Leasing Disputes

Most commonly, disputes arise because the tenant is in financial distress, and is in arrears with rent. The choice that faces a landlord is:

(a) Terminate the lease and re-enter;

(b) Negotiate with tenant to provide temporary relief, and keep the lease on foot; or

(c) Sue the tenant for arrears, and keep the lease on foot.

Options (b) and (c) can be pursued concurrently, and may be preferred to option (a) depending on the commercial circumstances.

Much will turn on why the tenant is not paying. If a tenant is having short-term liquidity problems then the landlord may be prepared to sit back, especially if it has some security in the form of guarantors of substance. If the tenant is trying to sell its business, waiting may mean the tenant can sell it as a going concern and the landlord will get paid any arrears and will secure a new tenant.

If the tenant is an “anchor” tenant or has some other strategic importance to the landlord’s other property holdings, it may be preferable to leave the tenant in. The landlord’s loss and damage from having the premises vacant might be far more than just the loss of rent and fixed outgoings, and almost impossible to quantify.

The state of the rental market will be relevant. A part payment will be better than no payment. If the landlord is not going to be able to locate a replacement tenant then it may be better off to leave the tenant in rather than have the space vacant, especially if it is part of a complex, and especially if the landlord already has vacant shops. In any event, there is nothing to prevent the landlord trying to find a new tenant before re-entering. A new tenant could be offered a lease on the condition that the landlord secures vacant possession of the premises within a certain time period.

Finally, the act of re-entry will, in the absence of a valid right to do so, be a repudiation by the landlord. That will give the tenant the right to accept the repudiation, terminate and claim loss of bargain damages. If the landlord is concerned about its right to re-enter (perhaps there is a dispute about the correct amount of rent or whether certain payments have been made) it may prefer to take the more conservative approach of suing for the rent as it accrues.

The right to terminate by re-entry must be exercised with care.

Most leases will have express provisions granting a right to forfeit the lease including notice provisions. Regardless, there is a right at common law and a statutory right to forfeit the lease where the tenant breaches an express or implied condition.

Even though in some circumstances you can re-enter without formal notice in reliance on the provisions of the Transfer of Land Act 1893 (WA) and the lease, it is prudent to give notice if possible. A failure to give notice may be a factor taken into account in a subsequent action for relief against forfeiture.

In addition, section 81 of the Property Law Act 1969 (WA) requires “reasonable” notice before effecting a right of re-entry in relation to a breach other than a failure to pay rent.

The forfeiture clause makes the lease voidable, not void, when a breach of the lease occurs, and accordingly the lease remains on foot until the re-entry occurs. Where the landlord has a right of re-entry, it has the option at common law of effecting a peaceful re-entry, or commencing an action for possession.

What usually happens, is that the landlord will issue a notice of default, requiring the tenant to remedy the default within a specified time. If the default is not remedied within the specified time, then the landlord will issue a notice of termination requiring the tenant to deliver up vacant possession.

If there is no action from the tenant to deliver up vacant possession, the landlord may enter on the premises and change the locks to effect a peaceful re-entry.

Once an action for possession is commenced, you can’t then effect a peaceful re-entry.

Even though a landlord may have properly exercised a right to forfeiture, in certain circumstances a tenant may be able to claim relief against forfeiture in equity. An order for relief against forfeiture restores the lease, without the need for any formal re-grant, as if it had never been forfeited .

Section 81(2) of the Property Law Act provides that a tenant may seek relief from the court, but this provision does not relate to forfeiture for non payment of rent (by reason of s81(9)). However, the equitable jurisdiction to grant relief against forfeiture for non-payment of rent still applies .

A good survey of the law appears in Alonso v SRS Investments (WA) Pty Ltd [2012] WASC 168.

Two issues are worth noting about guarantees. The first is that in Alonso an issue was whether a party who didn’t sign the agreement personally as guarantor, would still be bound because he or she signed on behalf of the company. The answer, with reference to previous authority on the same point, was an unequivocal “yes”. Justice Edelman found that the ultimate question was whether the parties conduct, viewed objectively evinces an intention to create legal relations and bind the guarantor.

A second issue that Alonso touches on is the principle from the High Court decision of Chan v Cresdon Pty Ltd (1989) 168 CLR 242, see Alonso from [98]. Chan v Cresdon is the leading case regarding the effect on a guarantee of a failure to register a lease.

It creates a presumption that a reference to a ‘lease’ in a guarantee will be construed as referring to a legal lease only (and not an unregistered lease). As such, if a guarantee is intended to operate in respect of an unregistered lease, this should be clearly and explicitly identified.

Apportioning the obligation to repair and maintain the premises between the landlord and tenant is fertile ground for dispute and litigation. Complaints about the state of repair of a building are often used as a “shield” when a landlord sues a tenant for arrears of rent. It is not uncommon that a tenant will assert the landlord’s failure to repair some feature of the premises has caused the tenant loss of business, which in turn has led to the tenant’s inability to keep up with the rent.

The case of Justelle Nominees Pty Ltd v Martin [No 3] [2009] WASC 264 commenced as a writ for possession by a landlord pursuant to a tenant’s default in payment of rent, but the reasons for decision of Blaxell J are primarily concerned with apportioning responsibility for repair and maintenance of a country pub in Bindoon, apparently in a serious state of disrepair.

Blaxell J found that, on the terms of the particular lease, the landlord was required to do all that was necessary to maintain the property in a “sound structural condition” and to repair all items of damage which were not specifically the responsibility of the tenant to repair under the lease.

The court noted the English case of Granada Theatres Ltd v Greehold Investment (Leytonstone) Ltd (1958) 2 All ER 551 in which Vaisey J had noted the possibility that “the items of serious disrepair which have given rise to the landlord’s liability have been built up out of, and are accumulated consequence of, a series of trifling wants of repair which ought to have been attended to from time to time as such by the tenants.”

The court also noted the case of Clowes v Bentley Pty Ltd (1970) WAR 24 in which Nevile J held that “The condition of premises at the commencement of a lease certainly has some significance in the construction of a covenant to repair and keep in repair as under such a covenant premises need only be kept in a state of repair consistent with their age at the time they were demised. A tenant of old premises is, under such a covenant, under no obligation to bring them up to date and what is a proper state of decoration and repair of a palace is entirely different from a proper state of decoration and repair of a tenement building.”

It is common that tenants will allege that the landlord has made representations inducing them to enter into the lease, and these representations will be used as a ‘shield’ against subsequent action by the landlord.

A case determined in 2016 by the High Court, Crown Melbourne Limited v Cosmopolitan Hotel (Vic) Pty Ltd [2016] HCA 26, canvasses some of the key issues.

The case concerns pre-lease negotiations and highlights the importance of communicating clearly when negotiating the terms of a prospective lease.

Cosmopolitan Hotel (“tenant”) entered into a lease of a restaurant premises with Crown Melbourne (“landlord”). Under the lease, the tenant was required to spend millions of dollars on refurbishment of the restaurant.

The tenant originally asked for a 10-year term, and expressed their concern that they needed longer than 5 years to make a profit after recovering the cost of the refurbishment. During the negotiations the landlord and its agents:

a) told the tenant that the lease was limited to five years only because it aligned with other tenant leases in the building; and

b) made numerous offhand remarks that suggested that a new lease would be offered to them at the end of the five years, for example, it was established that the landlord’s agent told the tenant that they would be, “looked after at renewal time”.

Following lengthy negotiations, the tenant signed the lease with a 5-year term and without any option to renew. However, clause 2.3 of the lease provided:

“At least 6 months, but not more than 12 months before the Expiry Date, the Landlord must give notice to the Tenant stating whether:

(a) the Landlord will review this Lease, and on what terms (this may include a requirement to refurbish the Premises or to move to a different premise…)

(b) the Landlord will allow the Tenant to occupy the Premises on a monthly tenancy after the Expiry Date; or

(c) the Landlord will require the Tenant to vacate the Premises by the Expiry Date.”

When the initial term expired, although the tenant had completed the required refurbishment, the lease was not renewed nor was a new lease offered, and the tenant was forced to vacate.

The tenant commenced proceedings in the Victorian Civil and Administrative Tribunal. The Tribunal declared that the representations (particular the statement that the tenant would be looked after at renewal) created a collateral contract under which the landlord agreed to exercise its option to renew the lease, and accordingly, its failure to do so entitled the tenant to compensation. The Tribunal further determined that should that conclusion be wrong, it would have also accepted the tenants’ submission that Crown was estopped from denying the existence of the collateral contract. It ordered that Crown pay the first respondent $467,505.00 and the second respondent $1,143,167.00 in damages for breach of that agreement.

The landlord appealed the Tribunal’s declaration in the Supreme Court. The primary judge and then the Court of Appeal of the Supreme Court of Victoria held that the Tribunal was in error and that the statement did not give rise to an enforceable obligation pursuant to a collateral contract. The primary judge also held that no estoppel arose. However, the Court of Appeal ordered that the matter be remitted to the VCAT for further determination on the issue of what relief could be given, on the basis that the statement founded a promissory estoppel.

The landlord appealed to the High Court and special leave was granted on the question of whether the statement could give rise to a claim for promissory estoppel. The tenants cross-appealed and special leave was granted on the issue of whether the statement amounted to a collateral contract.

On both issues, the High Court found in favour of the landlord.

It is common for oral encouragements and assurances to be given to current and prospective tenants. Landlords and their agents need to be aware that these representations (whether written or oral) may have significant implications in the future.

Because at its heart a leasing dispute is a commercial, contractual dispute, the Courts are a starting point for most disputes. From a landlord’s perspective, they have the advantage of recoverable costs. A writ issued in a court for recovery of rent sends a strong message to a tenant that payment is a priority.

For leasing disputes under Retail Shops Act, there is the option of taking the dispute to the State Administrative Tribunal (s16 of the Commercial Tenancy (Retail Shops) Agreements Act) (“Retail Shops Act”).

Prior to considering an application to the SAT, however, you must first determine whether you need to start with the Small Business Development Corporation (“SBDC”). I’ll leave it to David Eaton to talk about that.

The State Administrative Tribunal

Pursuant to s16 of the Retail Shops Act (but subject to s11(5)), a party to a retail shop lease may refer to the SAT any question between the parties which he believes to be a question arising under the lease.

A number of prescribed matters can be brought directly to SAT without first going through the SBDC. These matters can be found in reg 10 of the Commercial Tenancy (Retail Shops) Agreements Regulations 1985 and include, inter alia,

(a) Application for approval for variation of the period during which an option to renew is exercisable

(b) Application for an order that an option of renewal does not arise under section 13(1) of the Act

(c) Application for the approval of the inclusion in a retail shop lease of a provision about the relocation of a tenants business to be in a form other than the prescribed form

(d) Application for a matter before a Tribunal to be transferred to a court

Section 26 of the Retail Shops Act sets out the Tribunal’s powers. These powers include the power to make the following orders:

(a) Require a party to pay money;

(b) Require a party to do, or refrain from doing anything (including requiring the parties to vary the lease);

(c) Amend a lease; and

(d) Terminate a lease.

The Tribunal may allow any equitable claim or defence, and give any equitable remedy, in a matter before it that the Supreme Court may allow or give.

The Tribunal in determining the matter, may have regard to the certificate issued by the SBDC. Pursuant to s25C, the certificate may include any information about the conduct of the parties that the Commissioner considers appropriate in the circumstances.

Courts

Both the court and SAT have jurisdiction to determine a matter – SAT’s jurisdiction does not displace that of the courts (s27 Retail Shops Act).

However, an election has to be made, proceedings must be commenced in one or the other, not both.

The choice of forum, and the nature of the remedy pursued, naturally needs to be assessed on a case-by-case basis, taking into account the resources of the client, the need for finality, and the time frame in which a result is needed.

Where significant sums of money or complex issues of law are involved, or where greater finality is sought, court remedies may be more appropriate.

Court actions also allow the tenant to recover their costs if successful (whereas SAT is a largely a no costs jurisdiction), and there is the possibility of obtaining summary or default judgment.

You need to be careful in making the election between the courts and SAT. If there is any question over whether the lease is a retail shop lease, you may find that the SAT will not have jurisdiction to deal with the matter.

Further if an application for relief under a lease is made and the lease was forfeited before the application was made, the Tribunal cannot deal with it as there is no longer any ‘question arising from the Lease’ (Chen v Lease Equity Pty Ltd [2008] WASAT 248 (30 September 2008))

(i) Don’t ignore a breach: despite the fact that many leases contain non-waiver provisions, by allowing a breach or indulgence to continue without giving notice of the default and reaching a resolution, there is potential that the right to do so may be lost;

Ask for additional security: anytime a tenant is asking for an indulgence, is an opportunity to improve the security of the landlord;

Consider creative solutions: this will depend entirely on the circumstances, but look for all possible ways to bridge the gap between the landlord and the tenant, e.g. payment in kind might be an option in some circumstances, restructuring the terms of the lease in some way may be beneficial to both parties, or there may be options to offer the tenant alternative premises. The negotiations between landlords and tenants won’t necessarily be purely adversarial, because there is a commercially beneficial relationship which both parties may want to protect.

It is not uncommon for a leasing dispute to involve a tenant’s insolvency. The tenant’s financial position is quite often a major consideration in the negotiations.