Thursday, 14 June 2018

What are a landlord's obligations to undertake repairs under section 52 of the Retail Leases Act 2003 and what compensation can be ordered under section 54 of the Retail Leases Act 2003?

1.     A recent VCAT case (Versus (Aus) Pty Ltd v A.N.H. Nominees Pty Ltd (Remitted) (Retail Tenancies) [2017] VCAT 859) raised a number of matters, including whether the express terms of lease required the landlord to make the premises fit for occupation; the impact of s 52 and 54 of the Retail Leases Act 2003; whether representations made after lease was renewed gave rise to an equitable compensation obligation; and whether the premises were to be totally free of mould.

2.     The retail premises were located in Church Street, Brighton, Victoria from which the Tenant operated an exclusive lingerie business. In essence, the dispute concerned damage caused to the retail premises as a result of water or moisture ingress. This state of affairs resulted in the leased premises experiencing elevated levels of mould ecology, which ultimately caused the Tenant to vacate the Premises in May 2011. The Tenant did not re-occupy the Premises after that date.

3.     The Tenant contended that the Landlord failed to remediate the Premises to a condition where it was safe to re-occupy the Premises. It ultimately purported to determine the lease agreement by correspondence dated 27 March 2013 on the ground that the Landlord had repudiated its obligations under the lease. In response, the Landlord, by correspondence dated 9 April 2013, denied that it had repudiated its obligations under the lease but, nevertheless, accepted that the lease had come to an end.

4.     The Tenant claimed compensation for loss and damage caused to its lingerie business, which included loss of profit, loss of goodwill to the business value, and damage to various goods, fixtures and fittings.

5.     The case had been before the Tribunal several times. In 2014, Senior Member Riegler made orders. The Tribunal ordered that the Landlord pay the Tenant a large amount of compensation (over $300,000 in total over 2 separate proceedings).

6.     The Tenant successfully appealed the 2014 decision about the limit of the compensation ordered, and the claim came back to VCAT for further assessment

7.     One of the hotly contested issues at the rehearing was whether the landlord had repudiated its obligations under the lease because it had failed to remediate issues of moisture ingress and excessive levels of mould ecology, which adversely affected occupation of the Premises. The Landlord contended that there was no contractual or statutory obligation requiring the Landlord to ‘make good’ damage in or to the Premises.

8.     The Landlord submitted that its obligations only required it to maintain the Premises in a condition commensurate with its condition as at the commencement of the lease. It also argued that even if there was an obligation requiring the Landlord to make good damage in or to the Premises, the Landlord did not repudiate those obligations.

9.     Section 52 of the RLA, states, in part:
(1)       A retail premises lease is taken to provide as set out in this section.
(2)       The landlord is responsible for maintaining in a condition consistent with the condition of the premises when the retail premises lease was entered into –
(a)       the structure of, and fixtures in, the retail premises; and
(b)       plant and equipment at the premises; and
(3)       However, the landlord is not responsible for maintaining those things if –
(a)       the need for the repair arises out of misuse by the tenant; or
(b)       the tenant is entitled or required to remove the thing at the end of the lease...

10.  The landlord submitted that there was no evidence demonstrating that the condition of the Premises, when the lease was first entered into, was any different to its condition when the Tenant purported to terminate the lease. S 52 of the RLA, which imported the Landlord’s repair obligations, only operated in circumstances where it can be shown that the damage or defect crystallised after the lease was entered into. In other words, the Landlord’s obligation was to maintain, rather than to make good.

11.  The Tribunal accepted that the Tenant bears the evidentiary burden to prove that the Premises were in a worse condition than at the commencement of the lease.

12.  Ultimately, the Tribunal concluded (at paragraph 50) that:
Having regard to all of the matters raised above, I am not persuaded that the condition of the Premises as at [the date of termination of the lease] was any worse compared to the condition of the Premises at the commencement of the lease … Indeed, I find that, on the balance of probabilities, problems relating to moisture ingress and the presence of surface and airborne mould affecting the Premises had, in all likelihood, substantially improved as at that date, when compared to the state of the Premises [at the commencement].

13.  At paragraph 70, the Senior Member noted:
In my view, absent any contravention of s 52 of the RLA or covenant in the lease, the failure to eradicate the Premises of mould or excessive moisture, in circumstances where that condition was likely to have been present at the time when the lease was entered into, does not amount to a breach of the covenant of quiet enjoyment. As the authorities referred to above make clear, the covenant does not provide a remedy where the state of affairs existed at the date of grant of the lease.

14.  The Tenant also contended that s 54 of the RLA may provide a further ground upon which it can be said that the Landlord repudiated its obligations under the lease. Section 54 of the RLA states, in part:
54.       Tenant to be compensated for interference
(1)       A retail premises lease is taken to provide as set out in this section.
(2)       The landlord is liable to pay to the tenant reasonable compensation for loss or damage (other than nominal damage) suffered by the tenant because a landlord or a person acting on the landlord’s behalf –
(a)       substantially inhibits the tenant’s access to the retail premises; or
(b)       unreasonably takes action that substantially alters the flow of customers to the retail premises; or
(c)        unreasonably takes action that causes significant disruption to the tenant’s trading at the retail premises; or
(d)       failed to take reasonable steps to prevent or stop significant disruption within the landlord’s control to the tenant’s trading at the retail premises; or
(e)       fails to rectify soon as practicable –
(i)        any breakdown of plant or equipment that is not under the tenants care or maintenance; or
(ii)       any defect in the retail premises or in the building or retail shopping centre in which the retail premises are located, other than a defect due to a condition that would have been reasonably apparent to the tenant when entering into or renewing the lease or when the tenant accepted assignment of the lease; or

15.  At paragraphs 75 and 79 respectively, the Senior Member found:
Therefore, I do not accept that s 54(2) is to be construed to mean that a landlord will have repudiated its obligations under the lease if it refuses to rectify (under s 54(2)(e)(ii)), a latent defect as soon as practicable. If that were the case, the provision would be expressed differently, so that it imposed a positive obligation on a landlord to rectify any latent defect in the retail premises. It does not, and in my view, giving the provision that meaning would be importing words into the section which do not exist.

Consequently, I find that s 54(2) of the RLA, of itself, does not entitle a party to terminate a lease, even in circumstances where a landlord’s conduct amounts to a gross failure to act or not act within the matters referred to in subsections (a) to (f) of s 54(2).

16.  In analysing s 54, the Senior Member reached the following conclusions (at paragraph 90):
Therefore, compensation under s 54(2) is not available if it is found that the defect related to a condition of the premises that would have been reasonably apparent to the tenant when entering into or renewing the lease.

17.  The circumstances of this case are enlightening for all leasing lawyers, and retail landlords and tenants. The Tribunal’s findings make it clear that a landlord’s obligations to repair are limited to situations where the leased premises fall into disrepair during the tenancy. It is therefore critical that potential tenants and their advisors undertake a thorough assessment of the state of premises before any paperwork is signed, and have the potential landlord sign off on that state of the premises. It is also critical that the parties understand exactly who is responsible for any works required to bring the premises up to a reasonable standard, before the lease commences. These discussions should form an integral part of the negotiations between the landlord and the tenant prior to the commencement of the lease.

18. In this particular case, an inspection by a suitably qualified building inspector may also have alleviated some of the difficulties faced by the tenant. If the mould problem existed at the commencement, it would have been identified, and steps taken to remedy it. If the problem did not exist at the outset, there would be independent evidence to support the tenant’s contention that the state of the premises was significantly worse than when the lease commenced.

WG Stark
Hayden Starke Chambers

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