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

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

Are there any cases about the Victorian retail tenancies moratorium due to the Covid-19 pandemic?

In C B Buffet (Burwood) Pty Ltd v Delloyd Pty Ltd [2020] VCAT 1234 VCAT member Kincaid heard an application for an injunction to restrain a landlord from taking possession of retail premises. 

The case is of interest as it considered the application of the moratorium on rent in retail leases introduced by the Victorian government for the Covid-19 pandemic. 

As readers will know, in order to establish an entitlement to interlocutory injunctive relief an applicant must first demonstrate that there is a serious question to be tried as to its entitlement to relief. In respect of this question, the applicant must make out a prima facie case in the sense of demonstrating that, in the circumstances, there is a sufficient likelihood of success at trial, in respect of the question, to justify the preservation of the status quo pending the determination of the parties’ rights at trial. This does not mean that the applicant has to establish that it is more likely than not that it will succeed at trial. How strong the probability needs to be depends upon the nature of the rights asserted, and the practical consequences likely to flow from the relief sought.

An applicant must also establish that the balance of convenience favours the granting of an injunction. The Tribunal should take whichever course appears to carry the lowest risk of injustice should it turn out to have been wrong, in the sense of granting an injunction to a party who fails to establish its right at trial or failing to grant an injunction to a party who succeeds at trial.

Background

The tenant alleged that it operated a Chinese buffet style restaurant, and that it suffered a decline in business “from around January 2020” due to the Covid-19 pandemic.

The member stated that it was noteworthy that in late January 2020 the first Australian cases of Covid-19 were reported, mainly incoming travellers from China. The first Australian death from Covid-19 was reported on 1 March 2020, and the WHO declared the pandemic on 11 March 2020. News reports at the time indicated, however, that by early February 2020 Chinese restaurant businesses in Melbourne had substantially lost their customer base, and by mid-February 2020 many well-known Chinese restaurants in Melbourne had been forced to close.

The tenant gave evidence that in “early February 2020” its business was closed.

On 13 March 2020 the tenant received from the landlord a notice of default, which required the tenant to remedy certain defaults within 14 days. 

On 27 March 2020 the landlord took possession of the premises due to the non-payment of rent and other outgoings claimed in the notice of default.

On 29 March 2020 the National Cabinet announced a set of principles by which there should be a moratorium on evictions of commercial and residential tenants over the next six months for tenants who were unable to meet their commitments due to the impact of the Covid-19 pandemic. The principles were formalised on 3 April 2020, and were subsequently contained in what was called the National Cabinet Mandatory Code of Conduct-SME Commercial Leasing Principles During Covid-19 (the “Code of Conduct”).

These principles subsequently became the subject of legislation in Victoria (the “Covid-19 legislation”), comprising:

(a) COVID-19 Omnibus (Emergency Measures) Act 2020 (the “Act”), which came into operation on 25 April 2020;

(b) COVID-19 Omnibus (Emergency Measures)(Commercial Leases and Licences) Regulations 2020 (the “Regulations”), made 1 May 2020 under section 15 of the Act, but taken to have come into operation on 29 March 2020; and

(c) Coronavirus Economic Response Package (Payments and Benefits) Rules 2020 (the “Rules”), which came into effect on 9 April 2020.

In summary, the Regulations provide that where a tenant has an “eligible lease” as defined in section 13 of the Act, it is entitled to avail itself of a rent relief regime as described in the Regulations. When promulgated, the Regulations were to expire on 29 September 2020, but they have since been extended.

One of the requirements for qualification as an “eligible lease” was that the lease was in effect on the day the first regulations made under section 15 of the Act came into operation. That date was 29 March 2020. The landlord submitted that the lease, having been brought to an end on 27 March 2020, did therefore not qualify as an eligible lease. 

The landlord also submitted that this was relevant when considering the tenant’s alternative claim for relief against forfeiture, and the liabilities the tenant would have to meet as the usual condition of granting relief.

Interestingly for our purposes, the tenant alleged that the landlord was not entitled to re-enter the retail premises other than by having first complied with the provisions of the Act and the Regulations.

Regulation 9(2) of the regulations provides:

A landlord under an eligible lease must not evict or attempt to evict a tenant under the eligible lease to whom sub-regulation [9(1)] applies.

As noted, an eligible lease under the Act, being a lease that therefore had the protection of the rent relief provisions of the Regulations, was one that was in effect on 29 March 2020. The Tribunal found in this case that there was no serious question to be tried concerning the right of the landlord to bring the lease to an end by re-entry on 27 March 2020, and as a consequence the Tribunal found that there was no serious question to be tried concerning the right of the tenant to the protections against ejectment provided by the Covid-19 legislation.

As well as injunctive relief, the tenant claimed in the alternative relief against forfeiture. 

The landlord submitted that as to the future rent, the tenant may not be able to pay it for months or years as its capability of doing so, being linked to the tenant’s turnover, would require the tenant promptly to operate at the same level as the period prior to the onset of the Covid-19 pandemic. 

The Tribunal concluded that the tenant did not intend to seek relief from its obligation to pay rent and outgoings pursuant to the Covid-19 legislation, such that the amount of rent payable by the tenant until its business started operating again would be a matter for determination, failing agreement between the parties.  

The Tribunal accepted the evidence of the tenant’s director to the effect that the tenant is enrolled in the JobKeeper Scheme, and that the director is an “eligible business participant” engaged in the business of the tenant and entitled to receipt of the Jobkeeper payment. The Tribunal also accepted that the tenant qualified for the JobKeeper Scheme, as “carrying on business” in Australia on 1 March 2020, notwithstanding the landlord having taken possession of the premises on 27 February 2020. 

However, the Tribunal concluded that in regard to the tenant's obligation to pay rent and other amounts in arrears as a condition of the granting of relief against forfeiture, there was no serious question as to whether the tenant was entitled to take advantage of the rent relief provisions contained in the Covid-19 legislation. The Member accepted the landlord's submission that the lease was not an “eligible lease” within the meaning of section 13 of the Act because there was no serious question as to whether it was in effect on 29 March 2020. The tenant would therefore not be entitled to any rent relief or relief from any liabilities under the Covid-19 legislation.

Ultimately the Tribunal granted the tenant’s application for relief against forfeiture on the basis that all rent and outgoings that would otherwise have been paid by the tenant to the landlord to the date of the decision, had the landlord not taken possession when it did, must be paid by the tenant as a condition of granting relief.

This case shows the analysis that the Tribunal must undertake in order to determine whether a case falls within the moratorium granted by the  Code of Conduct and the Act and regulations created under it. 

W G 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

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