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:

1. 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;
2. 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
3. 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:

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:

1. 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.
2. 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.
3. 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:
4. 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
5. 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.

For those interested in this topic, another paper has just been published on the website of my colleagues at Eastern Bridge lawyers here: https://www.easternbridge.com.au/post/section-28-notices-of-last-date-to-exercise-option

^[1] S28A of the RLA.

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.

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: 

1. the annual review of the rent by CPI with a cap of 6%; and 
2. 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.

I have had a few inquiries recently about an earlier here in which I discussed the VCAT decision of Blue Train Café Pty Ltd v The Trust Company Limited (Building and Property) [2024] VCAT 75, in which the Tribunal rejected an argument by a landlord that a tenant seeking an injunction to restrain wrongful re-entry should be required to pay all of the disputed arrears into a solicitor’s trust account in order to secure an injunction.

The post concluded by noting that the decision had been appealed to the Supreme Court, and I know that a few readers have been waiting to hear the results of the appeal.

His Honour Justice Croft today handed down the Court’s decision refusing the appeal.  I haven’t seen a copy of the Court’s reasons yet and they have not made their way onto AustLii, but I did hear his Honour refuse leave to appeal and say that he would have refused the appeal if leave had been granted.

I will post some extracts from the Court’s reasons as soon as I can.

There are a couple of issues that often come up in landlord and tenant cases that were both considered by the Court of Appeal’s decision last week in Brotherhood of St Laurence v Sarina Investments Pty Ltd [2024] VSCA 46 (26 March 2024).

First, tenants occasionally try to terminate a lease when the landlord has breached its repair covenant.  However, default and termination clauses in leases invariably allow the landlord to terminate the lease for the tenant’s breach, but not the other way around.  As a result, tenants need to establish that the landlord has repudiated the lease.  Repudiation of a lease, particularly by a landlord, is something of an evolving area in the law of landlord and tenant.  

Repudiation has been recognised as a basis for terminating a lease for some time.  However, the courts have indicated that they will be slow to infer that a lease has been repudiated by a tenant (eg see Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 57 ALR 609 at 621) and, in my experience, it is even more difficult to establish that a landlord has repudiated a lease.  However, a few cases have indicated that the courts and VCAT may be willing to find that a landlord has repudiated by failing to repair or maintain the premsies (see the discussion in Versus (Aus) Pty Ltd v A.N.H. Nominees Pty Ltd [2015] VSC 515 at [118] to [135]; see also Hann-Woodlock v ADMR Pty Ltd [2011] VCAT 1776).

Secondly, leases often contain a covenant requiring either the landlord or the tenant to ‘repair and maintain’ certain features at the leased premises.  There is an ongoing debate over what is required by a requirement to ‘maintain’ parts of the premises, and the extent to which this obligation requires investigation and preventive maintenance.

Facts

The tenant occupied part of an office building and obtained an engineer’s report into cracking in part of the concrete slab on the second level, which identified a suspected structural defect and recommended further investigations.  On receipt of the report from the tenant, the landlord obtained its own report from the same engineer, which also recommended further investigations.  However, the landlord did not undertake the recommended investigations.  

The tenant ultimately said that the landlord was repudiating the lease and that it accepted that repudiation and terminated the lease.  The landlord, in turn, said that the tenant’s purported termination of the lease was itself a repudiation and which the landlord accepted, and purported to terminate the lease.  

It was only once proceedings were issued that the landlord engaged a new engineer who completed further investigations and concluded that, in fact, there was no structural defect and that the concrete slab was sound.

Findings

The Court of Appeal made three interesting findings.

First, the obligation in the lease to ‘maintain’ the building in which the leased premises was located has a pre-emptive or preventive element and is not enlivened only once a defect arises.  This is important, because most landlords are absentee landlords and repair covenants are always construed as covenants to repair on notice. 

With respect to this issue, the Court held, after reviewing authorities considering the word ‘maintain’, that:

84.       … these authorities demonstrate that a duty to maintain has a pre-emptive or preventive element and is not enlivened only once the thing required to be maintained falls into disrepair. In this way, a duty to maintain is to be distinguished from a duty to repair, which arises only upon the occurrence of a defect whereas a duty to maintain is continuous. …  While a duty to maintain may not prescribe the particular means of maintaining something, it does not follow that there is no obligation to carry out any maintenance until the relevant thing falls into disrepair.

Although the finding was about the construction of the particular lease in that case, and parties to other leases should be slow to apply construction cases as though they create a binding precedent, the case does suggest that parties to a lease with an obligation to ‘maintain’ in addition to an obligation to ‘repair’ should have contracts in place to regularly inspect the premises for problems that may arise in the future as part of its regular maintenance.  (Think of ‘maintenance’ as like the regular service on your car, which includes a safety inspection; and of ‘repairs’ as remedying any defects in the car that you or your mechanic have identified.)

Secondly, in the circumstances of this case, the landlord had an obligation to undertake further investigations of the suspected defect. 

On this issue, the Court held that:

90.       In our view, Sarina was required to undertake investigations in response to being put on notice of a possible structural defect. This is where, as set out above:

(a)       the scope of a duty to maintain a building in a structurally sound condition will vary depending on the circumstances (in particular, the nature of the thing which the subject of the duty); and

(b)       that obligation includes taking preventive or proactive measures to prevent a structural problem occurring.

91.       Indeed, in our view, once it is accepted that the maintenance obligation includes preventive measures, and that these measures vary in the circumstances of each case, these preventive measures may include investigating reasonably suspected defects. This may require obtaining expert reports in appropriate circumstances to determine whether remedial works are required. This does not require reading additional words into the maintenance covenant; rather, this obligation is inherent to a duty to maintain.

This does not necessarily mean that landlords need to go hunting for potential defects in the property in advance of them occurring (over and above regular inspections).  In this case, it was significant that the tenant had provided an engineer’s report recommending further investigations, and that the contents of that report had been confirmed in a further report to the landlord. 

It follows that a party with an obligation to ‘maintain’ part of a leased premises should be careful to follow up on recommendations that are made by contractors inspecting the leased premises – both from your own contractors and those provided to you by the other party.

Thirdly, by failing to do so, the landlord had repudiated the lease, allowing the tenant to accept that repudiation, terminate the lease and sue for damages.  

On this question, the Court held that:

[101]   We have concluded Sarina’s breach of the maintenance covenant was sufficiently serious to justify termination. First, the maintenance covenant was of high importance. It related to the structural soundness, and therefore safety, of the Premises for which the only permitted use was as a commercial office.

[102]   Second, we consider that Sarina’s breach was significant and subsisted for a substantial duration. In our view, the breach commenced after Sarina had a reasonable opportunity to consider and respond to the first NSIENT report provided on 18 March 2020.^[1] The breach continued until 3 March 2021, when BSL terminated the Lease. We note that throughout this period BSL continued to raise Sarina’s failure to address the issues described in the NSIENT reports.

[103]   The consequence of this breach was also significant, in light of all of Sarina’s conduct. By March 2021, BSL could not have had any comfort that Sarina’s breach in failing to investigate the structural soundness of the Building would be remedied in the foreseeable future. It is relevant that BSL was under the OH&S obligation, which Sarina was made aware of, at least in general terms, from July 2020. In all these circumstances, we have formed the view that BSL was entitled to accept Sarina’s repudiation and terminate the Lease on 3 March 2021. In our view, BSL became entitled to terminate for repudiation upon receipt of Sarina’s email of 18 December 2020 at the latest.

[104]   For completeness, for much the same reasons, we consider that Sarina’s conduct from March 2020 through to early 2021 also evinced an unwillingness to perform its obligations under the maintenance covenant so as to constitute a renunciation of the Lease.^[2]

This is a particularly interesting finding for leasing practitioners.  As referred to above, it is rare for a landlord to be found to have repudiated a lease for failing to repair or maintain the premises.  However, this decision goes a step further, and finds that the landlord had repudiated the lease by failing to conduct further investigations into the potential defects.  

The Court was, no doubt, influenced by the perceived degree of the landlord’s delinquency (it had, after all, failed to follow the advice that it received in its own report) and the severity of the potential damage, even though the defect was not ultimately established (it appears that the potential slab damage presented a genuine safety risk).  Consequently, these circumstances might not arise again any time soon.

Comments

These findings are interesting for retail and commercial leasing practitioners.

First, s 52 of the Retail Leases Act 2003 (Vic) implies into every retail premises lease an obligation on the landlord to ‘maintain’ many aspects of the retail premises.  Similar obligations are found in many commercial leases and impose an obligation to ‘maintain’ on both landlords and tenants.   

Consequently, findings about the extent of an obligation to ‘maintain’ a property, particularly the obligation to follow-up on recommended repairs, will affect a significant number of practitioners.

Secondly, a finding in an appeal 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. The Court of Appeal’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 consequences for landlord and tenant litigation.

^[1]Alternatively, it commenced after Sarina had a reasonable opportunity to consider and respond to the second NSIENT report, provided on 26 November 2020.

^[2] See Koompahtoo (2007) 233 CLR 115, 135–6 [44] (Gleeson CJ, Gummow, Heydon and Crennan JJ); [2007] HCA 61.