of outgoings or other charges, that is attributable to any period during which the premises cannot be used under the lease or are inaccessible due to that damage; and
(b) except where the tenant caused the damage, if the premises can be used under the lease but that use is reduced to some extent by the damage, the tenant’s liability for rent, and any amount in respect of outgoings or other charges, that is attributable to any period during which the use is reduced is decreased to the same extent; …
The tenant argued that the leased premises was partially damaged so it was entitled to withhold part of the rent under sub-s57(1)(b) of the RLA 2003. The Tenant also argued that the sub-section operated to reduce the tenant’s rental liability (rather than acting as a counterclaim or set-off against the rent) so that a default notice that failed to reduce the rent on account of the tenant’s claimed abatement of rent must overstate the rental liability and be defective.
In making its argument, the tenant relied on (among other things) the proposition that it is not possible for a tenant to pay rent and then retrospectively claim an abatement of rent, relying on the following passage from Osborne J in Vincent Cold Storage Pty Ltd v Centuria Property Funds No 2 Limited [2022] VSC 766:
[87] … insofar as the Tenants rely upon an abatement entitlement for the period from 1 January 2021 to 30 June 2022 (being for the period prior to that period relevant to the October Default Notice), I consider that they have not established a prima facie case. An entitlement to abatement is prospective, not retrospective. It is not open to a party seeking an abatement of rental to pay the rent but after payment has been made to assert an entitlement to abatement.[1]
In his reasons dismissing the appeal, Croft J first considered the requirements of a valid default notice and cited the well-known passage about the purpose of a default notice from Primary RE Ltd v Great Southern Property Holdings Pty Ltd [2011] VSC 242, in which Judd J held that:
[147] The true purpose of the notice is to give to the tenant an opportunity to consider its position and give a response. If the breach is capable of remedy, that response may be to admit the breach and propose a course of remediation. If compensation is sought, that response may involve agreement to pay reasonable compensation to be assessed. If the breach is not admitted, or the landlord rejected a proposal for remediation, the tenant may then apply for relief against forfeiture. …
Justice Croft then went on to make the following observations about default notices in the context of a claimed entitlement to abate the rent:
[36] In addition to the passages in Vincent Cold Storage relied upon by the Respondent in its written submissions, reference was made to the statement of Osborne J in Vincent Cold Storage in more general terms, as follows:[2]
In oral argument and in their written outline, the Tenants submitted that an overstatement of the amounts said to be owing in the October Default Notice renders the notice invalid because the amount of rent claimed to be owing was not due and owing. The Tenants therefore argued that because [they] were entitled to an abatement of 50%, the October Default Notice was invalid because it claimed the full amount of the rent and outgoings when only 50% of the rent and outgoings were payable. This would be a surprising outcome, as it would invalidate a notice if the amount claimed was overstated, even by a small amount, or if some but not all defaults alleged were made out.
Before considering any further aspects of the Vincent Cold Storage decision, I am of the view that this general statement more than illustrates the fallacy in the Applicant’s contentions with respect to the requirements of a notice under s 146 of the PLA. With respect, I entirely agree with the statement of Osborne J and his Honour’s highlighting the “surprising outcome” which would follow if a notice overstated the amount claimed. The converse also applies, of course, with respect to any clear accommodation of an abatement of rent. Perhaps on a more practical level, one might ask how a landlord in the position of needing to give a s 146 notice in circumstances where an abatement of rent is claimed would calculate the abatement sum. Given the likely circumstances of the issue of such a notice it is most unlikely that the parties would have agreed the quantum of the abatement of rent and in these circumstances what, asked rhetorically, is the landlord to do? If the landlord’s estimate of the abatement were wrong it would follow on the position put by the Applicant that the notice would be invalid. So pending determination of any abatement of rent by a court or tribunal, is a landlord, in seeking to ensure a valid notice under s 146, in effect, to bid against itself by seeking to overstate the abatement; and at its possible cost? Clearly not as this would significantly compromise the operation of provisions such as s 146 and is a position neither supported by the legislative provisions nor authority.
Accordingly, the Court held that the landlord’s default notice that did not make an allowance for the tenant’s alleged rent abatement was valid.
Comments and take-home points
The implications of the decision for a landlord are clear, namely, if a tenant is in arrears of rent and the facts suggest that the tenant might (or even does) have a claim for abatement of rent under s 57 of the RLA 2003, it would be prudent for the landlord to serve a default notice for the full amount of the rent payable on the face of the lease.
That being said, if it is clear that the tenant has an abatement claim and has actively sought to press that claim, it may be equally prudent for a landlord to make at least some allowance for that claim in its default notice.
The implications for a tenant are more nuanced.
First, the orthodox position in a landlord and tenant dispute is that it is prudent for the tenant to pay the rent (or as much of the rent as it can) and claim back any damages or set-off at trial. This is partly to secure the leased premises until trial and partly to prevent the impression that the tenant is only making the claim because it is insolvent and cannot afford to pay the rent.
Secondly, the extract from Vincent Cold Storage above suggests that an abatement of rent under s 57 of the RLA 2003 cannot be claimed retrospectively. That, in turn, suggests that the orthodox approach of paying the rent and claiming back the overpayment at trial should not be applied in an abatement case. However, the position is a bit more subtle than that and that extract needs to be viewed in a wider context.
On the one hand, in Edex International Holdings Pty Ltd v Marmalade Films Pty Ltd (2003) 56 NSWLR 56, Hodgson JA (with whom Beazley and Heydon JJA agreed) held that (emphasis added):
[25] Dealing first with the case of rent that has already been paid in full, in discharge of a liability for rent that has actually arisen, it would in my opinion be a most unreasonable result if the tenant could claim a refund of that rent or part of it, at least unless the tenant had made a claim for abatement of the rent and had paid the rent under protest or otherwise provisionally pending resolution of that claim. Otherwise, a landlord having no reason to suppose that anything was wrong would be deprived of the option of repairing the damage or terminating the lease under cl 8.2.4, and may be liable to make very substantial refunds of rent. I think it most unlikely that that result could have been intended.
This suggests that articulating the abatement of rent claim, then paying the full rent ‘under protest’ will preserve the tenant’s abatement of rent claimed.[3]
However, the point of Osborne J’s remarks in Vincent Cold Storage is that it can be fatal for a tenant with an abatement claim to sit back and do nothing. By implication, it is also risky to simply pay the rent under protest and do nothing.
Thirdly, as the text from Croft J’s decision highlights, there is usually (and probably always) uncertainty about the amount of rent that a tenant is entitled to withhold under sub-s 57(1)(b) of the RLA 2003, because there will always be arguments about the extent of the damage, and what proportion of the rent represents ‘the same extent’ as the damage.
Fourthly, a finding that the tenant has withheld too much rent can have significant implications for a tenant. For example:
- withholding rent may affect the tenant’s ability to exercise its option (see, for example, sub-s 27(2) of the RLA 2003);
- a dispute about whether rent has been paid may affect a tenant’s ability to assign the lease (at least until trial); and
- the tenant will be required to remedy the defaults at trial and seek relief from forfeiture, which may introduce other defences for the landlord (such as arguments about the tenant’s solvency), and has implications for the award of costs in non-retail disputes.
Fifthly, heading to VCAT for an injunction is expensive and time-consuming, especially for a tenant whose business is already distressed (as most are by the time they are seeking to abate rent).
Accordingly, when faced with a damaged property and a potential abatement of rent claim, to invert his Honour’s rhetorical question: what is the tenant to do?
My suggestion are:
- first and foremost, the tenant should clearly articulate its abatement claim to the landlord at the earliest stage, including a description of the nature of the damage, when it occurred, how it prevents the tenant from using the leased premises and how the tenant calculates its claimed rent abatement;
- next, the best approach is to negotiate as early as possible with the landlord and try to agree on an amount of rent to be abated. This can be difficult, especially if the abatement claim is coupled with a claim for economic loss (which it usually is) and the relationship between landlord and tenant has broken down. If a final agreement cannot be reached about the amount of rent to abate, tenants should try to reach an agreement on an amount of rent that can be paid until trial, pending resolution by the Tribunal. Mediation at the Victorian Small Business Commission is a useful avenue to help achieve either of those (although there may not be enough time to arrange a mediation if the landlord has served a default notice);
- if an agreement cannot be reached, another option is to issue proceedings for an urgent injunction at VCAT. There is often a long delay between issuing proceedings and final hearing, during which a tenant will need to pay rent. A pro-active tenant in a damaged property may get a sympathetic hearing if it seeks an injunction at an early stage and offers to pay a reasonable portion of the rent until trial. This will improve the tenant’s bargaining position when trying to resolve the case and might keep a financially distressed tenant afloat until trial. However, an interlocutory injunction can be expensive, time consuming and stressful, and may not be financially viable given that VCAT is generally a no-cost jurisdiction;
- the other alternative is to consider paying the rent ‘under protest’ and claiming the sums back at trial. This approach is taken frequently in cases in which I have been involved, and seems to be popular in other jurisdiction (eg Canada, see https://www.dv-law.com/insights/article/it’s-always-better-to-pay-under-protest-than-not-pay-at-all). Another version of this approach is to pay the disputed sums into a solicitor’s trust account until trial to ensure that the funds are not disbursed. Tenants often find the idea of paying rent during a dispute difficult, particularly when the premises is damaged and only partially useable. This is often the most commercially viable solution, especially in a no-cost jurisdiction. However, tenants adopting this approach can’t sit on their hands. They will need to issue proceedings as soon as possible to avoid the problems identified by Osborne J in Vincent Cold Storage. Payment under protest also carries with it an inevitable loss of bargaining power when trying to settle the dispute because the rent has already been paid to the landlord and the tenant faces the hurdle of having to extract that money from the landlord; and
- the merits of each approach will depend on a number of circumstances, not the least of which are the tenant’s available financial resources, the amount of rent being abated and the other claims that will inevitably arise as part of the same dispute.
Tenants face a series of difficult decisions in these circumstances and the best choice for an individual tenant will depend on its particular circumstances. Tenants in that position should seek advice from a suitably qualified leasing disputes specialist at the earliest opportunity.
Thanks to Luke Virgona for his valuable assistance in compiling this post.
[1] Edex International Holdings Pty Ltd v Marmalade Films Pty Ltd (2003) 56 NSWLR 56, [25]-[30] (Hodgson JA).
[2] Vincent Cold Storage, [75].
[3] The above passage from Edex International Holdings was, in fact, cited by Osborn in Vincent Cold Storage.
Sam Hopper Barrister 
August 7, 2024
Property / leasing