Leasing updates

In the recent VCAT decision of South Yarra Colonnade Pty Ltd v Designbuilt Industries Pty Ltd & Ors (Retail Tenancies) [2013] VCAT 266, a tenant of a retail shop sent a letter to its landlord advising the landlord that it intended to exercise its option.

When the lease was subsequently terminated, the landlord argued the tenant had validly exercised its option, creating a new lease term.
The tenant on the other hand argued that the letter constituted no more than a statement of future intention, and that the option lapsed when the tenant failed to make good that intention.

The Tribunal found the tenant had not validly exercised its option. The Tribunal determined that whether the option was exercised was a matter of objective fact.

The Tribunal held that the letter did not say clearly and unequivocally that the option was exercised. The letter on its own without more would not amount to more than an expression of a future intention.

What should a landlord do as a result of this case?

It is often the case that a tenant forwards a letter to a landlord expressing an intention to exercise an option. In view of the South Yarra Colonnade case, this is not sufficient.

Accordingly, if a landlord receives correspondence expressing a tenant’s intention to exercise an option, the landlord should immediately seek confirmation in writing that the tenant has in fact exercised the option.

In the recent VCAT decision of National Hospitality Group Pty Ltd v Royal Hotels Pty Ltd a landlord was required to compensate it’s tenant for damage caused by prolonged flooding from a leaking drain- even though the drain was located on neighboring land not owned by the landlord.

The facts of the case were briefly, as follows:

  • The tenant leased the basement of a premises at 125-129 Fitzroy Street, St Kilda from which it operated a public bar (the Premises).
  • A leaking drain, located on a neighbouring property situated at 133-137 Fitzroy Street, St Kilda – and not owned by the landlord of the Premises – resulted in water flowing into the Premises on 27 occasions between 30 October 2010 and 16 November 2011.
  • The tenant of the Premises claimed the owner failed to take reasonable action to investigate and address the flooding and, as a result, the landlord was responsible for the consequential disruption to the tenant’s business, loss of revenue and rent incurred for the relevant period.
  • The owner was notified directly, and through its agent, on numerous occasions about the flooding and the damage and business disruption which was occurring as a consequence. Neither the owner, nor the agent, took any appropriate action to address the damage.

Section 54(2)(d) of the Retail Leases Act provides that –

(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 the landlord or a person acting on the landlord’s behalf –

(d) fails 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

  • when it was ultimately discovered that the leaking drain was the cause of the problem, rectification works commenced in April 2012 and concluded in June 2012 – notwithstanding that flood events at the Premises occurred on 27 occasions commencing in October 2010 and on each occasion the tenant advised the landlord of the flooding events.

The Tribunal held the following:

  • Despite the cause of the water entering the Premises being damage to a drain (due to tree roots and cracks in the drain) which was located outside the Premises, the Tribunal held the landlord was liable to pay the tenant damages of $35,000.
  • The owner had abrogated its responsibility under section 52(2)(d) of the Act.
  • The owner of the Premises, either directly or through its agent, consistently failed to respond directly to the tenant’s complaints or keep the tenant informed as to the progress or outcome of any investigation (as to the source of the leak) or provide the tenant with any reports or advice from third parties as to such investigation.
  • The tenant was entitled to compensation under section 54(2) of the Act on the basis the owner had breached the covenant of quiet enjoyment by failing or refusing to take steps which were reasonably available to it.

What is the lesson from the case for landlords?

If a tenant of a premises complains to an owner about water leakage, on the basis of the National Hospitality Group case, the landlord must take reasonable steps to investigate the problem, so as to ascertain the cause of the leakage, and take reasonable steps to have the problem rectified.

  • Important Amendment to Regulation 6 of the Retail Leases Regulations 2013

The Retail Leases Act 2003 (the Act) excludes from the definition of “retail premises”, and therefore excludes from the operation of the Act, premises in respect of which the “occupancy costs” under the lease, as at the commencement date of the current term of the lease, are more than the amount prescribed by the Regulations – see section 4(2)(a).

Before 22 April 2013, the amount prescribed by the Regulations was $1 million per annum, and the amount of any GST payable on the rental and outgoings for the first year of a term of the lease was included in the determination of “occupancy costs”.

From 22 April 2013, the amount prescribed in the Regulations is now $1 million exclusive of GST.

This will therefore mean that a number of leases, which previously would not have been subject to the Act, will now be subject to the Act.

This is particularly important for landlords. If a lease is subject to the Act, the landlord will not be able to pass on land tax to the tenant, and the landlord will also be subject to the repair obligations in section 52 of the Act.