Can a lease be frustrated at law, ending the parties' legal obligations?

The NSW Court of Appeal was recently called upon to deal with further fallout from the Covid-19 pandemic in Cao v ISPT Pty Ltd [2024] NSWCA 188. I am currently testing an AI platform. Here is an AI generated summary of the case (which took a few seconds): Background The appellants, Howard Cao and Yuan Zhao, were guarantors of a three-year commercial lease agreement (the Lease) for restaurant premises in the World Square Shopping Centre in Sydney. The tenant, Beijing Roast Duck Sydney Pty Ltd (the Tenant), operated the "Quanjude" restaurant at the premises. The Lease commenced on 1 October 2019, with an option to renew for another three years. The respondents, ISPT Pty Ltd and AWPF Management Pty Ltd, were the landlords and owners of the shopping centre. The Public Health Orders In response to the COVID-19 pandemic, the New South Wales government issued a series of public health orders under the Public Health Act 2010 (NSW), commencing on 23 March 2020. These orders imposed various restrictions on the operations of hospitality venues, including restaurants. The key phases were: a period when only takeaway service was permitted; a subsequent phase allowing limited dine-in capacity based on a 4 square metre rule per customer; and later, an increased capacity based on a 2 square metre rule. Principles of Frustration The doctrine of frustration applies when an unforeseen event renders the performance of a contract radically different from what was contemplated by the parties. However, it does not apply if the supervening event was a risk allocated to one party under the contract. Determining frustration involves evaluating the degree of impact on contractual performance, the length of disruption, and whether the parties still hold valuable rights under the contract. Frustration is not readily established, and the effects on a party's business, while relevant, are not determinative. Special Condition 4 The appellants argued that Special Condition 4 of the Lease, which required the Tenant to open the premises during specified trading hours, was rendered incapable of performance by the public health orders, leading to frustration. The Court rejected this argument, finding that the public health orders did not prevent takeaway operations, and that Special Condition 4 could not reasonably be construed as requiring illegal activity. Effect on the Tenant's Business The appellants contended that the public health orders transformed the Tenant's restaurant business into a radically different business, rendering it unviable for the remainder of the Lease term. However, the Court held that the risk of business interruption due to government action was allocated to the Tenant under the Lease. Additionally, the public health orders did not create a fundamental change in what was contracted for, as the restaurant could still operate, albeit with reduced capacity for a significant portion of the remaining term. The summary provided above appears accurate, although it does not provide any great detail about the doctrine of frustration and the legal principles that were considered by the NSW Court of Appeal. A further query posed to the AI platform generated the following response (again in seconds): The key legal principles discussed in the case, particularly regarding the doctrine of frustration of a contract, are summarised as follows: - Doctrine of Frustration: The doctrine applies if a supervening circumstance renders the context of performance of a contract so different from what the parties had assumed, making the contract fundamentally or radically different from what was contracted for. It does not apply if the supervening event is a risk for which one party had assumed responsibility under the contract. Frustration involves issues of degree and is not lightly made. The test looks at the effect of the supervening event on the performance of contractual obligations and the enjoyment of contractual rights. Frustration can arise even where contractual obligations could still largely be performed and may occur as a result of creeping or gradual change. - Allocation of Risk: In this case, the risk of disruption to the Tenant’s business by external events, including governmental action, was allocated to the Tenant under the Lease. Various provisions in the Lease contemplated the possibility of the business being interrupted or affected by external events. - Assessment of Frustration: Assessing frustration is a practical matter and should not be approached in a one-sided fashion. It requires considering both restrictive measures enacted in response to the pandemic and governmental measures introduced to aid businesses through the crisis. The appellants did not establish that the public health orders rendered the Tenant’s business unviable for the remainder of the Lease term or any significant part of it. Implications for Future Litigation: - Future litigation arising from the COVID-19 pandemic and state government responses will need to consider carefully the allocation of risk in contracts and whether the supervening events were risks assumed by one of the parties. - Courts will assess the practical impact of supervening events on the performance of contractual obligations and the enjoyment of contractual rights, taking into account both restrictive measures and governmental aid measures. - The high threshold for establishing frustration means that mere disruption or increased difficulty in performing contractual obligations may not be sufficient to claim frustration. These very brief summaries confirm that there is a very high bar to establishing that a contract (in this case a commercial restaurant lease) has been frustrated by either the Covid-19 pandemic itself or the various state government responses to the pandemic in imposing various restrictions on the population at large, and restricting the numbers of people who could attend restaurants to dine out at various times as the pandemic raged. WG Stark

Can an Owners Corporation pass a rule that prevents a particular use of a lot in Victoria?

It is relatively common for Owners Corporations to seek to restrict the use to which a lot in a building subject to a subdivision can be put. 
 
Both the Supreme Court of Victoria and the Victorian Civil and Administrative Tribunal have found that an owners corporation rule seeking to prohibit a particular type of use of a lot is an invalid rule which is beyond the owners corporation’s rule making power provided for by the Owners Corporation Act 2006 (Vic) (Act).

For example, in Lawandi v Owners Corporation 21842D (Owners Corporations) [2015] VCAT 1810 (20 October 2015), the owners corporation sought to prevent the Applicant from using the relevant premises for residential purposes in a building which was primarily used for commercial purposes. 

The owners corporation introduced a new rule by Special Resolution which provided:

A lot owner or occupier must not use the lot, or permit it to be used, for residential or other accommodation, whether short term, long term or otherwise.

In considering the rule, the Tribunal closely considered the wording of section 138 of the Act and Schedule 1 of the Act. 

VCAT Vice President, County Court Judge Davis, found that the matters which an owners corporation may make rules about are confined to the subject matter in Schedule 1 of the Act. 

Clause 5 of Schedule 1 of the Act (relating to lots) was found to enable an owners corporation to make rules regulating the external appearance of lots or activities being carried out on a lot so far as they impact on common convenience or common areas, but did not extend to prohibiting a particular use of a lot.

Vice President Judge Davis found:

[T]he power under the Act in an OC to make rules “for and with respect to” a “change of use of a lot” cannot be construed to allow an OC to make a rule prohibiting the change of use of a lot.  Rather, the power is to be construed as a power to make rules for and in respect of any change of use of a lot that are necessary for the carrying out of its functions under the Act.

Rules limiting types of uses within buildings affected by owners corporations are common in inner city developments. 

However, it seems that attempts to restrict the use of a lot in are likely to be ineffective (for example the Republic Tower at 299 Queen Street, Melbourne (the subject of Morrish v Republic Tower Body Corporate [2004] VSC 56) and the Watergate Building in the Docklands (the subject of Owners Corporation PS501391P v Balcombe (Owners Corporations)[2015] VCAT 956)). 

The cases have important ramifications for owners corporations and members of owners corporations. 

Careful consideration needs to be given about the potential invalidity of any owners corporation rule which seeks to prohibit a lot from being used for a particular purpose, such as a residential use or a commercial use, and a member’s obligation to comply with a rule of this nature.

WG Stark

Hayden Starke Chambers

Is it a good idea to use a template or precedent form of lease?

The High Court decision in Gee Dee Nominees Pty Ltd v Ecosse Property Holdings Pty Ltd [2017] HCA 12; (1987) 261 CLR 544; 91 ALJR 486; 343 ALR 58 (29 March 2017) (Kiefel, Bell, Gageler and Gordon JJ with Nettle J dissenting) highlights the risks involved in poor drafting of legal documents and using template documents that are not suitable for the required purpose. 

Here we have a transaction nominally within the jurisdiction of the Magistrates Court of Victoria that has had a Victorian Supreme Court trial, an appeal to the Court of Appeal of the Supreme Court of Victoria, an application for special leave to the High Court of Australia, and a High Court of Australia appeal, no doubt at a cost that significantly outweighed the entire cost of the transaction. 

In total, nine judges examined the lease in this case, and three of them found in favour of the tenant. 

The case concerned the construction of a lease by which the land was leased for a term of 99 years, commencing in 1988.

The landlord had wished to sell and the tenant wished to purchase the leased land for a consideration of $70,000 but they were precluded from doing so because of town planning restrictions.

The contracting parties, therefore, sought to achieve a similar result to a sale, by amending a standard 1980 printed form instrument of a farm lease, with the rent for the entire 99-year term ($70,000) being paid upon entry into the lease. 

The parties agreed to an amendment to clause 4 of the Lease, which contained certain words from the original template struck out, and replaced with:

4. [The Lessee] will pay all rates taxes assessments and outgoings whatsoever which during the said term shall be payable by the tenant in respect of the said premises.

Clause 4 of the agreement (relating to outgoings) was ambiguous. The clause could be read as imposing on the lessee an obligation to pay all rates etc; it could also be read as confining that obligation to those that are payable by the tenant.

In 1993, the original landlord sold the property (subject to the lease) to Ecosse Property Holdings Pty Ltd. In 2004, Gee Dee Nominees Pty Ltd took a transfer of the lease from the original tenant. Therefore, neither of the original parties to the transaction was a party to the litigation. 

Justice Croft (a highly respected property lawyer) found (see [2014] VSC 479) in favour of the landlord. He concluded (at paragraph 47) it was:  

… entitled to a declaration that the Lease on its proper construction provides that the defendant shall pay all rates, taxes, assessments and outgoings whatsoever in respect of the leased land, including land tax. 

On appeal to the Court of Appeal [2016] VSCA 23 (Santamaria, Kyrou and McLeish JJA), only Kyrou JA found in favour of the landlord. Santamaria and McLeish JJA are also highly respected lawyers, and they agreed with the tenant’s interpretation of the lease. 

Somehow, the High Court granted special leave to appeal. Interestingly, Gageler J noted that the case involved no point of disputed legal principle or question of public importance: [45].

In any event, to resolve the ambiguity in clause 4, the majority of the High Court  (Kiefel, Bell and Gordon JJ, and Gageler J in a separate judgment, with Nettle J dissenting) turned to the commercial purpose that the parties sought to be achieved by entering into the lease.

Kiefel, Bell and Gordon JJ (at paragraph 23), held that: 

The Court of Appeal majority's analysis lacks any reason that sounds in commercial sense for the parties to have chosen to amend the usual covenant respecting liability for rates, taxes and other outgoings contained in the standard form with a view to increasing the potential financial burden imposed on the lessor.

At paragraph 25, their Honours also held that:

... the lease does not provide an option to renew or to purchase for a nominal sum at the end of the term. The significance of this omission is suggested to favour the conclusion that the parties bargained for the lessor to bear the expense of any imposts levied on it as owner taking into account the value to the lessor of the reversion. An alternative view is the omission was inadvertent; neither the parties nor their advisers turning their minds to how matters might stand in 2087. Kyrou JA was drawn to that explanation. So are we. A surrounding circumstance of which the reasonable businessperson would be aware is that the lessor company was in receivership. It must be accounted highly unlikely that a receiver would agree to burden the lessor company with uncertain financial obligations over the term of a ninety-nine year lease. 

Finally, they concluded (at paragraphs 26 - 27):

The Court of Appeal majority's conclusion failed to give effect to the clear statement of the parties' objective in entering the agreement. It makes no commercial sense, having regard to that objective, for the lessor to remain liable for the payment of rates, taxes and other outgoings over the term of the lease. That is especially so where the lessor has taken as consideration for the lease the land value, with no provision for future adjustments. The lessor would have been exposed to uncertainties including the effect that any change of (lawful) land use by the lessee might have had on the amount of any rates, taxes and other outgoings.

On its proper construction cl 4 imposes on the lessee the obligation to pay all rates, taxes, assessments and outgoings whatsoever that are payable during the term of the lease in respect of the land. This construction accords with the commercial aim of the parties that the lessee assume the position of owner, so far as a lease may provide, with all of an owner's liabilities.

At paragraph 51 of his judgement, Justice Gageler noted:

Clause 4 can only be so construed for what it is: a clumsily tailored variation of an ill-fitting off-the-shelf precedent. To bring linguistic and grammatical precision to its construction would be to burden the clause with more weight than its jumble of words will bear.

Nettle J, who dissented in the High Court, is another highly respected judge. 

This case confirms that either party's interpretation of the ambiguous term of the lease could have ultimately succeeded. 

Conclusion 

The decision is an extreme example of the results that can flow from poor drafting of legal documents and using template documents that are not suitable for the required purpose. 

As a result, it sounds a warning to all lawyers tasked with drafting leases and contracts of sale of real estate: be judicious in the use of precedents and consider carefully whether the particular clause is fit for the purpose for which you are trying to employ it. 

WG Stark

Hayden Starke Chambers

When will a hand-written licence to occupy premises in a contract of sale of real estate be enforceable?

1.     In CAG Company P/L v Cheruku and anor [2020] VCC 13, the County Court (Marks J) considered the interpretation of a handwritten clause in a contract of sale of real estate allowing the purchaser to take possession of the property being sold 5 and 1/2 months before settlement.

 

2.     The plaintiff agreed to sell its Coburg North property to the defendants in February 2019, for $1.37 million, with settlement to take place some seven months later, on 1 September 2019. The contract of sale included a handwritten clause, which was added by the plaintiff’s real estate agent and initialled by the defendants when they signed the contract of sale on 9 February 2019.

 

3.     The precise wording of the hand-written clause was:

The Vendor allows the purchaser to take possession of the property

under lease LICENCE agreement on the March 20th March [sic] 2019 at $700 per week until Settlement.

 

4.     Settlement eventually occurred on 2 September 2019 and the defendants moved in. They did not take possession before settlement.

 

5.     The dispute (the value of which was $16,500) was over whether the defendants were obliged to pay the licence fee or not.

 

6.     The plaintiff vendor submitted that the clause was ambiguous. It said that it could mean that the $700 per week payment it sets out was mandatory (payable regardless of whether the defendants took possession before settlement) – or that it was permissive (only payable if the defendants took possession before settlement).

 

7.     The plaintiff then argued that where a clause is ambiguous and there is a constructional choice as to how it is interpreted, that ambiguity may be resolved by considering pre-contractual negotiations in order to establish the parties’ objective intentions. Finally, the plaintiff submitted that the pre-contractual negotiations established that the parties’ objective intentions were that payment was mandatory. The fact the defendants did not take possession is irrelevant: the fee provided for by the clause was payable in any event as a fee for the opportunity to take possession.

 

8.     The defendants, on the other hand, argued the handwritten clause was not ambiguous. It permitted the defendants to enter the property under a licence agreement but it did not compel them to do so, nor did it create a liability to pay if they had not entered the property before settlement.

 

9.     The lawyers for the vendor must have realised that there was a problem with the clause as drafted by the estate agent, and after the contract of sale was signed proceeded on the basis that the defendants were required to sign a further agreement, described as a ‘Licence Agreement’ which included extensive terms not provided for in the contract of sale.

 

10.  At paragraph 31, of the judgment Her Honour noted:

… the plaintiff did not offer the defendants possession of the property on or from 20 March 2019 based on the handwritten clause. On the contrary, they issued proceedings seeking to force the defendants to sign the Licence Agreement.

 

11.  It was not until trial that the plaintiff claimed that $16,500 was due to it as a debt because of the handwritten clause.

 

12.  This allowed the judge to conclude that the parties had not reached agreement. She found (at paragraphs 34 to 35):

 

… it is for the plaintiff to show, on the balance of probabilities, that it

has established the precondition to the debt claim it now pursues.

 

35 It has not. On its construction of the handwritten clause, in order to succeed on its claim it needs to establish that after the contract of sale was executed it offered the defendants possession based on that clause. It needs to show it was ready, willing and able to offer possession – without requiring as a further condition of possession that the defendants agree to further conditions not contemplated in the contract of sale. It did not show that.

 

13.  Her honour went on to explain the meaning of the hand written clause. She noted at paragraph 36 that the clause was “unambiguous". The word allows is clearly permissive.

 

14.  Following on from that construction, Judge Marks concluded (at paragraph 38, emphasis added):

The proper construction of the clause is that the plaintiff is giving the defendants the opportunity to take possession of the property under licence from 20 March 2019, at the cost of $700 per week until settlement if they take possession.

 

Conclusion

15.  With all due respect to real estate agents in Victoria, they should be leaving the drafting of unusual terms in Contracts for the Sale of real Estate to lawyers.

 

16.  The ambiguity in the licence clause shows that it is imperative that the drafting of such a clause is clear, as well as concise.

 

17.  The vendor’s lawyers clearly recognised that the hand written clause was inadequate, which led to their attempt to renegotiate the clause and its effect by drafting a more detailed licence agreement. Unfortunately, the evidence showed that no agreement could be reached about the terms of the proposed licence agreement, and so it seems that the vendor ‘jumped the gun’ in seeking to enforce the licence agreement, leading to unnecessary (and ultimately unsuccessful) litigation.

WG Stark

Hayden Starke Chambers

The effect of COVID-19 on residential tenancies

On Friday, 17 April 2020 I presented an online seminar to Leo Cussen Centre for Law about the impact of COVID-19 on residential tenancies to approximately 60 online attendees.

The talk looked at some of the relevant measures that are being implemented in so far as they relate to residential tenancies in Victoria in April 2020. The topics covered in the presentation included:   

• Eviction Notices  
• Inspections and Open Homes  
• Loss of Income  
• Insurance  
• Government Protection Measures  
• Landlord’s and Tenant’s rights and responsibilities 

A copy of my paper is available to anyone who is interested. 

After the talk, the attendees posed a large number of questions about the way the proposed legislative changes will affect both landlords and tenants, confirming that this is an area causing considerable concern in the community. 

The Victorian government is proposing to introduce legislation into the Parliament on 23 April 2020. 

It is expected that the legislation will: 

1. introduce a temporary ban on evictions (for 6 months from 29 March 2020), 
2. pause rental increases for the same six month period, 
3. provide land tax relief for landlords, and 
4. provide rent relief for tenants experiencing financial hardship. 

Tenants and landlords who struggle to strike a deal over rent reductions will be given access to a fast-tracked dispute resolution service, with Consumer Affairs Victoria or the Victorian Small Business Commission mediating to ensure fair agreements are reached. 

If a landlord provides tenants impacted by coronavirus with rent relief, they will be eligible for a 25 per cent discount on their land tax, while any remaining land tax can be deferred until March 2021. 

Evictions will be banned for residential tenancies for six months, except in some limited circumstances.  

The Government will also create an $80 million rental assistance fund for renters facing hardship due to coronavirus. To be eligible for up to $2,000 in rent relief, renters will need to have registered their revised agreement with Consumer Affairs Victoria or gone through mediation, have less than $5,000 in savings and still be paying at least 30 per cent of their income in rent. 

I will provide a further post, if the legislation provides any surprises. 

WG Stark

Hayden Starke Chambers

Property Law - Dealing with COVID-19 Impact on Residential Leases

This Friday from 1pm to 2pm, I will be presenting a Live Stream seminar for the Leo Cussen Institute about "Dealing with COVID-19 Impact on Residential Leases". 

This one hour CPD seminar is designed to help you identify and guide you through the essential issues to focus on and how to manage your clients and risks.

During this session I will focus on the following issues:

1. Eviction Notices
2. Inspections and Open Homes
3. Loss of Income
4. Insurance
5. Government Protection Measures
6. Landlord’s and Tenant’s rights and responsibilities

Bookings and further information can be obtained at:

https://store.leocussen.edu.au/products/property-law-dealing-with-covid-19-impact-on-residential-leases 

WG Stark

Hayden Starke Chambers

When will the Victorian Residential Tenancies Amendment Act 2018 commence?

Further to my post about  the proposed reforms to Victorian Residential Tenancies legislation (see: https://melbournepropertylaw.blogspot.com/2018/02/what-residential-tenancy-reforms-are.html), the Victorian State Government has now passed the Residential Tenancies Amendment Act 2018. 

The reforms number more than 130 allegedly providing increased protections for renters, while ensuring rental housing providers can still effectively manage their properties.

As a result, renters will be able to: 

a.    Have a pet. Consent can only be reasonably refused through a Victorian Civil and Administrative Tribunal (VCAT) order; and

b.    Make certain modifications without first obtaining the residential rental provider's consent, such as installing picture hooks and furniture anchors to stop televisions and other heavy items falling on children.

Other key changes will: 

a.    Require every rental home to meet basic minimum standards, to be set out in regulations, such as providing functioning stoves, heating and toilets.

b.    Require residential rental providers to undertake mandatory safety maintenance for gas, electricity, smoke alarms and pool fences.

c.     Implement the recommendations of the Royal Commission into Family Violence that relate to rental housing. These include:

                                                       i.     Allowing victims to end a lease in family violence situations without first needing a final intervention order, and

                                                     ii.     Ensuring victims are not held unfairly liable for debts created by perpetrators of the violence.

d.    Allow caravan and residential park residents to seek compensation if their park closes.

e.    Clarify rights of entry and photography when a landlord needs to sell a rental property, and

f.      Streamline the rules dealing with goods left behind at the end of a tenancy. 

The changes will come into force progressively.

Apparently, the government is working on complementary reforms to provide easily accessible and informal dispute resolution through VCAT. Also, according to the Government information available further consultation will be undertaken where necessary to develop guidelines around the new laws.

As previously noted in this blog, broadly speaking, the reforms fall into the six categories:

1.     Rental security;

2.     Tenant rights;

3.     Faster payments and rental bonds;

4.     Fair priced rent;

5.     Pets are welcome; and

6.     Modifications.

WG Stark 
Hayden Starke Chambers

What are the recent amendments to the Owners Corporations Act, 2006 relating to short term accommodation arrangements?

1.     Air B’N’B/ Stayz/the short term rental industry in general have attracted considerable media attention in Victoria and Australia over the last several years. 

2.     Attempts to curb the ability of apartment owners/tenants to let their property out by short-stay accommodation arrangements had proved largely unsuccessful in the Victorian Building Appeals Board, Victorian Civil and Administrative Tribunal, the Victorian Supreme Court and the Court of Appeal. For example, see: Owners Corporation PS 501391P v Balcombe [2016] VSC 384, an appeal to Riordan J from VCAT, which concluded that Owners Corporations could not prohibit short term leasing. See also Genco & Anor v Salter & Anor [2013] VSCA 365, an appeal to the Court of Appeal from (originally) the Building Appeals Board, relating to an attempt by the City Of Melbourne to allege that the use of apartments for short stay arrangements was a breach of the Building Code.

3.     However, see Swan v Uecker [2016] VSC 313 in which the landlord was actually successful, arguing the tenant was in breach of the lease by sub-letting to ‘Air B’N’B. 

4.     I wrote a 3 part blog about this issue in August 2016 (see: https://melbournepropertylaw.blogspot.com/2016/08/).

5.     In late 2018, the Victorian Labor Government introduced amendments to the Owners Corporations Act, 2006 in an attempt to give Owners Corporations the power to regulate these types of arrangements. Act No 34 of 2018 received Royal Assent on 14 August 2018. The Act came into effect on 1 February 2019.

6.     Among other things, the Act establishes a complaints procedure relating to short-stay accommodation. 

7.     The new provisions purport to allow complaints to the relevant owners corporation about a breach by a short-stay occupant of the conduct proscriptions applying to short‑stay accommodation arrangements. 

8. The relevant conduct proscriptions include —

a.    Unreasonably creating noise likely to interfere substantially with the peaceful enjoyment of another lot;

b.    Behaving in a manner likely to interfere unreasonably and substantially with the peaceful enjoyment of another lot;

c.     Using a lot or the common property so as to cause a substantial hazard to the health, safety and security of any person or an occupier;

d.    Unreasonably and substantially obstructing the lawful use and enjoyment of the common property by an occupier or a guest of an occupier; and

e.    Substantially damaging or altering a lot or the common property, intentionally or negligently.

Action

9.     If an owners corporation decides to take action in respect of a complaint, it:

a.    Must give notice in writing, specifying the alleged breach and stating that the breach must be rectified; and

b.    May apply to VCAT to resolve a short-stay accommodation dispute in relation to the breach.

10.     Under the new Section 169, VCAT may make any order it considers fair including one or more of the following orders—

a.    A prohibition order under section 169D (preventing the future use of the premises for short term accommodation arrangements);

b.    A loss of amenity compensation order under section 169E;

c.     An order for a civil penalty not exceeding $1100 under section 169G; and

d.    Any applicable order that VCAT may make under section 165.

11.  The owners corporation must report to the annual general meeting in relation to the number of complaints made; the nature of the complaints; the number of matters on which action was taken under this Division; the nature of the matters in respect of which action was taken; and the outcome of each action.

12.  It will be interesting to see how successful the amendments are. 

13.  I believe there are some relatively large scale short stay operators in Melbourne, whose businesses may be affected (severely) by the legislation, and as a result who may attempt to overturn the legislation as unconstitutional. For example, there does not appear to be any compensation available to those operators whose businesses are severely impacted by the amendments to the legislation.

WG Stark

Hayden Starke Chambers