An interesting issue came across my desk.

A tenant had exercised an option to renew its lease but, for various reasons, a deed of renewal was never executed.  The tenant then purported to assign the lease.  The question arose as to whether a lease in those circumstances is capable of assignment.

It seems to be well established that the exercise of an option creates an agreement to lease rather than a lease (see Farrands, The Law of Options, 2010 at 137).  The lease is not created until the parties execute a deed.

Under the doctrine in Walsh v Lonsdale, the putative tenant is to be treated as in many ways the same as a tenant of a legal estate.  However, the Courts have been careful to point out that Walsh v Lonsdale is based on the putative tenant’s ability to seek and obtain specific performance of an agreement to lease, and that the putative tenant does not have a legal lease (see, in particular, Chan v Cresdon Pty Ltd (1989) 168 CLR 242 and the discussion in Bradbrook, Croft and Hay, Commercial Tenancy Law, 3rd ed, 2009, at [4.8]).

An interest in a contract cannot be unilaterally assigned.  A tripartite agreement to novate is required, extinguishing the old contract and creating a new one. Consequently, it follows that the putative tenant under an agreement to lease can’t unilaterally assign its interest.  It seems to follow that the agreement for lease can’t be unilaterally assigned.

However, it may be possible to characterise the purported assignment as an agreement to assign future property (ie to assign the lease if and when it is created).  An agreement to assign future property may be effective and crystalises the moment the property is created (see discussion of Meagher, Gummow & Lehane, 4th ed, at [6-190] to [6-330]).

If that argument can be made out, then the assignee would need to either issue proceedings in the name of the assignor (or possibly join the assignor as a defendant) seeking specific performance of the agreement to lease and compelling the landlord to produce a deed.  However, if the assignor is in liquidation, deregistered or dead, specific performance of the agreement to lease may be difficult to obtain.

I have not found  a case directly on point, but the arguments seem compelling.  This all highlights the need to obtain a deed of renewal of a lease when an option is exercised.

Deputy President Macnamara at VCAT recently held that a permitted purpose in a lease provided as “hotel” was synonymous with “pub”, and that the term “hotel” in modern parlance does not necessarily mean the tenant must provide accommodation.

This is useful for people settling leases of pubs and hotels.

However, it does not address the “difficult question” of whether a lease of serviced apartments is a retail premises lease (see Meerkin v 24 Redan Street Pty Ltd [2007] VCAT 2182, Deputy President Macnamara; 16 November 2007).

Thanks to Jordon Ross, who appeared in the case, for providing a copy of the decision to me.

The case does not yet appear on AustLii.  If readers would like a copy of the decision, it is attached here: Bay Street Rose Pty Ltd v Christopoulos.

Under the Retail Leases Act 2003 (Vic) a landlord is only entitled to withhold consent to an assignment in the circumstances set out in s. 60(1), which says:

(1) A landlord is only entitled to withhold consent to the assignment of a retail premises lease if one or more of the following applies—

(a)   the proposed assignee proposes to use the retail premises in a way that is not permitted under the lease;

(b)   the landlord considers that the proposed assignee does not have sufficient financial resources or business experience to meet the obligations under the lease;

(c)   the proposed assignor has not complied with reasonable assignment provisions of the lease;

(d)   the assignment is in connection with a lease of retail premises that will continue to be used for the carrying on of an ongoing business and the proposed assignor has not provided the proposed assignee with business records for the previous 3 years or such shorter period as the proposed assignor has carried on business at the retail premises.

Section 60(1) will prevail over any inconsistency in a retail premises lease (see s. 94 of the Act).

The Landlord must act reasonably when relying on s. 60(1)(b) and possibly when relying on the other provision of s. 60(1) (see AAMR at [45], cited in my blog entry on 20 May 2011).

What is reasonable or unreasonable will depend on the circumstances. For example:

1. generally, it is reasonable for a landlord to seek to prevent its premises being used in an undesirable way or by an undesirable tenant or assignee (see Le Coz v Innominata Pty Ltd [1999] VCAT 1598 at [22]);
2. a landlord is not entitled to prevent an assignment on grounds which have nothing whatever to do with the relationship of landlord and tenant or to the subject matter of the retail premises lease (see Le Coz at [22]);  and
3. regard should be had to the purpose of the Act, which is to foster and protect small business and encourage innovation by the establishment of new small business (AAMR at [18]).

The landlord may be entitled to request more security from the proposed assignee if it considers that the proposed assignee does not have sufficient financial resources or business experience to meet the obligations under the lease.  However, the additional security must be reasonable.

In Kamil Cafe Pty Ltd v Asian Pacific Building Corporation Pty Ltd [2005] VCAT 2264 the landlord withheld consent because the tenant had poor communication skills and lacked business experience and confidence.  VCAT found that the tenant had some business experience and accounting training and that the particular business did not require strong communication skills from its owner to be successful.  Consequently, the landlord had unreasonably withheld its consent to the assignment of the lease.

In AAMR, a company controlled by the same family as the proposed assignee had been placed into liquidation, but the family had paid the creditors and the Liquidator’s fees and expenses and had the winding up order annulled.  While the group of companies had clearly been under financial stress, the Tribunal found that the tenant had the financial resources to operate the business at the leased premises.

Until the decision of Deputy President Macnamara in Café Dansk Pty Ltd v Shiel & Ors [2009] VCAT 36, it was widely believed that landlords were responsible for conducting repair and maintenance at leased premises but that those costs could be passed on to tenants as outgoings under the terms of the lease. The belief was based on:

1. the definition of “outgoings” in the RLA including costs for “maintenance and repair”;  and
2. the note to s. 52, which refers to those costs being recovered as an outgoing.

This belief was overturned in the Café Dansk case, in which Deputy President Macnamara expressed the view that:

[41] When the section was initially enacted with effect from 1 May 2003, it obliged a landlord to maintain structures, fixtures, plant, equipment, appliances and so forth “in good repair”. Act No 82 of 2005 made a number of retrospective amendments to the 2003 Act including an amendment to s 52 which scaled back the landlord’s liability to maintaining the relevant items “in a condition consistent with the condition of the premises when the retail premises lease was entered into”. The note at the end of the section was also added by the 2005 amendment and the addition of the note was also made retrospectively.

[42] Mr Langevad drew my attention to provisions on the website of the Victorian Small Business Commissioner. The effect of the addition of the note according to the website was that it would –

clarify that while the landlord is responsible to arrange and carry out the repairs under s 52(2), the cost of those repairs, other than capital cost and the cost of urgent repairs may be passed on to the tenant if they had been specified in the lease as recoverable outgoings under the lease.

[43] Mr Shiel in his evidence said that he attended a seminar conducted by the Real Estate Institute of Victoria which advocated this same view. It was apparently in reliance upon this view that Mr Shiel in the early version of the disclosure statement included an estimated outgoing of $2000 per annum for repairs and maintenance to the property. In his work Retail Leases Victoria, Dr Croft does not appear to refer to the note added to s 52 in 2005. On the suggestion that the landlord’s cost of complying with s 52 may be recovered by the landlord as an outgoing, Dr Croft said:

Prior to the amendments effected by the 2005 amending Act, it had been suggested that a landlord may be able to recover the costs for his repair obligations under subs 52(2) from the tenant, but this suggestion would appear to face at least two reasonably substantial difficulties. The first is that under para 51(1)(c) a landlord is not able to claim from any person (including the tenant) the landlord’s legal or other expenses relating to the landlord’s compliance with the 2003 Act. The other difficulty is that even if the landlord’s expenses in complying with subs 52(2) are regarded as falling within the definition of “outgoings” under s 3 of the Act, recovery of outgoings as defined depends upon the operation of ss 29 and 39 which, in turn, depends upon the lease provisions which comply with 39. As the provisions of subs 52(2) are ‘implied terms’, implied by force of statute and also expressly protected by the provisions of s 94 (which, in subs 94(1) expressly prevents contracting out with respect to ‘anything that the lease has taken to include or provide because of the provisions of this Act’ …), the difficulty appears to be substantial.

[44] I find Dr Croft’s sceptical views on this point compelling. It would, in my view, make a mockery of s 52 if Parliament having allocated the responsibility for certain repairs to the landlord, the landlord could then send the bill to the tenant for the cost of carrying out those repairs. To attempt to reach this unlikely result by reliance on the note at the end of the section is, to quote Lord Salmon, “like trying to suspend a 3 tonne truck from a cobweb” (Broome v Cassell & Co [1971] 2 QB 354, 390). Even if I were wrong on this point, the strategy for a landlord to recover the cost of compliance with his s 52 obligations from the tenant would depend upon there being a covenant in the lease making these amounts recoverable as outgoings. There is no such clause in this lease. The covenants requiring the tenant to carry out the repairs itself do not deal with any outgoings issue.

The above statement is probably obiter given that the lease did not permit the landlord to recover repair costs as outgoings (see paragraph [44] above).  However, the view expressed by Deputy President Macnamara should not be lightly dismissed given that:

1. it is a reasoned opinion expressed by a very highly regarded member of the Tribunal with extensive retail leasing experience;  and
2. it refers to and relies upon extra-judicial comment by a Supreme Court Judge.

That being said, in my view, that decision may be open to challenge.  The Explanatory Memorandum to the 2005 amending act states that:

Clause 25.

Sub-clause (6) inserts a note at the foot of section 52(5) of the Principal Act regarding sections 39 and 41.  The effect of the note is to highlight other provisions in the Act which, together with the application of section 52 of the Act, clarify that while the landlord is responsible to arrange and carry out the repairs under sub-section (2), the cost of those repairs other than capital costs and the cost of urgent repairs, may be passed on to the tenant if they have been specified in the lease as recoverable outgoings under the lease. 

It appears that this Explanatory Memorandum was not provided to the Deputy President.

Solicitors advising landlords or tenants entering new leases should be aware that:

1. as the law presently stands, repair and maintenance costs cannot be recovered by a landlord;  and
2. that may change if the Café Dansk decision is challenged.

If a lease is silent, the common law does not imply against either a landlord or a tenant an obligation to perform capital works on leased property.

This has been the source of a significant dispute, as the tenant usually carries the immediate commercial risk if the building is run down, yet the landlord gains the long term benefits of the repairs.

The Retail Leases Act 2003 (Vic) addresses this to some extent by imposing on the landlord an obligation to maintain the premises in a condition consistent with the condition of the premises when the lease was entered into (see s 52). However, the exercise of an option starts a new lease, which can cause real problems for a tenant if the building needs repair around the time the tenant needs to exercise its option (see Ross-Hunt Pty Ltd v Cianjan Pty Ltd [2009] VCAT 829 at [30] to [32]).  Also, s 52 of the RLA does not address existing problems with the building.

Section 251 of the Building Act 1993 (Vic) says that:

(1) If the owner of a building or land is required under this Act or the regulations to carry out any work or do any other thing and the owner does not carry out the work or do the thing, the occupier of that building or land or any registered mortgagee of the land or the land on which the building is situated, may carry out the work or do the thing.

(2) An occupier may—

 (a) recover any expenses necessarily incurred under subsection (1) from the owner as a debt due to the occupier; or

(b) deduct those expenses from or set them off against any rent due or to become due to the owner.

…

(6) This section applies despite any covenant or agreement to the contrary.

Practitioners for both landlords and tenants should be aware that this may create a “back door” way of creating a repair covenant with respect to any repairs that have been the subject of a notice or order under the Building Act.