Detailed examination required to determine if a tenant has parted with possession of leased premises

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Most leases preclude the tenant from parting with possession of the leased premises  without the prior written consent of the lessor. It is not always easy to determine whether a tenant has parted with possession and invariably a detailed examination of the facts is required.

In Lontav Pty Ltd v Pineross Custodial Services Pty Ltd [2011] VSC 278 Hargrave J undertook such an examination following which he held that the tenant had not parted with possession despite strong prima facie evidence that it had done so.

In Lontav the tenant had been negotiating with a potential purchaser of the  tenant's hotel business. The tenant and the purchaser had an understanding that no sale could take place until the purchaser had obtained  the necessary liquor licencing approvals and the landlord's approval. Even though it was not clear that a purchase price had been agreed a "deposit" was paid.

The purchaser also engaged solicitors to help him transfer the liquor licence and a company was incorporated to hold the liquor licence ("the proposed assignee") as the licensee of the liquor licencee. The tenant sought the landlord's approval to an assignment of the balance of the term of the lease to the proposed assignee. The lessor refused to consider the proposed assignment until all overdue rent and outgoings were paid in full.

The tenant signed the application to transfer its liquor licence to the proposed assignee.  The liquor licence transfer application form required that there be confirmation that "settlement has occurred" before a licence would be issued. Hargrave J interpreted this to mean that there had to be confirmation that the sale of business contract had been settled and the tenant had assigned the lease.

By mistake a new liquor licence was issued to the proposed assignee.  The principal of the tenant was diagnosed with a serious illness with the consequence that the tenant and the principal of the proposed assignee ("the manager") entered into a management agreement to manage the tenant's business. This agreement required the manager to guarantee the financial commitments  made by the tenant and losses incurred by the tenant from the date of his appointment.

The manager commenced managing the hotel business and despite him not being authorised by the management agreement to do so, he paid rent and staff using the proposed assignee's bank account rather than the tenant's bank account. The proposed assignee also paid for significant renovations and was noted on an insurance certificate as an insured. 

Hargrave J approached the question of whether the tenant had parted with possession by determining whether the management agreement, if implemented according to its terms, had the effect that the tenant retained legal possession of the premises. His Honour decided that because of the seriousness of the illness suffered by the principal of the tenant, no variation to the management agreement should be inferred from the tenant's acquiescence in the manager's departure from the management agreement.

His Honour decided that upon the proper construction of the management agreement the tenant had not parted with possession, but  because of other breaches of the lease the landlord was entitled to terminate the lease and had done so. The tenant was granted relief against forfeiture. 

For those interested in examining when a tenant can be said to have parted with possession have a look at the Queensland Court of Appeal decision in ACE Property Holdings Pty Ltd v Australian Postal Corporation [2010] QCA 55.

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Author: Robert Hays Barrister subject to copyright under DMCA.