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.

In the recent case of Blue Train Café Pty Ltd v The Trust Company Limited (Building and Property) [2024] VCAT 75, the tenant sought an injunction to restrain the landlord from re-entering a leased premises because of alleged unpaid outgoings.  The Tribunal found that there was an arguable case that the landlord had miscalculated the outgoings that were currently payable. 

The usual practice of the Tribunal in these circumstances (or when there is a counterclaim of the right quantum and character so that it arguably defeats the alleged arrears) is to make the interlocutory injunction conditional only upon:

1. the payment of rent from the date of injunction to trial; and

2. the usual undertaking as to damages.  

The Tribunal does not usually make an order for the payment of the disputed arrears into Court or a solicitor’s trust account.

However, the landlord in this case argued that any injunction should be made conditional upon the tenant paying the amount of the disputed outgoings into the trust account of the landlord’s solicitor.  

The landlord relied on mortgage cases where disputed arrears are, as a general practice, required to be paid into court.  In particular, the landlord relied on the following extract from the decision of the Full Court of the Federal Court in Telstra Corporation Ltd v First Netcom Pty Ltd (1997) 78 FCR 132:

Thus it may be said that where a person seeks an injunction to restrain the termination of an ongoing agreement with the consequence that the party so enjoined is forced to continue to deal against his or her will, the party seeking the injunction will, prima facie, be required to pay to the party enjoined any monies owing between them or, if there is dispute as to whether monies are owing, to pay the amount in dispute into court, in addition to the normal undertaking as to damages.

… In determining the extent of the amount which would be paid into court (if any), the Court must, of necessity, have regard to the financial circumstances of the applicant for injunctive relief. Where the applicant is comfortably solvent, so that there would be no concern that the respondent be forced to continue to do business, and incur perhaps even greater indebtedness, and ultimately be left lamenting for amounts unpaid, the Court, as a matter of discretion, might refrain from ordering payment into court. But it will almost invariably be relevant to the way the Court exercises its discretion to have evidence as to the financial situation of the applicant, unless all amounts owing are paid to the respondent, paid into court, or security for the amount provided.

In Blue Train, in accordance with its usual practice, the Tribunal declined to follow those cases and ordered that the injunction should be granted without a condition that the disputed amount be paid into the trust account of the landlord’s solicitor.  At that point, it was ‘steady as she goes’ as far as landlord and tenant dispute at VCAT are concerned.

However, I have been informed that an application for leave to appeal the decision has now been filed in the Supreme Court.  I am not aware of a hearing date.

A successful appeal leading to a requirement for tenants to pay disputed arrears into a solicitor’s trust account as part of the price of an injunction would represent a significant departure from the Tribunal’s usual practices, although it appears that a similar requirement is near universal in mortgage cases.  This would:

1. represent a significant shift in tenants’ ability to obtain an injunction to restrain wrongful re-entry over disputed arears or when the tenant has a counterclaim that defeats the arrears;  and 
2. confine the strategies available to financially distressed tenants, potentially reducing the bargaining power and business recovery or exit strategies available to them.

I will note on this blog any relevant developments in the appeal.

The Victorian Government yesterday announced the appointment of 20 new members to VCAT.

A copy of the Government press release is available here: https://www.premier.vic.gov.au/new-vcat-members-clear-backlog-and-reduce-wait-times

16 of the new members will be appointed to the residential tenancies list and 4 to planning and environment.

There is no mention of members being appointed to the building and property list (which includes retail tenancies).

However, I have been informed that a number of existing VCAT members who are currently allocated to the residential tenancies list also have experience in building and property. The new appointments should (hopefully) free up some of those members to sit in the building and property list, which will go some way to addressing the current delays in the building and property list.

Congratulations to all of the new appointees.

Most practitioners will be aware that the RLA 2003 does not apply to leases predominantly for the provision of services above the third storey, generally known as the Third Storey Exclusion.  

However, the definition of ‘storey’ has caused consternation within the leasing community, as ‘storey’ does not equate to ‘floor’ or ‘level’. 

This issue was considered earlier this year by Deputy President Riegler in the context of a costs dispute in a rent relief case.  In short, the Tribunal found that:

• Ground floor = Storey 1
• Level 1 = Storey 2
• Level 2 = Storey 3
• Level 3 = Storey 4 and so on…

This is consistent with earlier decisions in this area, such as Evans & Ors v Thurau Pty Ltd [2011] VCC 1444 and gives a good indication of how to apply the Third Storey Exclusion.

A copy of the Tribunal’s decision can be found here: Aqua Greenland Pty Ltd v Max Therapy School Pty Ltd (Building and Property) [2023] VCAT 449.

A copy of the Third Storey Exclusion is found here: Ministerial Determination No. S 75 dated 30 April 2003.

For those looking for more detail about the case, Eli Fryar (who will be at the Bar taking retail leasing briefs from May next year) has provided the following detailed summary.

Background

The tenant, Max Therapy School Pty Ltd leased a premises located on Level 3, 310 King Street, Melbourne, from the landlord, Aqua Greenland Pty Ltd.

The tenant’s business (a training facility delivering diploma courses in remedial massage) was severely affected by the Covid-19 pandemic and as result, the tenant made a number of requests for rent relief under both the COVID 19 Omnibus Act & Regulations and the CTRS Regulations.

The landlord ended up making several offers for rent relief, some of which were accepted.  In relation to the unaccepted offers, the tenant alleged that they were deemed to be accepted and therefore binding on the parties whilst the landlord contended that it was forced to initiate the proceeding to seek a declaration that rent relief be determined in accordance with the unaccepted offers.

The matter ultimately resolved by consent, save that both parties sought their costs against the other.

Costs dispute and Third Storey Exclusion

The landlord argued that it was entitled to its costs under s 109(3)(e) of the VCAT Act on the basis that the landlord was forced to commence the proceeding because the tenant failed to agree on an appropriate level of rent relief.

The tenant submitted that the unaccepted offers for rent relief were not in dispute and were therefore deemed to have been accepted by the tenant under the relevant regulations.

It was not in dispute that the tenant operated a retail business from the premises.  Ordinarily in such circumstances s 92 of the RLA 2003 (that each party bear their own costs of the proceeding unless the circumstances in s 92(2) are engaged) would apply.

However, the landlord further submitted that the RLA 2003 did not apply because the premisses were located on the “fourth storey” of the building.

Sub-section 4(2)(f) of the RLA 2003 provides that certain premises which are the subject of a Ministerial Determination are to be excluded from the operation of the RLA 2003.  

The Third Storey Exclusion itself states that (emphasis added): 

Acting under Section 5(1)(c) of the Retail Leases Act 2003, I determine that the following kind of premises to which Section 4(2)(f) applies:  

Premises that are located entirely within a building which, under the terms of the lease relating to the premises, or part of the premises, are used, or are to be used, wholly or predominantly for the retail provision of services, other than premises located entirely on any one or more of the first three storeys in a building, excluding any basement levels. 

In determining whether or not the premises was located on the fourth storey of the building, Deputy President Riegler referred to the definition of “storey” in the Building Code of Australia 2019 – Volume One (emphasis added):

19.       As indicated in the Ministerial Determination, the exclusion of the RLA 2003 does not apply to retail premises which wholly or predominantly occupy the first three storeys in a building. It is unclear from the affidavit material whether the Premises fall within this description. Neither the RLA 2003 nor the Ministerial Determination define what constitutes a storey, for the purposes of the Ministerial Determination. This is regrettable because it is sometimes unclear whether the reference to a building ‘Level’ or ‘Floor’ corresponds to the same number of storeys. In relation to Class 2 to Class 9 buildings, the Building Code of Australia 2019 – Volume One defines a storey as:

Storey means a space within a building which is situated between one floor level and the floor level next above, or if there is no floor above, the ceiling or roof above but not – 

• a space that contains only – 
• a lift shaft, stairway or meter room; or 
•  a bathroom, shower room, laundry, water closet, or other sanitary compartment; or 
• accommodation intended for not more than 3 vehicles; or 
• a combination of the above; or 
• a mezzanine.

20.       On the assumption that the ground floor of the building in which the Premises are situated is described as the Ground Floor and having regard to the definition of a storey in the BCA, I am satisfied that the Premises are located on the fourth storey. I have formed that view based on the following: 

• Ground floor to Level 1 (the Ground Floor) being the first storey; 
• Level 1 to Level 2 (Level 1) being the second storey; 
• Level 2 to Level 3 (Level 2) being the third storey; and 
•  Level 3 to Level 4 (Level 3) being the fourth storey. 

However, despite finding that the premises were located on the fourth storey and that the RLA 2003 didn’t apply due to the Third Storey Exclusion, Deputy President Riegler did not make an order as to costs, holding that:

21.       However, notwithstanding my finding that the space between Level 3 and Level 4, occupied by the Premises, is the fourth storey and as a result, s 92 of the RLA does not apply, I am not satisfied that it would be fair in the circumstances to order costs in this proceeding… 

This case serves as a reminder that retail premises located above the third “storey” will be excluded from the operation of the RLA 2003.  When considering whether or not a premises is located above the third “storey” don’t forget to include the ground floor in your calculation as follows:

• Ground floor = Storey 1
• Level 1 = Storey 2
• Level 2 = Storey 3
• Level 3 = Storey 4 and so on…

Sam Hopper and Eli Fryar