Tuesday, 8 May 2012

When does a variation to a lease amount to a surrender and re-grant?

In Richmond Football Club Ltd v Verraty Pty Ltd [2011] VCAT 2104 , Senior Member Riegler of VCAT considered the effect of a surrender and re-grant of a Retail Premises Lease (over the Wantirna Club premises) in 2004, and the fact that no disclosure statement for outgoings had been provided by the landlord.

Background facts (taken from the judgment):
By an agreement dated 26 August 1998, Richmond Football Club Ltd (‘RFC’) and Verraty entered into a lease of the Wantirna Club (‘the Premises’). The lease was for 10 years commencing on 7 May 1998, with a further option term of 10 years.

Under the terms of the lease RFC was liable to pay all outgoings and land tax related to the Premises. The rent for the first year of the lease was fixed at $714,000 per annum.

The rent was to increase annually during the first 10 year term by 4% and that the rent for the first year of the option term was to be agreed or as determined by a valuer but not less than the rental paid immediately prior to the rent review date plus 4%.

In 2003, RFC contacted Verraty and claimed that anti-smoking legislation introduced in September 2002 had had an adverse effect on the profitability of the Wantirna Club. Consequently, it sought a rent review opportunity. A series of communications followed between the parties and their lawyers. Eventually, the parties executed a Variation of Lease dated 30 January 2004 (‘the 2004 Variation’).

The 2004 Variation reduced the rent, amended the rent review and bank guarantee provisions, introduced an obligation to pay GST and extended the term of the lease by 10 years to 18 May 2018.

Until December 2009, RFC continued to pay outgoings and land tax in accordance with the express terms of the lease.

Shortly before 9 December 2009, Verraty received two letters from RFC. The first letter sought to renegotiate the terms of the lease as a consequence of further changes made to the gaming laws in Victoria. The second letter stated that RFC had received legal advice that the 2004 Variation had effected a surrender and re-grant and therefore, the tenancy became subject to the Retail Leases Act 2003 (‘the RLA’) from the date that the 2004 Variation was entered into.

Under the RLA (s.46), RFC is not liable to contribute to any outgoings until it is given a statement of outgoings. No such statement of outgoings had been provided to RFC up until that time. Further, under s.50 of the RLA, any provision of retail premises lease is deemed void to the extent that it makes a tenant liable to pay an amount for land tax.

RFC argued before VCAT that the 2004 Variation operated in law as a surrender and re-demise of the lease - principally because it significantly extended the term of the original lease. Consequently, the lease was governed by the RLA (because that Act applies to retail premises leases entered into or renewed after 1 May 2003).

By operation of the RLA, RFC was not required to pay land tax or outgoings from the date that the parties entered into the 2004 Variation. Therefore, it sought to recover amounts paid in respect of that expenditure.

The landlord argued that the RLA does not apply to the lease as varied because the 2004 Variation effected a variation and not a surrender and re-grant. Alternatively, it argued that RFC is estopped from asserting its rights under the RLA or otherwise is not entitled to the relief it seeks.

The member concluded at paragraph 38 that:

In my opinion, the substantial changes made to the original lease - by significantly extending the term of the lease, altering the rent payable, and imposing an obligation to pay GST - clearly operate at law to effect a surrender and re-grant on substantially the same terms as the original lease as amended by the 2004 Variation. 

The member found further (at paragraphs 46 and 47):
The cases referred to [by Verraty] … are situations where the parties were aware of their rights but chose not to exercise them. The present situation is different. There is no evidence to suggest that either party was aware of their rights or obligations arising under the RLA when the 2004 Variation was executed. Indeed, the evidence suggests and I find, that RFC was completely ignorant that the 2004 Variation may have constituted a surrender and re-grant, with the obvious consequence of the RLA then governing the relationship between the parties.

In my opinion, there can be no estoppel by convention in the present case because RFC was unaware of its rights under the RLA until it first raised the issue in 2009. The situation might be different if RFC had been aware that the 2004 Variation had the effect of introducing the RLA but nevertheless chose to ignore whatever rights or obligations arose under that Act. However, that is not the case here. Therefore, I do not accept that the elements of estoppel by conventional (sic) have been established.

Retail premises lease
The member found (in paragraph 62) that the lease was a retail premises lease, within the meaning of that term as defined in the RLA.

In those circumstances, RFC sought to recover land tax in the sum of $143,675 paid between 1 April 2004 and 4 December 2009 and outgoings in the sum of $81,855.78 in respect of municipal rates and $6,516.05 in respect of water rates, said to have been paid in breach of certain provisions of the  RLA.

The member further found (at paragraphs 98 and 99):

In my opinion, the payment of outgoings is analogous to the payment of rent, in that it has a direct connection with the use and occupation of the Premises. In my view, The Dog Depot applies in respect of the payment of outgoings. Good consideration was received for the money paid in respect of outgoings. That being the case, it would be unconscionable or unfair to allow RFC to be repaid moneys in respect of outgoings.

Therefore ... the claim for money had and received, in so far as it relates to outgoings, must fail.

Land tax  
The member reached a different conclusion about land tax (at paragraph 104):

In my view, the consideration given by Verraty for the payment of land tax is severable. It is analogous to the imposition of the withholding tax in David Securities. There is no right nor can there be a right to require RFC to pay land tax owed by Verraty pursuant to the terms of the lease. That consideration fails and in my opinion, does not give rise to a defence to the restitutionary claim made by RFC.

The member found that the landlord was obligated to repay RFC $125,320 being money had and received in respect of land tax mistakenly paid by RFC after 29 October 2004 (ie 6 years before the proceedings were issued).

The case confirms that parties should be extremely careful when re-negotiating the terms of their existing leasing arrangments to ensure that they do not trigger any unwanted consequences, by effecting a surrender and re-grant in circumstances where legislation has intervened to impose different obligations on the parties.

W G Stark
Hayden Starke Chambers

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