My friend Robert Hay just added a post to his blog on a new decision in which VCAT held that a landlord repudiated the lease by failing to comply with its repair and maintenance obligations under s 52 of the RLA.

Read Robert’s post here.

VCAT’s decision is available here.

Acceptance of the landlord’s repudiation will terminate the lease and allow the tenant to claim damages.

This decision is useful for tenants as it gives a tenant bargaining power against a landlord who has failed to adequately maintain a premises, particularly given the recent press about the lack of retail tenants to fill vacant shops.

For example, assuming that the breach constitutes a repudiation of the lease (not all breaches are a repudiation – but that is a topic for another post), it might be possible for a tenant to accept the landlord’s repudiation, terminate the lease and use the threat of litigation to renegotiate the terms of its lease on more favourable terms.

However, this would be a bold strategy because:

1. the landlord may be able to find another tenant, causing loss of goodwill, investment in fitout and all the usual problems that come with the loss of a retail premises lease; and
2. the tenant would then need to sue for damages.  This may be a hollow remedy given that:

(a) the tenant is only entitled to its loss.  Many smaller retail tenants have significantly reduced profits after payment of directors’ salaries;  and

(b) the litigation would take place in a no-cost jurisdiction.  Litigation over the loss of a tenancy requires either a forensic accountant or a valuer in addition to the usual legal costs, which may consume a significant portion of the damages award.

In the past week or so a debate has been brewing between shopping centre retailers and landlords, fuelled by comments made in the media by Mark McInnes and Solomon Lew of Premier Investments.

McInnes is employing a strategy of closing stores to reduce losses in his ‘ongoing cost-reduction program’.   In some cases where Premier Investments have threatened to close stores, landlords have responded by offering rent reductions of up to 30%.

McInnes discusses this strategy here and refers to the “massive arguments” taking place between centre management and retailers.

One commentator says that landlords face the possibility that other retailers might follow Premier’s lead and should be thankful that there have not been more store closures.   In the same article, he encourages landlords to “jump at the chance to replace underperforming fashion tenants sooner rather than later”.

Solicitors for both landlords and tenants should consider both the opportunities and the risks that this recent press creates for their clients.

For those interested in following the debate, a summary of recently reported articles follows:

‘Lew all cashed up for bargain hunt’, AFR, 20 September 2011

• Solomen Lew intending to take advantage of poor retail conditions to purchase assets
• Solomen Lew optimistic for sales growth in first half of 2012 compared with 2011

‘Premier warns retail to get worse’, The Australian, 20 September 2011

• 18% decline in profit for 2010-11
• Premier’s strategy of closing stores to reduce losses; ‘ongoing cost-reduction program’
• some store closures have been prevented where shopping centre landlords have offered rent reductions when Premier threatened not to renew their lease

‘McInnes gets his mojo back with ambitious agenda’, The Australian, 20 September 2011

• Solomen Lew waiting for the right acquisition opportunity
• McInnes talks about the “massive arguments” between centre management and retailers
• McInnes discusses strategy of closing stores on expiry of leases
• When threatened with store closures, some landlords are offering rent reductions
• McInnes also suggested that there is the possibility of claw-back by sharing the costs for store refits
• Suggests that retailers only have bargaining power where they are willing to close stores

 ‘Retailers ‘being gouged’’, The Age, 20 September 2011

• McInnes increasing his rhetoric against shopping centre landlords, threatening landlords with closure and in some cases succeeding in getting rent reduced

 ‘The making of a real estate monster’, SMH, 21 September 2011

• small retailers at risk
• suggests that retail property owners may be thankful that there haven’t been more store closures
• landlords face the possibility that other retailers might follow Premier’s lead
• says landlords must “jump at the chance to replace underperforming fashion tenants sooner rather than later”

Solicitors with clients who possess old laneways should consider lodging caveats to protect their clients’ possessory title and making an adverse possession application to the Registrar or Titles as soon as possible.

Under s 7B of the Limitation of Actions Act 1958 (Vic):

7B            No title by adverse possession against Councils

 (1) Despite any rule of law or provision made by or under this or any other Act, but without limiting section 7, the title of a Council to council land is not affected by reason only of any possession of that land adverse to the Council, irrespective of the period of that possession.

…

(3) In this section—

…

council land means land of which a Council is a registered proprietor under the Transfer of Land Act 1958;

registered proprietor and Registrar have the same meanings as in the Transfer of Land Act 1958.

A registered proprietor under the TLA is defined as ‘any person appearing by the Register or by any registered instrument to be the proprietor of any estate or interest in land’.

Many land owners have adversely possessed disused laneways for decades without needing to perfect their titles, many of whom purchased the possessory title from their predecessors.

The register often still shows the proprietor of the land to be the old developer who subdivided the land in the early years of the 20th century, even though local government legislation vests the title in the council.

However, it appears that the local council may be able to defeat old adverse possession claims by making an application to the Land Titles Office to become registered proprietor.  If the adverse possessor does not have a caveat lodged, then the council’s application may proceed without their knowledge.  The person in actual possession of the land may then need to purchase the disused land from the council.  As the current occupant of the land probably purchased the possessory rights from their predecessor in title some years ago, this could mean that they have to buy the land a second time.

Anyone claiming adverse possession of a laneway will, of course, need to satisfy all the usual requirements of an adverse possession claim.  Consideration will need to be given to whether or not an entry has been made in the Government Gazette declaring the disused laneway to no longer be a road and its impact on any adverse possession claim (see, for example, the discussion at [225-1250] of Halsbury’s Laws of Australia).

Robert Hay has just put an interesting post on his blog about a change to the legislation regarding goods left on the premises after termination of a lease – see here.

The potential problem with the statute that Robert has identified emphasises that it is prudent for landlords to ensure that leases contains a clause dealing with goods left behind.

Section 52(2) of the RLA 2003 creates a ‘keep in repair’ covenant.  The landlord is required under s 52 to keep the premises in a condition consistent with the condition of the premises when the retail premises lease was entered into.

In Computer & Parts Land Pty Ltd v Aust-China Yan Tai Pty Ltd [2010] VCAT 2054, a decision of Senior Member Lothian, the tenant complained about deterioration to the roof and a failure of the air conditioning system.  Prior to the commencement of the lease, the landlord and the tenant agreed in a special condition in the lease that the landlord would complete certain work to bring the premises to a particular standard before commencement of the lease.  The landlord never completed that work and the tenant ultimately sued for specific performance of the landlord’s repair and maintenance obligations.

The decision is long and tackles a number of complicated issues.  The following sub-paragraphs summarise some of the interesting findings for practitioners in this area:

1. the tenant’s knowledge of any defects in the premises is not relevant to the operation of s 52 (para [78]);
2. the condition of the premises for the purposes of s 52 is determined by reference to what was in fact demised and from the intention of the parties (para [79]).  The tenant need not rely solely on the condition of the premises, but can rely on an agreement to put the premises into a particular state at the commencement of the lease (para [101]).  The condition of the premises for the purposes of s 52 is the condition that the parties agreed to put it into at the commencement of the lease (paras [104] to [108]).  The standard for s 52 is what was agreed, not what the condition of the premises in fact was when the lease was entered into (para [146]);
3. but for the special condition in the lease creating an obligation on the landlord to put the premises into a particular state, the landlord had no obligation to do more than ensure that the poor system did not deteriorate further (para [103]);
4. s 52 does not require the landlord to re-design or improve the premises (paras [90] to [97]);
5. the obligation to keep in repair could, in extreme circumstances, mean replacement if it is the only option open to the landlord (paragraph [84]). On balance, the only way to ensure that the roof in that case would survive the lease was to replace it (para [127]).  On the other hand, the Member said she intended to order repair of the roof because it was likely (rather than certain) that the roof will not survive (para [128]);  and
6. the submission was rejected that s 52 should give to the tenant the intended benefit of the premises (para [100]).

Similar issues were raised in Savers INC v Herosy Nominees Pty Ltd [2011] VCAT 1160.  The decision was delivered on 20 June 2011, also by Senior Member Lothian.

The landlord in that case argued that:

1. s 52 should not be read beneficially in favour of the tenant;  and
2. the landlord’s obligations to maintain the premises to a standard higher than that specified in s 52 should be read down.

The tenant argued that s 52 creates a ‘baseline’ obligation and that the parties are entitled to agree to a wider obligation.

The Tribunal:

1. accepted that s 52 should not be read to benefit the tenant;
2. acknowledged that, on one view, the tenant’s interpretation of s 52 favoured the tenant;  and
3. nevertheless found that the parties could agree to a wider obligation than that imposed by s 52.

It is not entirely clear how the intentions of the parties can be relevant to the operation of s 52 in light of s 94 of the RLA, which prohibits parties to a retail premises lease from contracting out of the operation of the RLA.

Nevertheless, we now have two Tribunal decisions (albeit from the same member) indicating that it is possible for the parties to a lease to enforce against the landlord an obligation higher than that imposed by s 52.