How does a party to a contract of sale of real estate in Victoria prove that they are ready, willing and able to perform the contract, in order to obtain an order for specific performance?

On 15 March 2023, in Knight 34 Langdon Rd P/L and anor v Bell and others [2023] VSCA 54, the Court of Appeal of the Supreme Court of Victoria (Emerton P, WalkerJA and J Forrest AJA) considered an application by an unsuccessful defendant for leave to adduce further evidence. 

The case concerned a dispute about a Contract for the Sale of a unit 'off the plan' in Toorak. The purchase price was $3,528,000 and a deposit of $350,000 had been paid. The purchasers had obtained an order from the Trial Judge that the vendor specifically perform the contract by settling the sale.

The further evidence was said to go to whether the purchasers were actually in a position to settle, the argument being that they were not, as they did not have the loan funds available on the day that they had applied for specific performance. 

The Court of Appeal rejected the application to rely on further evidence and dismissed the application for leave to appeal. 

For our purposes, the Court of Appeal made the following observations (at paragraphs 69 to 70): 

... we accept the Bells’ submission that it is not necessary, in order for a party to be properly characterised as ‘ready, willing and able’ to perform a contract of sale by payment of the purchase price, to have in hand — or in their bank account — the full amount of the purchase price at the time they claim to be ready, willing and able. As Menzies J observed in Bishop v Taylor:

The requirement of readiness and willingness does not demand that a purchaser should always have the purchase price in his pocket; all that is necessary is readiness and willingness to perform the contract according to its terms ((1968) 118 CLR 518, 525; [1968] HCA 68).

70                  That is, it is only necessary for a person to have the full amount of the purchase price immediately available as at the date on which the obligation to pay falls due (see Bisognin v Hera Projects Pty Ltd [2018] VSCA 93, [171]–[173] (Tate JA, Kyrou JA agreeing at [216], Coghlan JA agreeing at [217])). Thus, even if we had accepted that, on 19 July 2022, the Bells did not have immediate access to funds sufficient to pay the full purchase price for the Bell apartment, we would not have concluded that they had misled the Court by submitting that they were ready, willing and able to perform the contract of sale. In that regard, we accept the Bells’ submission that ‘[f]ar from demonstrating that they were not able to have the funds ready for settlement when the time for performance came, the so-called “fresh evidence” demonstrates exactly the opposite’

The Court of Appeal has therefore confirmed that to obtain an order for specific performance of a contract of sale of real estate in Victoria, all that a party to the contract needs to do is demonstrate that they will meet their obligations at the date that they fall due. In this case, the Trial Judge and the Court of Appeal found that the purchasers had met that requirement. 

WG Stark

Hayden Starke Chambers

Are there any recent Victorian cases about a mortgagee's duty of good faith in selling in a pandemic?

Further to my post (see: https://melbournepropertylaw.blogspot.com/2021/06/are-there-any-recent-cases-about.html) about a decision of the Supreme Court of Queensland about a mortgagee's duty of good faith in selling in a pandemic, the Supreme Court of Victoria has now had to deal with the same issue. 

Matthews As J in 230V Harvest Home Road Pty Ltd v Joseph Salvo & Ors [2021] VSC 558 heard an application for summary judgment and concluded that the plaintiff had no real prospects of success on its statement of claim. As a result, summary judgment was granted in favour of the defendants/mortgagees. 

The claim related to the enforcement by the mortgagees of a $1.7m loan that they made to the Plaintiff, secured by a first registered mortgage over the property located in Harvest Home Road, Wollert (‘Property’). The Property was approximately 3,900 square metres of vacant land that was suitable for residential development.  After purchasing the Property, the Plaintiff obtained a planning permit for the construction of 18 townhouses on the Property.

The loan and accrued interest were due to be paid by 21 December 2019.  The Plaintiff failed to do so.  The mortgagees served a notice pursuant to s 76 of the Transfer of Land Act 1958 (Vic) (‘TLA’) on the Plaintiff or about 15 January 2020. 

After the notice was served, the Plaintiff advised the mortgagees that it had sold the Property for $2.5m plus GST. Unfortunately, this sale did not complete. 

On 6 June 2020, the mortgagees exercised their power of sale and sold the Property for $1.9m plus GST, with settlement due on 7 August 2020.  Settlement occurred after the Plaintiff’s application for an interim injunction to prevent settlement from occurring was dismissed.

In the claim, the Plaintiff alleged that the mortgagees did not:

(a)                Act in good faith and have regard to the interests of the Plaintiff by selling the Property for $1.9m which was substantially below the value of the Property;

(b)               Take reasonable steps to obtain the best price for the Property which was valued up to $2.4m; and

(c)                Have regard to the interests of other encumbrancers including a subsequent mortgagee and caveators.

At paragraph 43, Her Honour noted: 

"The key questions in this proceeding concern the Mortgagee Sale and whether the [mortgagees] breached their duties as mortgagees [of good faith in conducting the sale of the Property], causing loss and damage to the Plaintiff."  

The evidence before the Court included the following:

In March 2020, the mortgagees obtained a valuation of the Property in the range of $1.8m to $2m from the real estate engaged to sell the Property. The agent asserted that the sale price of $1.9m plus GST was market value, perhaps even higher than market value in the then current climate, and was the best offer made to purchase the Property.

The auction (scheduled for 4 April 2020) was cancelled due to the restrictions imposed by the Victorian government due to the COVID-19 pandemic, and the mortgagees instructed the agent to instead sell the Property by private treaty. 

The mortgagee sale was an arm’s‑length contract, the mortgagees and the purchaser were not previously known to each other nor had any previous association, and were introduced by the real estate agent. 

In addition to the offer which was accepted by the mortgagees that led to the contract, the following offers were made and rejected:

(a)                $1.8m, subject to certain conditions in favour of the prospective purchaser, with settlement in October 2020;

(b)               $1.81m including GST, subject to strict conditions in favour of the prospective purchaser; and

(c)                $1.9m, subject to the prospective purchaser obtaining finance, with settlement not before 15 October 2020.

The amount owing by the Plaintiff to the mortgagees was $1,878,500 plus the costs of enforcing the Loan Agreement and the Mortgage. There was also an outstanding costs order in the mortgagees' favour arising from the earlier failed injunction application by the plaintiff. The mortgagees demanded $115,329.49 from the Plaintiff and from a guarantor, which was alleged to be the shortfall following the settlement of the Mortgagee Sale, which was not paid at the date of the hearing.

The plaintiff asserted that February Sale fell through as the purchaser’s bank would not lend at a high enough leverage-to-value ratio as was necessary for the purchaser to settle the purchase of the Property. 

The plaintiff intended to try and get a further extension from the mortgagees for this purchaser, who was seeking to obtain private alternative finance, or find a new buyer at the same price or to refinance the Property. 

Appraisals obtained by the plaintiff valued the Property between $2.1m and $2.4m.

The mortgagees argued that they had, in the circumstances of the case and the current COVID-19 epidemic, obtained the best price consistent with their entitlement to realise its security. 

There was no allegation that the purchaser has acted otherwise than bona fide and in his own best interests.  

The Plaintiff submitted that by selling the Property for $1.9m, which is below the appraisals made by three real estate agents around that time, the mortgagees sold the Property at an undervalue.  This was said to be an undervalue of between $300,000 and $500,000 based on those appraisals, or $600,000 when compared with the February Sale. 

The Plaintiff submitted that there is no evidence that the mortgagees or their real estate agent obtained an expert independent valuation prior to the sale, which failure was said to be contrary to standard practice in mortgagee sales and for the sale of undeveloped land.  It also said that providing a price range in the absence of an auction created an artificial ceiling on the price of the land. 

The Plaintiff asserted that the absence of an independent valuation and the evidence of the Property being sold at substantially undervalue pointed to a breach of the mortgagees’ duties in exercising their power of sale.  

Her Honour rejected the Plaintiff’s submission that the onus was on the mortgagees to show that they had satisfied their duties under the TLA and that the Plaintiff has nothing more than a fanciful chance of success.

At paragraph 91 of the judgment, Matthews As J concluded that the onus is not on the mortgagees to disprove the Plaintiff’s case by positively proving their own case.  The onus is on the mortgagees to show that the Plaintiff’s case has no real prospect of success, which the Plaintiff can refute by showing cause to the contrary. 

At paragraph 93, Her Honour proceeded:              

"Hence, rather than the [mortgagees] having the onus of showing that they have satisfied their duties as mortgagees, the question is whether there is sufficient evidence before the Court that the allegation that the [mortgagees] have breached their duties as mortgagees has a real prospect of success. 

The evidence relied upon by the mortgagees established that a conventional marketing campaign was undertaken.  There was nothing unconventional about the marketing material or the marketing channels; rather, the usual methods of selling land were employed.  This included advertising on commercial and development focused websites.

Having embarked upon a conventional marketing campaign in early March 2020, the mortgagees were then confronted with "exceptionally unconventional circumstances".  By mid to late March 2020, the state of Victoria was in lockdown due to the COVID-19 pandemic.  It was hardly surprising that in those circumstances, the auction of the Property which had been scheduled for 4 April 2020 was cancelled.  It was also hardly surprising that the mortgagees instructed the real estate agent to proceed to attempt to sell the Property by private treaty." 

At paragraph 100, Matthews As J noted:

"I do not see how it can be said that these actions constitute a breach of the mortgagee’s duties.  The auction could not physically be held, and a mortgagee is not obliged to wait until market conditions improve before conducting a mortgagee sale. A mortgagee has an entitlement to realise its security, provided that it abides by its duties in doing so. The duty to take reasonable steps to obtain the best price is a duty to take appropriate steps in the circumstances which are consistent with its right to enforce its security interest."

At paragraph 102 and following, Her Honour stated:           

"That really leaves the question of whether the Property was sold by the [mortgagees] at an undervalue.  While I accept that there is no evidence to explain how [the real estate agent] came to a range of $1.8m to $2m when advising the [mortgagees], the only evidence that this is an undervalue is that contained in the [the plaintiff's director's] Affidavit.  The fact that the Plaintiff had entered into the February Sale at $2.5m plus GST is not indicative of $1.9m plus GST being below market value, as the purchaser under that contract was unable to complete [the sale] due to an inability to obtain finance at that price.  I do not see how a failed contract can be said to be indicative of market value.  There is no evidence at all to support [the plaintiff's director’s] own view of value, being $2.475m to $2.7m, as he simply does not give any evidence to show how he came to that range.

The selling real estate agent's appraisal was followed by a marketing campaign and by offers made which were rejected.  The Plaintiff says that the marketing campaign put a range of $1.9m to $2.09m on the Property.  First, there [was] no evidence before [the Court] as to that other than [the plaintiff's director’s] statement: there is no document exhibited that shows this was the range stated in the marketing material.  Even if [the plaintiff's director’s] evidence in this regard is accepted, and I have no reason not to accept it given that the mortgagees could have contradicted it if they had felt the need to, there is no evidence before me that putting this range on the marketing material constitutes bad faith or a failure to obtain the best possible price.  Second, [the plaintiff's director’s] states that once the mortgagees advertised it at this price, “no one was willing to buy the property at what it was worth because it was now being advertised for $600,000 less”.  I do not accept this.  There is no evidence to support the finding that this was $600,000 below market value, and in any event this is opinion evidence which is inadmissible as [the plaintiff's director’s] is not an expert.  There is no evidence to state that putting the range that the real estate did put on the Property constitutes a failure to obtain the best price.  Having given the range of $1.8m to $2m to the mortgagees, it was entirely consistent for the real estate agent to have stated that range in the marketing material. 

Importantly, the evidence is that there was a significant amount of interest in the Property, but that interest manifested in only four offers (the three described above and the one which was accepted), all roughly within the price range given to the mortgagees.  Of the rejected offers, two were at the bottom end of the real estate agent's valuation and all three were on terms less favourable than the offer which was ultimately accepted.  Further, it is not as if the Property was sold to the first offeror or that it was on the market for a brief period of time.  The evidence is that the Property was on the market for about 3 months before the mortgagees accepted the best offer they had received in that time.

The evidence was that after the Mortgagee Sale, there remained a shortfall in the amount owing to the mortgagees of at least $115,329.49.  This supports the position that the mortgagees accepted the best available offer to them at the time.

At paragraph 107, Matthews As J did not accept that the Plaintiff has demonstrated that its claims that the mortgagees failed to abide by their duties as mortgagees when exercising their power of sale have a real prospect of success.

In the Injunction Application, the Court had already held that the Plaintiff had not established it had a prima facie case.  The Plaintiff’s evidence being no better than it was then, if a prima facie case had not been established at the time of the Injunction Application, her Honour found it difficult to see how it could then be said that the Plaintiff’s case has a real prospect of success.

Conclusion

In the circumstances of this case, it is clear that a borrower will have great difficulty in establishing that a lender has not acted in good faith simply by selling a security property during the COVID-19 pandemic. 

A borrower will need to establish a lack of good faith in the sale, something which is not made out simply by proving that the sale was at an under value (although that was not in fact proven in this case). 

WG Stark 

Hayden Starke Chambers

How far above ground level can an owner of land enforce their rights of ownership?

In Janney v Steller Works Pty Ltd [2017] VSC 363, (2017) 53 VR 677, Justice Riordan of the Supreme Court of Victoria was asked to consider the extent of a landowner's right to possession of the airspace over their land, and their ability to control entry onto their land. 

The circumstances of the case were that the neighbour was proposing to interfere with the landowner's right of possession by incursion into airspace over that land through the operation of a construction crane sailing over the land at times during a proposed 11 month construction period. The proposed construction was of a four-storey building comprising 27 dwellings above a basement car park on neighbouring properties at Foam Street and Ormond Road, Elwood ("the Construction Site"). 

The developer served a notice purporting to protect works on the Construction Site, which included the use of the crane during the construction. 

In fact, the relevant Building Regulations did not apply to the proposed crane; in any event, the landowners objected to the proposed notice, stating among other things that: "We are very concerned about the safety of our family if/when the crane boom is over our property."

The landowner and the developer engaged in extensive correspondence prior to the court proceedings. The landowner noted that they owned the airspace above their property and that the proposed crane use would be a trespass. They sought compensation to allow them to relocate to a similar property in Elwood for the duration of construction, or alternatively that construction proceed without a crane. The developer rejected this proposal. 

The landowner applied for an injunction to restrain the developer from engaging in the threatened incursion. 

At paragraph 28 of his judgment, Riordan J noted:

The fact that the plaintiffs’ rights as the owner of land extends into airspace is trite. On one view, the owner’s rights extend to protecting not only the land but the sky space above the land stretching the limits of the atmosphere and the soil beneath the surface down to the centre of the earth (The Latin maxim: cujus est solum, equs est usque ad coelom et ad inferos. See Bernstein v Skyviews & General Ltd [1978] 1 QB 479, 485). The issue of whether such rights are limited to the prevention of incursions that ‘[interfere] with that part of the airspace above [the] land which is requisite for the proper use and enjoyment of that land’ (Graham v K D Morris & Sons Pty Ltd [1974] Qd R 1, 4) (such that, for example, claims in trespass cannot prevent aircraft flying over property), has been said to await a definitive ruling from the High Court (Anthony P Moore, Scott Grattan, Lynden Griggs, Bradbrook, MacCallum and Moore’s Australian Real Property Law (Thomson Reuters, 6th ed, 2016) 812 [16.140]).

Despite noting the absence of High Court authority, Justice Riordan concluded that even applying the more restricted view, the incursions of the crane, while in weathervaning mode, constituted an actionable trespass. 

He set out his reasons at paragraph 30. 

He noted that the case of Graham v K D Morris & Sons Pty Ltd [1974] Qd R 1 was a similar fact situation. The judge concluded in that case that the invasion of the plaintiff’s airspace by the projection of the crane jib was a trespass and the overhanging crane interfered with that part of the airspace above the land which is requisite for the proper use and enjoyment of that land. The judge in that case also noted that any hardship which the defendant will suffer [as a result of the injunction] has been brought about by its own negligence and its cavalier and high-handed attitude.

In Anchor Brewhouse Developments Ltd v Berkley House (Docklands Developments) Pty Ltd [1987] 2 EGLR 173, Scott J granted a permanent injunction to restrain a tower crane from weathervaning over the plaintiffs' land. 

Scott J rejected the defendant’s argument that there was no trespass and said:

• •  
    What is complained of in the present case is infringement of air space by a structure positioned upon a neighbour’s land. The defendant has erected tower cranes on its land. Attached to each tower crane is a boom which swings over the plaintiffs’ land. The booms invade the air space over the plaintiffs’ land. Each boom is part of the structure on the defendant’s land. The tort of trespass represents an interference with possession or with the right to possession. A landowner is entitled, as an attribute of his ownership of the land, to place structures on his land and thereby to reduce into actual possession the air space above his land. If an adjoining owner places a structure on his (the adjoining owner’s) land that overhangs his neighbour’s land, he thereby takes into his possession air space to which his neighbour is entitled. That, in my judgment, is trespass. It does not depend upon any balancing of rights.
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  • He also noted that:
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  • It is not, in my view, accurate to say that no harm is being done to the plaintiffs by the trespassing cranes. 
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In London & Manchester Assurance Co Ltd v O & H Construction Ltd (1989) 2 EGLR 185, Harman J also considered a swinging crane, in that case over the Albion Wharf on the Thames. His Honour said:

• •  
    It is, in my view, beyond any possible question on the authorities and the law that a party is not entitled to swing his crane over neighbouring land without the consent of the neighbouring owner.

At paragraph 32, Riordan J noted that by legislative amendments, New South Wales, the Northern Territory, Queensland and Tasmania have provided for the statutory imposition of an easement by the courts to promote land development. That has not happened in Victoria.

The Honourable Justice Riordan concluded at paragraph 33 that:

Even without the authorities, I would conclude that the weathervaning was neither a trifling nor de minimus interruption of the plaintiffs’ rights. The evidence established that the plaintiffs live on the property with their two children. This is not a case ... where the property is used purely for commercial purposes. Collapses of cranes are not unknown. I accept the plaintiffs’ evidence that the plaintiffs and their children may be well justified on leaving their home if very strong winds were forecast ... Owners of property should not have to live with the fear that at any time the boom of a crane may be above their home and the risk (however small) that it may crash down on their family.

He also concluded (at paragraph 34) that:

Neither in money terms is the encroachment insignificant. As Lord Selbourne pointed out in Goodson v Richardson, an interest in land may have ‘precisely the value which that power of veto upon its use creates’.

At paragraph 35, he concluded that:

An encroachment into airspace raises a strong prima facie entitlement to an injunction. He referred to the decision of AL Smith LJ in Shelfer v City of London Electric Lighting Co, to the following effect: 

Many judges have stated, and I emphatically agree with them, that a person by committing a wrongful act … is not thereby entitled to ask the Court to sanction his doing so by purchasing his neighbour’s rights, by assessing damages in that behalf, leaving his neighbour with the nuisance, or his lights dimmed, as the case may be. 

In such cases the well-known rule is not to accede to the application, but to grant the injunction sought, for the plaintiff’s legal right has been invaded, and he is prima facie entitled to an injunction. 

In the result, Riordan J granted the injunction restraining the developer from allowing the tower crane to swing onto the plaintiff's land. 

Conclusion 

As the recent construction boom in Victoria has continued despite the impact of COVID-19, it seems likely that cavalier builders who wish to use construction cranes without considering the effect on neighbours may have to face the possibility that they will be restrained from those actions. 

The take away from these decisions is that builders and developers who propose to construct with the assistance of a tower crane will need to ensure that they obtain their neighbours' permission for any intrusions over the neighbours' air space, prior to the commencement of construction.  

WG Stark 

Hayden Starke Chambers

What happens if I lodge a caveat over the title to real estate in Victoria when I do not have a caveatable interest?

A caveat is an instrument that protects an unregistrable legal or equitable interest in real property. 

The caveat is a notice to the public that the person lodging the caveat (the caveator) holds an unregistered interest in the property, and provides details of the interest claimed. 

The caveat prevents the registration of any dealings a person has with the property until the caveat is removed or the caveator consents.

Lodging a caveat is a very serious matter, and as a result a caveat should not be lodged ‘without reasonable cause’. 

Section 118 of the Transfer of Land Act 1958 (Vic) provides: 

Any person lodging with the Registrar without reasonable cause any caveat under this Act shall be liable to make to any person who sustains damage thereby such compensation as a court deems just and orders.

What does ‘without reasonable cause’ mean?

In 2019, the High Court of Australia explained what it means to lodge a caveat ‘without reasonable cause’ for the purposes of claiming compensation under the NSW provision that is equivalent to section 118. 

The case dealt with the question of what property vests in a trustee in bankruptcy. However, in determining that issue, the High Court has provided some useful insight into the issue of whether a person has lodged a caveat without reasonable cause.

In Boensch v Pascoe [2019] HCA 49; 94 ALJR 112; 375 ALR 15, the High Court (Kiefel CJ, Gageler and Keane JJ and separately Bell, Nettle, Gordon and Edelman JJ) endorsed the two-step ‘reasonable cause’ test that had been applied in Beca Developments Pty Ltd v Idameneo (No 92) Pty Ltd (1990) and other cases.

Background

Mr Boensch was a trustee holding real property on trust for the benefit of his children (Trust Property). Mr Pascoe was appointed as Mr Boensch's trustee in bankruptcy upon Mr Boensch being declared bankrupt. Whilst acting as Mr Boensch’s trustee in bankruptcy, Mr Pascoe lodged a caveat over the Trust Property.

Ultimately, the caveat was removed by a lapsing notice issued by the NSW Registrar General. Mr Pascoe chose not to issue litigation to establish that he had a caveatable interest in the real property (mainly due to the limited equity that appeared to be available in the property). 

Mr Boensch then commenced proceedings against Mr Pascoe seeking compensation under the Act on the grounds that Mr Pascoe had lodged and maintained a caveat over the Trust Property ‘without reasonable cause’.

In determining whether Mr Pascoe had lodged and maintained the caveat over the Trust Property ‘without reasonable cause’, the trial judge applied a two-step test, namely that a caveat is lodged ‘without reasonable cause’ if the lodging party:

1. does not have a caveatable interest; and
2. does not have an honest belief based on reasonable grounds that they have a caveatable interest.

As a result, in order to claim compensation under the equivalent of section 118 successfully, Mr Boensch was required not only to establish that Mr Pascoe did not have a caveatable interest in the Trust Property but also that Mr Pascoe did not have an honest belief on reasonable grounds that he had a caveatable interest over the Trust Property.

The High Court concluded that Mr Pascoe had a caveatable interest in the Trust Property for the purposes of lodging and maintaining the caveat. This was on the basis that the caveatable interest arose from Mr Boensch’s entitlement to be indemnified out of the Trust Property for liabilities he incurred while he was trustee. This entitlement to be indemnified created an equitable interest which vested in Mr Pascoe upon his appointment as Mr Boensch’s trustee in bankruptcy.

The majority (Bell, Nettle, Gordon and Edelman JJ) noted (at ALR page 46, paragraph 116):

For the reasons earlier stated, there is no reason to doubt that, upon the making of the sequestration order, the ... property vested in equity in Mr Pascoe by reason of Mr Boensch’s right of indemnity and, therefore, that Mr Pascoe had a caveatable interest in the property. Nor is there any reason to doubt that Mr Pascoe honestly believed on reasonable grounds that the property so vested, either on the basis that the trust was void or on the basis of Mr Boensch’s right of indemnity. On the facts as found, Mr Pascoe did not lodge or refuse to withdraw the caveat without reasonable cause.

The minority (Keifel CJ, Gageler and Keane JJ) noted (at ALR page 20, paragraph 12) that:

The existence of a caveatable interest, without more, supplies “reasonable cause” for lodging and maintaining the caveat.

In the circumstances, the High Court concluded that Mr Pascoe did not lodge the caveat ‘without reasonable cause’ and therefore Mr Boensch was not entitled to compensation under the New South Wales provision equivalent to section 118 of the Transfer of Land Act 1958.

Conclusion 

This High Court decision highlights the importance of ensuring that caveats are lodged and maintained with ‘reasonable cause’. 

It also provides guidance on how a Court will approach the issue of whether a caveat has been lodged ‘without reasonable cause’ under the Act, and thus whether an applicant is entitled to compensation under section 118 of the Transfer of Land Act 1958.

Legal practitioners will be aware that if they lodge a caveat without reasonable cause, they may be engaging in unsatisfactory professional conduct, or even professional misconduct. If that happened, the legal practitioner is likely to find themselves the subject of a disciplinary matter initiated by the Legal Services Commissioner, and having their right to engage in legal practice put at risk. 

WG Stark

Hayden Starke Chambers

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.

Conclusion  

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