A group of residents were successful this week in an application brought against the operators of the Wollert Lifestyle Community (Lifestyle). The application concerned the validity of exit fees in residents’ Residential Site Agreements (RSA) and covenants that allow rent to be charged after a resident dies.
Residents typically buy a home from Lifestyle and rent land on which the home is located, and are then required to enter an RSA which requires them to pay an exit fee, calculated as a percentage of the price when they on-sell their homes. Also, on the death of a resident, the RSA says their estate must keep paying rent but they are not able to occupy the home.
VCAT President Justice Woodward delivered his ruling on Monday, 7 July 2025, finding that:
exit fees in RSAs could not be charged if the amount of those fees is not disclosed up front. As the amount of a resident’s exit fees is not known until sale, Lifestyle’s model of exit fees as a percentage of sale price can never comply with and cannot be charged under s 206S of the Residential Tenancies Act 1997 (Vic) (RTA); and
to require grieving relatives of a deceased resident to pay rent but not be able to occupy the home is ‘harsh, if not unconscionable’, and the RSAs are to be varied under s 206G of the RTA to allow the estate of a deceased resident to sub-let the home before sale.
The decision will have flow-on affects for residents not only at Wollert Lifestyle Community, but any resident at the 24 operating Lifestyle Communities in Victoria with these kinds of clauses in their RSAs.
See below links to Justice Woodward’s ruling and recent media coverage by The Age and Sam’s interview with ABC Radio National Breakfast.
Tenants with rent in arrears often try to reduce those arrears by setting them off against some other claim against the landlord. This has caused many landlords to introduce covenants that require the rent to be paid ‘without deductions’ or words to that effect.
While a contractual exclusion of set-off is generally effective, in the recent decision of AMTB Pty Ltd v Chan (Building and Property) [2025] VCAT 236, VCAT has recognised that such a clause may not be effective against a damages claim arising from an alleged breach of a covenant implied into a lease by the Retail Leases Act 2003 (Vic) (RLA 2003).
Some background on equitable set-off
To understand the implication of VCAT’s decision, you need some background on equitable set-off and how it works.
Generally, if a tenant owes, say, $1500 rent to its landlord, and the tenant has a separate claim against the landlord for $1000, those amounts could be netted off against each other, resulting in the landlord receiving $500. However, in the ordinary course, both of the underlying debts continue to exist – it’s just more convenient for the tenant to make a single payment of $500 to the landlord. This is how ordinary set-offs work. Importantly, in this situation, the landlord could still give the tenant a default notice and seek to terminate the lease for the full $1,500.
However, equitable set-off is different. When there is a particular connection between the two claims (more on that later), the Courts will recognise that the tenant’s counterclaim operates as a defence to the landlord’s claim. In the example above, if the tenant can establish an entitlement to an equitable set-off, the tenant’s primary liability to pay rent to the landlord is reduced to $500 – the counterclaim reduces the rent itself. Also, ordinary set-off only works in limited circumstances and is usually not available when the tenant has an unliquidated damages claim. However, those rules are a little more relaxed in the case of an equitable set-off and, importantly, an equitable set-off may be available when the tenant has a damages claim.
To establish an equitable set-off, the tenant’s counterclaim must ‘impeach’ the landlord’s rent claim. In substance, that means that there must be some form of causal or (for want of a better word) ‘moral’ connection between the landlord’s rent claim and the tenant’s counterclaim.
Generally speaking, while the categories aren’t closed, an equitable set-off may be available in the following circumstances: [1]
where the liability under the originating claim arose only because of the originating claimant’s breach of duty;
where the originating claimant’s behaviour is hindering or preventing the originating claim from being satisfied; and
where the originating claimant is in some way responsible for reducing or denying to the opposing claimant the benefit which was the quid pro quo for satisfying the originating claim, or the enjoyment of the benefit.
Usually, that will mean the tenant needs to show that it has a counterclaim against the landlord arising from the landlord’s breach of the lease, and possibly that its counterclaim caused or contributed to the tenant’s inability to pay the rent.
Landlords’ responses – ‘no deductions’ clauses
In response, it has become common for landlords to require a covenant in their leases that stipulates rent is to be paid ‘withoutdeduction or set-off’, or variations on that theme.
Generally, the Courts have held that such a clause will be effective to prevent a party relying on an equitable set-off (see Citibank Pty Ltd v Simon Fredericks Pty Ltd [1993] 2 VR 168 at 175; Connaught Restaurants Ltd v Indoor Leisure Ltd [1994] 1 WLR 501; 4 All ER 834 (CA); and Main Roads Construction Pty Ltd v Samary Enterprises Pty Ltd [2005] VSC 388 at [47]).
This leaves tenants whose rent is in arrears but who have a genuine grievance against their landlord in a difficult position.
VCAT’s recent decision
In the AMTB decision, the Tribunal granted an injunction restraining the landlord from terminating a lease and re-entering the leased premises. The tenant claimed an equitable set-off reducing the alleged rent arrears arising from losses incurred by the landlord’s breach of its statutory implied repair obligations under s 52 of the RLA 2003, despite the lease containing a ‘no deductions’ clause.
The tenant was operating a nightclub the second floor of premises leased from the landlord. To enter the nightclub, patrons could enter via a stairwell or a lift. The lift had been unreliable for some time and from mid-2024 was largely inoperable, which the tenant says led to significant losses in trade. The tenant stopped paying rent from October 2024 and in December 2024 was served with a notice of default claiming rent arrears upwards of $80,000.
The tenant applied to VCAT for an injunction to prevent the landlord from re-entering the premises and argued that its damages claim could be set off against the alleged arrears.
The landlord argued that the rent clause contained in the lease excluded any right to equitable set-off. The rent clause stated (emphasis added):
5. Payment of Rent
… The said rent is to be paid clear of all deductions or abatements of all or any kind whatsoever and not otherwise except with the consent in writing of the Lessor…
The landlord also referred the Tribunal to the case of Paramount Investments Pty Ltd v Club Fogolar Furlan Melbourne [2024] VCAT 169, where the Tribunal held:
[22] I accept that in some circumstances, a tenant who has a legitimate claim against a landlord may set-off that claim against a competing claim for rent in arrears. However, that right of set-off is subject to the terms of the lease.
In response, the tenant argued that the ‘no deductions’ clause was not effective against a claim for damages arising out of a breach of a covenant implied by the RLA 2003 because the parties to a retail premises lease cannot contract out of that Act.
The tenant’s claim arose from alleged breaches of s 52 of the RLA 2003, which states that:
52 Landlord’s liability for repairs
(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 –
…
(b) plant and equipment at the retail premises; and..
Section 94 of the RLA 2003 states that:
94 The Act prevails over retail premises leases, agreements etc.
(1) A provision of a retail premises lease or of an agreement (whether or not the agreement is between the parties to a retail premises lease) is void. To the extent that it is contrary to or inconsistent with anything in this act (including anything that the lease is taken to include or provide because of a provision of this Act).
(2) A provision of a retail premises lease or of an agreement (whether or not the agreement is between the parties to a retail premises lease) is void. To the extent that it purports –
(a) to exclude the application of the provision of this Act; or…
The tenant argued that as a result of s 94 the parties could not contract out of the covenant implied by s 52. If they cannot contract out of a covenant implied by the Act, they similarly cannot contract out of the remedies that flow from a breach of that covenant. It must also follow, so the tenant argued, that the parties cannot contract out of an equitable set-off that flows from a breach of that covenant.
The tenant relied on the decision of Deputy President Macnamara (as his Honour was then) in C & A Delaveris Pty Ltd v Bretair Pty Ltd [2009] VCAT 1663, in which his Honour contemplated the corresponding provisions of the now repealed Retail Tenancies Reform Act 1998 (Vic) (1998 Act), and held that:
79. … a provision in a retail lease is void to the extent that it claims to ‘exclude the application of any provision of this Act’. In my view, the inclusion of the words ‘without deduction’ in the covenant to pay rent is avoided by Section 47 to the extent that it limits the effect of the statutory implied covenant to repair would otherwise have, hence a breach of the repair covenant would be available as a set off in the present case.
…
84. … It is in accordance with well established practice to allow a set off of the liquidated sum incurred by a tenant in meeting a repair obligation owed by the landlord and reducing the rental liability accordingly.
Section 47 of the 1998 Act is in similar terms to s 94 of the RLA 2003.
After considering those arguments, the Tribunal in AMTB accepted that the tenant’s position was arguable and granted the injunction, holding that:
[21] …the principal question for trial is whether a claim for unliquidated damages arising from a breach of s 52 of the RLA can be set-off against a claim for rent and outgoings in arrears if the lease contains a “no deductions” clause or, alternatively, whether s 94 of the RLA renders such a clause void.
Implications
Both landlords and tenants should be aware that a ‘no deductions’ clause does not work in all circumstances, and that an equitable set-off arising from breach of a covenant implied by the RLA 2003 (or another statute that the parties are prohibited from contracting out of) can provide a work-around for a tenant seeking to remain in the leased property (at least at the interlocutory injunction stage).
This can be quite a powerful tool for tenants, as it can keep the tenant in the property and trading while it pursues its counterclaim and seeks to negotiate some form of resolution with the landlord with respect to the alleged arrears. This can, and often does, allow a tenant to trade out of its difficulties and, if necessary, refinance or otherwise restructure to save a distressed business on the brink.
Sam Hopper SCand Dylan Matthews
Dylan Matthews is a final-year Bachelor of Property and Real Estate / Bachelor of Laws student from Deakin University.
[1] See Young, Croft and Smith, On Equity (Thomson Reuters, 2009) at p 997.
This decision overturns the VCAT decision in Northcote Shopping Centre Pty Ltd v Aldi Foods Pty Ltd [2024] VCAT 641, which is one four decisions from the Tribunal holding that a ‘cap’ on either a current market rent review or rent review by CPI or similar published index is a form of mixed review that is prohibited by sub-s 35(2) of the RLA 2003. For discussion on the various VCAT decisions , see: here, here, here and here).
This decision is likely to be significant as there appear to be a significant number of retail premises leases in Victoria that have a ‘cap’ on rent increases in their terms.
As always, I will keep readers of this blog abreast of any further developments on this issue.
In a decision handed down this week, the Tribunal held that an obligation in a retail premises lease to repaint and re-carpet periodically is not inconsistent with the landlord’s obligation to maintain the premises under s 52 of the RLA 2003.
In the decision of Deng and Deng Pty Ltd v McPhee and Anor (Building and Property) [2024] VCAT 1025, the Tribunal granted an injunction to a tenant who had been locked out of its motel business by its landlord. One of the breaches relied on by the landlord was an alleged failure by the tenant to:
paint the Premisses internally every 3 years and externally every 5 years; and
replace the carpet every 5 years.
The Tenant argued that the repainting and recarpeting clause was inconsistent with s 52 of the RLA 2003.
Section 52 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.
Section 94 of the RLA 2003 renders void any provision in a retail premises lease that is inconsistent with a provision of the RLA 2003.
The tenant argued that:
the landlord was responsible under s 52 of the RLA 2003 to maintain the paint and carpet in the retail premises in a condition consistent with their condition when the lease was entered into; and
by purporting to require the tenant to repaint and re-carpet periodically, the landlord was in substance contracting out of that obligation.
The Tribunal did not accept that argument, and found that the repainting and re-carpeting clause was not inconsistent with s 52, holding that:
[37] … it is immaterial [under the terms of the lease] whether the paint or carpet has deteriorated to a condition which is not commensurate with the condition when the retail premises lease was entered into. In other words, it has no comparator, which appears to be an essential element under s 52 of the RLA.
[38] Unlike clause 8 [of the lease], which is directed at repairing or maintaining an element of the Premises, the obligation to paint at a point in time and irrespective of the condition of the paintwork at the time the Lease was entered into; and an obligation to re-carpet at a point in time, again irrespective of the condition of the carpet at the time the Lease was entered into, is more likely to be work of a capital nature. The obligation to repaint and re-carpet does not crystallise in order to maintain the Premises in a condition consistent with their condition when the retail leases premises lease was entered into. Rather, the obligation crystallises irrespective of that condition.
The Tribunal ultimately found that the requirement to repaint and re-carpet fell into the exception on the recovery of capital costs in s 41(2)(a) of the RLA 2003 and that there was no arguable case or serious issue to be tried that the repainting and re-carpeting requirement was inconsistent with s 52.
The Tribunal held that there was a serious issue to be tried on other grounds, and granted the injunction to the tenant, so it does not look like the tenant will be able to appeal that decision.
However, obligations to paint during the term of a lease are common and, in fact, can be found in some versions of the LIV standard lease. The argument that those provisions are inconsistent with s 52 of the RLA 2003 and void by operation of s 94 of that Act has been in circulation for some time and I am aware of at least two other cases in which the point is currently being pressed. Consequently, despite the finding of the Tribunal in this case, I expect that this will not be the last time the point argued.
VCAT just published another decision in which a Tribunal member held that market rent review cause with a ‘cap’does not comply with sub-s 35(2) of the Retail Leases Act 2003 (Vic) (RLA 2003).
In the case of Cote Noire Pty Ltd v Roberts Family Enterprises Pty Ltd (Building and Property) 2024 VCAT 810 Deputy President Riegler considered a market rent review clause that included the following text:
(h) Notwithstanding any such agreement or determination and unless otherwise excluded pursuant to the Act, the annual rental payable in the first year following any Market Rent Review Date shall in no circumstances be less than 103% and no more than 105% of the annual rental paid in the year immediately prior to the Market Review Date in question.
The Tribunal cited the reasoning of Member Nash (as the Acting Senior Member was then) from the decision in Roberts Family Enterprises Pty Ltd v Meddles Bekirofski and Reshar Bekirofski (Building and Property) [2023] VCAT 121, discussed here, and held that:
[9] I accept and adopt the reasoning of Member Nash set out above. In my view, clause 3.5(h) constitutes a hybrid method for calculating rent review and is contrary to those methods which are prescribed under s 35(2) of the RLA. It is a “mixed rent review” or hybrid version of either a fixed annual amount (s 35(2)(c) of the RLA) because it purports to fix variables between 3.5 and 5 percent of the exit rent; or purports to restrict current market rent within those parameters (s 35(2)(d) of the RLA).
This is now the fourth decision from VCAT holding that a rent review clause with a ‘cap’ is not permitted by sub-s 35(3) of the RLA 2003.
As discussed in an earlier post here, a decision on the same point of law in Northcote Shopping Centre Pty Ltd v Aldi Foods Pty Ltd [2024] VCAT 641 has been appealed to the Supreme Court. The Court has now listed that appeal for a hearing on 21 November 2024.
Acting Senior Member Nash at VCAT today handed down an interesting decision about the operation of s 28 of the RLA 2003 in the case of Pagica Pty Ltd atf the Oscinah Trust v Inlet Property Pty Ltd (Building and Property) [2024] VCAT 830.
In summary, the Tribunal found that:
a s 28 notice is invalid if the rent for the new term is the current market rent and the notice only states the landlord’s proposed rent for the new term;
the notice was not held to be invalid because it referred to the tenant’s ability to call for an early rent review in only one line of the notice; and
a tenant of a retail premises lease canont exercise its option until it receives a valid s 28 notice.
So far as I am aware, this is the first substantive decision about the new provisions in s 28 and it will certainly prompt a lot of debate in the leasing community.
Backgound
In the Pagica Pty Ltd case, the tenant had an option to renew the lease for a further term with a market rent view for the first year of the renewed term.
Section 28 of the RLA 2003 says (emphasis added):
(1) This section applies if a retail premises lease contains an option exercisable by the tenant to renew the lease for a further term.
(1A) The landlord, at least 3 months before the last date that an option to renew the lease may be exercised, must give the tenant written notice setting out—
(a) the date by which the option to renew the lease may be exercised by the tenant; and
(b) the rent payable for the first 12 months under any renewed term of the lease; and
(c) the availability of an early rent review under section 28A; and
(d) the availability of a cooling off period under section 28B; and
(e) any changes to the most recent disclosure statement provided to the tenant, other than any changes in relation to rent.
(2) If the landlord fails to give the tenant all of the information required by subsection (1A) or to give written notice within the time specified by that subsection—
(a) the retail premises lease is taken to provide that the date after which the option is no longer exercisable is instead 3 months after the landlord notifies the tenant as required; and
(b) subject to subsections (2A) and (2B), if that date is after the term of the lease ends, the lease continues until that date on the same terms and conditions as applied immediately before the lease term ends, unless the landlord and tenant otherwise agree; and
(c) the tenant, whether or not the landlord has by then notified the tenant as required, may give written notice to the landlord terminating the lease from a specified day that is—
(i) on or after the date on which the term of the lease ends; and
(ii) before the date until which the lease would otherwise have continued because of paragraph (b).
(2A) If the tenant requests an early rent review under section 28A and the rent determination under that review is less than the rent payable under the lease during a term extended under subsection (2)(b), the rent payable during the extended term is to be equal to the rent determination.
(2B) If the tenant does not request an early rent review under section 28A but the rent specified in a written notice under subsection (1A) is less than the rent payable under the lease during a term extended under subsection (2)(b), the rent payable during the extended term is to be equal to the rent specified in the notice.
(3) If the tenant gives the landlord a notice of termination under subsection (2)(c), the lease terminates on the day specified in the notice.
(4) If an option to renew is exercised because of subsection (2)(b) after the term of the lease ends, the lease for the further term commences on the expiry of the previous lease, disregarding for this purpose any period during which that lease continued because of that subsection.
To comply with s 28(1A)(b) and (c) of the RLA 2003, the landlord gave to the tenant a notice (Renewal Notice) that contained the following text:
Commencement rent:
The commencement rent for the further term will be: $110,000.00 per annum + GST
Early rent review:
An early rent review is available to the Tenant (section 28A)
After the Renewal Notice was received, there were various discussions between the landlord and the tenant and a number of attempts were made by the tenant to exercise its option.
Ultimately, the tenant argued that the Renewal Notice was not valid and that it had validly exercised its option, and the landlord argued that the Renewal Notice was valid and that the tenant had lost its opportunity to renew the lease.
Findings
There are three interesting findings in the case.
First, there was to be a market rent review at the start of the renewed term. However, the landlord’s notice specified the sum of $110,000 plus GST as the rent for first year of the new term. The Tribunal held that this did not comply with sub-s 28(1A)(b) of the RLA 2003, holding that:
[61] Section 28 of the RLA requires the notice to state the commencing rent for the further term. The Lease states that the commencing rent for the further term is to be determined by a market rent review unless otherwise agreed by the parties. The Renewal Notice states the commencing rent for the further term is $110,000 per annum plus GST. That statement on its face is clearly incorrect and misleading. The commencing rent had not been agreed by the parties, and was not the product of a market rent review.
[62] In those circumstances, I find that the Renewal Notice did not comply with the notice requirements of s 28 of the RLA and is therefore invalid. A consequence of that finding is that it renders the Renewal Notice as a nullity and therefore, no notice under s 28 has been given by the landlord to the tenant.
Secondly, the tenant also argued that the one-line reference to an early rent review was inadequate. The Tribunal did not accept that argument, holding that:
[63] With respect to the early rent review, the Renewal Notice states that an early rent review is available and then refers to the relevant section of the RLA. The tenant argues this is insufficient and the Renewal Notice should be a stand-alone document that contains all the information necessary for a tenant to understand its rights and make informed choices.
[64] A renewal notice should set out sufficient information to allow the tenant to make an informed decision about whether to exercise the option for a further term or not. Where the lease provides that there is to be a market rent review, the availability of an early rent review must be recorded in the renewal notice.[1]
[65] As set out above, the stating of a fixed rent amount as the commencing rent and then a reference to the tenant being entitled to an early rent review is inconsistent with s 28 of the RLA. It is this inconsistency that I consider renders the notice invalid and therefore not compliant with s 28 of the RLA.
Thirdly, the landlord’s notice had a section for the tenant to sign to acknowledge receipt of the notice. On 31 January 2023, after various discussions between the parties, the tenant signed the acknowledgement of receipt and returned the notice to the landlord within the period for exercising the option under a letter stating “please find attached signed Notice of renewal of Lease”, apparently under the misapprehension that signing the acknowledgement of receipt operated to exercise the tenant’s option.
In a letter dated 5 April 2023, the tenant’s solicitor argued that the landlord’s notice was invalid and that the letter of 31 January 2023 was the valid exercise of its option, and concluded by saying (emphasis added):
If I am wrong and the tenant has not exercised its option then I am instructed and authorised by the tenant, and hereby give notice on behalf of the tenant that the tenant exercises its option for the further term of 5 years.
The Tenant argued it validly exercised the its option, either by the letter of 31 January 2023 or the letter of 5 April 2023.
However, the Tribunal held that the option was not capable of being exercised until a valid s 28 notice was provided, for the following reasons:
[69] The consequence of the Renewal Notice being invalid is that the landlord has not complied with s 28 of the RLA.
[70] Prior to 2019, if the landlord did not serve a notice in accordance with s 28 of the RLA on a tenant, the tenant could still serve its own notice to exercise the option. Section 28(1) provided, insofar as is relevant:
(1) If a retail premises lease contains an option exercisable by the tenant to renew the lease for a further term, the landlord must notify the tenant in writing of the date after which the option is no longer exercisable—
(a) at least 6 months; and
(b) no more than 12 months—
before that date but is not required to do so if the tenant exercises, or purports to exercise, the option before being notified of the date.
(emphasis added)
[71] However, these provisions of the RLA were amended in 2020 …
[72] The effect of these amendments has been to remove the section which specifically dealt with the situation where a tenant seeks to exercise an option for a further term but the landlord has not served a valid notice under s 28.
[73] As a consequence, the lease will continue on foot until such time as the landlord issues a valid notice. Under the previous iteration of the legislation, the tenant could exercise an option for a further term without being fully apprised of the financial commitment it may be entering into as a market rent would not occur until after the tenant had committed itself to the further term. The amendment to the RLA has resulted in the tenant’s proprietary interest in the premises being protected until such time as it has all the information that the landlord is required to give it, which ought to be sufficient information for the tenant to determine whether or not exercising the option for a further term is a business decision it wishes to make.
[74] In those circumstances, under the provisions of the RLA the lease continues and the option is exercisable by the tenant up to 3 months after a valid notice is given by the landlord to the tenant.
[75] The 5 April letter is a clear and unequivocal expression of the tenant’s intention that it wishes to exercise its option for a further term of the lease but until such time as the landlord serves a valid notice, the circumstances in which a valid exercise of the option do not arise.
[76] I therefore find that while the tenant has expressed its intention to exercise the option, the 5 April letter was of no legal effect.
For similar reasons, the Tribunal found that it did not need to consider whether the letter of 31 January 2023 validly exercised the tenant’s option (see para [66]).
Comments
There are a number of take-home points:
Practitioners drafting s 28 notices should be aware of the first and second findings above. Of particular importance is the finding that only stating the landlord’s proposed rent for the new term does not comply with s 28 if the rent for the new term is a market rent.
That being said, sub-s 28(2B) seems to suggest that a landlord should state a figure for the proposed new rent in the s 28 notice when there is a market rent review. I think it would be prudent for landlord’s drafting s 28 notices to state both that the rent for the new term will be the current market rent as agreed between the parties or determined by a specialist retail valuer and the figure that the landlord proposes for the new term. I am told that the current version of the LIV copyright s 28 notice suggests that landlords do both.
The third finding above might raise a few eyebrows in the leasing community, and there is likely to be some debate about the finding and its implications. For what it’s worth, I would add the following to the debate:
on the one hand, the purpose of the amendments to s 28 and the ability for a tenant to call for an early rent review under s 28A is to address the perceived mischief of a tenant being required to exercise its option in a rising market without first knowing what the rent for the new term would be. If a diligent but uninformed tenant could exercise its option before receiving a valid s 28 notice, it would inadvertently lose that right; and
on the other hand, a tenant might find itself in a difficult position if a landlord does not provide a s 28 notice when rents are falling, as the tenant is unable to exercise its option to bring about a market rent review.
In an earlier post here I discussed another decision from VCAT holding that rent review by CPI or to the current market rent with a ‘cap‘ on increases is inconsistent with s 35(2) of the RLA 2003.
A number of readers have told me that they are following this issue closely and I noted on my last post that I would update readers if an appeal is filed.
The unsuccessful party in the VCAT case has filed an application for leave to appeal in the Supreme Court. The appeal does not yet have a hearing date.
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 inVincent 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 tenanthas 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).
Have a look at the following text from section 37(2) of the Retail Leases Act 2003 (Vic) (emphasis added):
(2) The current market rent is taken to be the rent obtainable at the time of the review in a free and open market between a willing landlord and willing tenant in an arm’s length transaction having regard to these matters—
(a) the provisions of the lease;
(b) the rent that would reasonably be expected to be paid for the premises if they were unoccupied and offered for lease for the same, or a substantially similar, use to which the premises may be put under the lease;
(c) the landlord’s outgoings to the extent to which the tenant is liable to contribute to those outgoings;
(d) rent concessions and other benefits offered to prospective tenants of unoccupied retail premises—
but the current market rent is not to take into account the value of goodwill created by the tenant’s occupation or the value of the tenant’s fixtures and fittings.
Most people think that the paragraphs marked (a) to (d) are sub-sub-sections (or sub-sub-clauses in a contract, or sub-sub-paragraphs in a submission or a judgment).[1] And most lawyers can tell you that the text at the top, starting with ‘(2) The current …’ is called the ‘chapeau’, which is French for hat or cap.
But what do you call the bottom bit – the bit in bold in the text above? It seems that the jury has been out on this question for some time.
The second author, Callum Dawlings, has done some research on this very important question.
In SMA Solar Technology AG v Beyond Building Systems Pty Ltd (No 5)[2012] FCA 1483, Perram J in the Federal Court of Australia looked at a similarly structured clause in s 120(2) of the Trade Marks Act 1995 (Cth), and referred to the bottom bit as the ‘chausette’. While that sounds rather sophisticated and charming on its own, and a suitable counterpart to ‘chapeau’, (although misspelled) ‘chaus[s]ette’ translates from French to English as ’sock’. Given the firstnamed author’s tendency towards foot odour, we think we can do better than ‘sock’.
More recently, in Viljoen v Hayes [2017] NSWSC 801, Parker J in the NSW Supreme Court considered the rule 5.3(1) of the Uniform Civil Procedure Rules and referred to the bottom bit as the ‘chaussure’. Again, this new addition sounds suitably elegant, and translates to the English word ‘shoe’, which strikes us both as an appropriate counterpart to the hat.
However, a few weeks later, the President of the NSW Civil and Administrative Tribunal, Wright J, along with Principal Members Harrowell and Seiden SC, reverted to the word ‘chaussette’ (spelt with two s’s this time), and provided the following thoroughly researched explanatory footnote:
We use “chaussette” (the French word for sock) in this context to refer to the concluding general words of a statutory provision. This is by analogy with “chapeau”, the French word for hat, which is used to refer to the introductory general words of a statutory provision appearing above a number of paragraphs which are all governed by the introductory words. As far as we can ascertain “chausette” was first used in this way by Perram J in SMA Solar Technology AG v Beyond Building Systems Pty Ltd (No 5) [2012] FCA 1483 at [79]. The term was later adopted by A.J.L. Bannon SC, in oral arguments before the High Court, in Astrazeneca AB & Anor v Apotex Pty Ltd [2015] HCATrans 106. Parker J in Viljoen v Hayes [2017] NSWSC 801 at [26] has recently adopted the use of “chaussure” (French for shoe) instead of “chausette” to refer to the concluding words of a provision.[2]
While ‘chausette’ (erroneously spelled with one “s“) has been favoured in South Australian Courts of Appeal (see Jones v The Queen[2018] SASCFC 80 [117], [137]; Weragoda v The Queen[2021] SASCA 123 [54], [71] and Gjona v The Queen[2021] SASCA 79 [9] (Doyle CJ is the common denominator on the benches in the latter two cases), ‘chaussure’ seems to have gained popularity in the Federal Court Full Bench and the NSW Court of Appeal (see O’Connor v O’Connor[2018] NSWCA 214 [89], and Kwatra v Minister for Immigration, Citizenship and Multicultural Affairs[2022] FCAFC 194 [13]).
Curiously though, Stevenson J as a trial judge in the NSW Supreme Court has variously used:
‘chausseur’ (a shoemaker): see Curve Securities Pty Ltd v Young (No 2)[2022] NSWSC 1436 [52];
‘chaussette’: see Downer EDI Rail Pty Ltd v John Holland Pty Ltd (No 4)[2018] NSWSC 326 [335]-[348] (where ‘chaussette’ also appears in the catchwords!); Bank of Queensland Ltd v AIG Australia Ltd[2018] NSWSC 1689 [46]-[50]; G&S Engineering Services Pty Ltd v MACH Energy Australia Pty Ltd[2019] NSWSC 407 [14]; and New Hope Corporation Ltd v Northern Energy Corporation Ltd (admin appt)[2019] NSWSC 879 [40];
‘chasseur’: see The Trustee for the Host Plus Superannuation Fund t/a Host-Plus Pty Ltd v Maritime Super Pty Ltd[2023] NSWSC 725 [40] (where ‘chapeau’ appears in the same sentence as ‘chasseur’);The University of Sydney v Multiplex Constructions Pty Ltd (No 2) [2023] NSWSC 1019 [20]; and MGW Engineering Pty Ltd t/a Forefront Services v CMOC Mining Pty Ltd[2021] NSWSC 514 [76] (in which his Honour footnoted Viljoen v Hayes and compared Parker J’s use of ‘chaussure’); and
also used ‘chaussure’ itself: Heavy Plant Leasing Pty Ltd (in liq) v McDonnell Dowell Constructors (Aust) Pty Ltd(No 2)[2022] NSWSC 1775 [67].
The word ‘chasseur’ translates from French to English as ‘hunter’, although we suspect that the word may have the same origins as English’s ‘chase’ or ‘chaser’.
Ever practical, and not to be outdone by their New South Welsh brethren (and sistren), the Victorian Court of Appeal in Brotherhood of St Laurence v Sarina Investments Pty Ltd [2024] VSCA 46 weighed in on the debate (perhaps unwittingly) and referred to the bottom bit of a clause in a lease as the ‘tailpiece’. No interstate cases were (foot)noted or, it would appear, were they drawn to their Honours’ attention.
For our part, we have always favoured ‘sabot’, although there is no published decision using it in this context (despite numerous attempts by the authors to have it adopted by a bench in this state). A sabot is a French clog carved from wood, which contrasts nicely with ‘chapeau’. The two words also rhyme when delivered in the firstnamed author’s terrible schoolboy French accent (but not, he hastens to add, in the secondnamed author’s far more refined gallic drawl).
It also appeals to the rebellious undergraduate who lurks within us all, as the artisans who crafted sabots rebelled against the mechanisation of the footwear industry by throwing their sabots into shoe-making machines, which is said to be where we get the words ‘sabotage’ and ‘saboteur’: see https://www.youtube.com/watch?v=F7r1GnG9cQ8.
Which version or other word do you prefer? Join the debate in the comments below…
Sam Hopper and Callum Dawlings
[1] The second author to this post would prefer to retain the terminology recommended by AGLC 4, at 3.1.4, and to refer to the text preceded by (a) to (d) as the respective paragraphs of sub-section (2) of section 37, but he was overruled by the first named author.
An earlier post on this blog here discusses two cases from Member Nash at VCAT in which the Tribunal held that a rent review covenant with a cap (or, in one case, a cap and collar) was inconsistent with sub-s 35(2) of the RLA 2003. In another decision handed down today, Acting Senior Member Nash (as the Member is now known) considered a similar issue in another lease.
In the decision of Northcote Shopping Centre Pty Ltd v Aldi Foods Pty Ltd [2024] VCAT 641, the Tribunal considered a series of leases which contained covenants for:
the annual review of the rent by CPI with a cap of 6%; and
market rent reviews on the exercise of an option with a cap of 10%.
In applying the same reasoning as she did in the cases discussed in my earlier post, the Tribunal held that each of those rent covenants were inconsistent with sub-s 35(2) of the RLA 2003, stating that:
[35] The Tenant’s focus of argument has been around the ameliorating aspect of the legislation. It is said that this aspect of the legislation was not considered in detail in the previous decisions.
…
[38] The legislature used the phrase “must be one of the following” deliberately. If it had intended to permit the use of multiple formulae, it would have used the phrase “must be any of the following”.
[39] The limitation of the rent review calculation provides certainty for both Landlord and Tenant, they know exactly how each year’s rent will be determined. This assists in budgeting, finance and valuation of each parties’ interest for business purposes. To permit two alternative methods to apply depending on which one is the lesser removes that certainty.
[40] The purpose of the RLA is clearly set out in s 1. The nature of the legislation is to “improve the fairness of the dealings between landlords and tenants”. That does not mean that a Tribunal or court is required to undertake language gymnastics to achieve an ameliorating effect when the words of the statute are clear. This is particularly so where to do so would achieve the opposite effect and create greater uncertainty and unfairness in such a relationship.
[41] While always taking account of the ameliorating nature of the RLA, the concept of fairness also includes certainty and that certainty cannot exist if the parties are unsure of what rent will be payable each year as it is dependent on two different calculations.
This decision is the third from VCAT holding that a ‘cap’ on a rent review covenant in prohibited by sub-s 35(2) of the RLA 2003. This suggests that the issue is settled at the VCAT level (albeit that the decisions are from the same member).
However, the issue has not been raised on appeal at this stage.
I will add a note to this blog in the event that the tenant files an appeal.
Sam Hopper Barrister 
July 9, 2025
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