Leases May Require Substantial Fitouts for the Purpose of the Intended Use

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Leases often require tenants to undertake substantial fit outs and it is common for landlords to contribute to the fit-out. A turn key arrangement for example,

In a recent case in New South Wales the landlord covenanted that "immediately upon receipt of the lease duly executed by the Lessee and the Bank Guarantee it will pay to the Lessee the sum of $45,000 being the Lessor's contribution to the Lessee's fitout of the premises". 

The option clause made no reference to the covenant being excluded in a new lease following the exercise of the option. The tenant claimed that following the exercise of the option it was entitled to be paid $45,000.

The primary judge held that because the lessor's payment was for a fixed sum it was clearly an "absurdity" to give the lease a literal meaning and he declined to do. 

See: Miwa Pty Ltd v Siantan  Properties Pty Ltd [2010] NSWSC 1203 at [17]. At [16] the primary judge said 'it is difficult to imagine the parties intended that $45,000 would be paid irrespective of whether there was a fit out or paid in full in a case where the cost of fit out was less than $45,000 but that is the claim of the plaintiff'.  

The Court of Appeal allowed the tenant's appeal. See: Miwa Pty Ltd v Siantan Properties Pty Ltd [2011] NSWCA 297. The Court of Appeal examined the caselaw dealing with "absurdity".  Basten JA at [17] held that the test of absurdity "is not easily satisfied" and said that "the courts have no mandate to rewrite agreements, so as to depart from the language used by the parties, merely to give a provision an operation which, as it appears to the court, might make more commercial sense". e following the exercise of an option.



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Swanton's case doubted

In Stone v Leonardis [2011] SASC 153 the Supreme Court of South Australia held at [36] that in principle a registered proprietor could lodge a caveat on title to protect its own interests.

 In Stone the registered proprietor lodged a caveat preventing a mortgagee of the land settling on a contract of sale.  The registered proprietor's allegation was the mortgagee had improperly exercised the power of sale by entering into a contract for less than the market value.

 It has been held in Victoria that in such circumstances a mortgagor did not have an equitable interest but had a mere equity to set the sale aside.

See: Swanton Mortgage Pty Ltd v Trepan Investments Pty Ltd [1994] 1 VR 672 and Vasiliou v Westpac Banking Corporation (2008) 19 VR 229.

White J held that Swanton was "clearly wrong" and that the court should not follow it.  However, in the circumstances  of the case His Honour decided that the caveat should be removed.

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Landlords beat administrators and obtain possession under s.440C of the Corporations Act

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Division 6 of Part 5.3A of the Corporations Act 2001 provides for the imposition of a moratorium restraining parties from taking steps against a company under administration. 

According to s 435A the purpose of Part 5.3A is to provide for the business, property and affairs of an insolvent company to be administered in a way that maximizes the chances of the company, or as much as possible of its business, continuing in existence, or if it is not possible for the company or its business to continue in existence, results in a better return for the company’s creditors and members than would result from an immediate winding up of the company.  

During the administration the owner or lessor of property which is used by or in possession of the property  cannot take possession of the property or otherwise to recover it, except with the administrator’s written consent or with the consent of the court. See: s440C. The onus is on the lessor wishing to take possession that this is the appropriate course. See: Re Java 452 Pty Ltd (1990) 32 ACSR  507.

In IMO Colorado Group Limited [2011] VSC 552 Gadiner As J had to consider applications by landlords under s440C to enforce rights to possession of premises located in two shopping centres leased by Colorado.  

When the application was made the administration had already proceeded for six months. With respect to one lease, the administrator of Colorado was appointed three days before the expiry of the term.  Upon expiry of the lease the landlord was precluded by s440C from taking possession of the premises. 

Before the expiry of the lease the landlord had negotiated with a tenant in the shopping centre to lease another site in the centre. The consequence was that three tenants had to relocate including one tenant which agreed to lease the area occupied by Colorado. 

Because of the moratorium the tenant could not take possession of the premises with the result the landlord lost $17,000 in rent per month and had to contribute $50,000 to the fitting-out of temporary premises for the tenant. 

Under a second lease, Colorado was due to vacate premises on the expiry of the lease; however, Colorado went into administration and refused to vacate when the lease ended. The new lessee was unable to take possession of the premises and the landlord was facing a claim for compensation. 

The administrator opposed the application on the basis that they wished to preserve the businesses and maintain control of the Colorado network in order reduce o implement the proposed sale or restructure and that the grant of leave in respect of the two stores would the likelihood of a successful sale or restructure because key revenue generating stores would have to be closed. 

They maintained that the new owner would be interested in negotiating with the lessors to take on the leases. After reviewing the caselaw, Gardiner AsJ stated that applications for leave under s440C required a balancing exercise involving the weighing up of the interests of the lessors whose proprietary rights in respect of the premises are substantially qualified by the operation of the section and the object of endeavouring to preserve the business of Colorado.  After engaging n the balancing exercise 

His Honour granted leave to the landlords to enforce its rights to possession.

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Beware of lease variations

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It is trite law that a slight variation to a lease may effect a surrender and re-grant. See: Pascoe-Webbe  v Nuguna Pty Ltd (1985) 3 BPR 97,231 (SC, NSW per Young J).

 In Richmond Football Club Limited v Verraty Pty Ltd [2011] VCAT 2104 a variation to a lease had major consequences for an unwitting and unfortunate landlord. The lease, which had been made in 1998, was for a term of 10 years with an option for a further term of 10 years and required the tenant to pay land tax and outgoings.

In 2004 the lease was varied: the changes included reducing the rent, amending the bank guarantee and rent review provisions, introducing an obligation to pay GST and extending the lease term by 10 years. The tenant contended that the variation effected a surrender and re-grant with the consequence that from the date of the variation the Retail Leases Act 2003 applied to the lease.

By reason of s.50 of the 2003 Act a provision in a lease requiring a tenant to pay land tax is void. Also, by reason of s.46 of the 2003 Act a tenant was not required to contribute to outgoings until given a statement of outgoings. The tenant sought recovery of land tax and outgoings paid after the variation.

The landlord claimed that the tenant was estopped from alleging that a surrender and re-grant occurred; this submission was rejected on two bases, namely that the tenant had not been aware of its rights until 2009 and the provisions of the 2003 Act could not be circumvented on the basis of estoppel.

The tenant sought recovery of the land tax and outgoings on the basis that they were paid under a mistake because the tenant was unaware that it had no liability to do so.

 Consequently, there was a total failure of consideration and therefore the landlord was obliged to repay the amount paid by way of land tax and outgoings as money had and received.

The landlord’s defences based on estoppel and unconscionable conduct failed. The landlord also relied on Ovidio Carrideo Nominees Pty Ltd v The Dog Depot Pty Ltd (2006)VSCA 6 in alleging that good consideration had been provided by the landlord for the payments; this claim was rejected with respect to land tax because there was no obligation on a tenant to pay land tax and s.50 of the 2003 Act expressly prohibited a tenant from recovering land tax.

The landlord’s argument based on The Dog Depot was successful with respect to outgoings because outgoings were part of the consideration payable by the tenant; the tenant received a benefit in exchange for the payment of outgoings and therefore the tenant’s claim for money had and received failed. The landlord also relied on The Dog Depot to claim compensation for lost land tax based on the tenant’s use and occupation of the premises; this claim failed because consideration had not been given for the payment of the land tax. The tenant recovered $125,320 in land tax, being all the land tax paid that was not caught by the Limitations of Actions Act 1958.

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Sub-tenant obtains relief against forfeiture of head lease

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The termination of a lease automatically terminates any sublease.  See: Bradbrook, Croft & Hay Commercial Tenancy Law, para 19.6.

Where a landlord seeks to enforce a right of re-entry or forfeiture against a tenant the Court, on application of the sub-tenant,  may vest the property in the head lease in a sub-tenant for the whole of the term of the lease or a lesser term on terms that the Court thinks fit. See: s.146(4) of the Property Law Act 1958 (Vic).

In Leahy v Austin Management Services Pty Ltd [2011] QCA 186 the Queensland Court of Appeal rejected an appeal by a landlord from the granting of relief to a sub-tenant based on the Queensland equivalent of s.146(4), being  s.125 of the Property Law Act 1974. 

The sub-tenant leased only part of the area of the land leased by the tenant from the landlord. The new lease awarded to the sub-tenant was on the same terms as the forfeited head lease except for the expiration date (which was the date of expiry of the sub-lease) and the area demised and the rent and outgoings which were payable in accordance with the sub-lease.

The sub-tenant had operated its workshop business for 25 years on the site. The landlord appealed on the basis that the primary judge erred by not giving due recognition to the prejudice she would suffer by not being able to lease the site to a new tenant as a whole. There also was evidence that the area occupied by the sub-tenant would have achieved a higher rental than was being paid by the sub-tenant.

The appeal was unsuccessful.

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Ministerial determination valid

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My previous post contended that the Ministerial Determination dated 29 April 2003 made pursuant to s. 5 of the Retail Leases Act 2003 (2003 Act) was made with power by reason of s.13(3) of the Interpretation of Legislation Act 1984. By the Determination the Minister excluded from the definition of "retail premises" in s.4 of the 2003 Act certain premises that were used wholly or predominantly for the retail provision of "services" and located above the first three storeys of a building.

Section 5 of the 2003 Act came into effect on 1 May 2003. The Determination was made on 29 April 2003 and thus before  s.5 commenced.

Section 13 of the Interpretation Act permits the exercise of certain powers provided for in legislation the commencing date of which is postponed. In the absence this provision it would be necessary to include in an Act specific power, for example, to make regulations or appointments that have to be in place when the Act commences operation[1].

Section 13(3) was not incorporated in the Interpretation Act until April 2006.

The Minister's Determination was effective because of s.13 of the Interpretation Act as it appeared in 2003 and not by reason of s.13(3).  When the Interpretation Act was enacted, and when the 2003 Act commenced on 1 May 2003, s.13 provided that:

“Where an Act or a provision of an Act which does not come into operation immediately on the passing of the Act will, upon its coming into operation, confer power or amend another Act so as to confer power under the other Act as so amended to make subordinate instruments, give notices, make appointments, prescribe forms or do any other thing for the purposes of the first-mentioned Act or provision or that other Act, the power may be exercised at any time after the passing of the first-mentioned Act but the exercise of the power does not confer a right or impose an obligation on a person before the coming into operation of the first mentioned Act or the provision of that Act in question except insofar as is necessary or expedient for the purpose of –

 (a)        bringing the first-mentioned Act or the provision of that Act in question into operation;

 (b)        making the first-mentioned Act or the provision of that Act in question fully effective at              or after the time at which it comes into operation; or

 (c)        making the amendment made to the other Act by the first-mentioned Act or the                        provision of that Act in question fully effective at or after the time at which the first-                    mentioned Act or provision comes into operation.”

 (underlining added)

 Where an Act has passed but had not come into operation, s.13 of the Interpretation Act confers power to, among other things, “give notices” or “do any other thing for the purpose of the Act”.  This power does not confer a right or impose an obligation on a person before the Act comes into operation except so far as it is necessary to make the Act fully effective when it comes into operation.

Because of s.13 of the Interpretation Act the Minister had the power to make the Determination: although the 2003 Act had not commenced:

(a)        the 2003 Act had passed; and

(b)        the Determination was made by “notice”, or, at the very least, the Minister had done “any other thing for the purpose of the Act” within the meaning of s.13 of the Interpretation Act.

---

[1] See Pearce and Geddes, Statutory Interpretation in Australia, 7th ed, paragraph 6.7.

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Author: Robert Hays Barrister subject to copyright under DMCA.

Ministerial determination not invalid

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My friend Sam Hopper has said in his blog http://samhopperbarrister.com/ that Judge Anderson in the County Court found that the  Ministerial Determination which effectively excludes premises above the third storey from being "retail premises" was not a valid exercise of power.

While Judge Anderson did express the view that it appeared the determination was made without power, His Honour said that he did not consider it necessary to decide the matter.  See: Evans, Tapsall and Van Veen v Thurau Pty Ltd [2011] VCC 1354  at [19]. 

The  argument put to Judge Anderson was that s 5(1)(f) of the Retail Leases Act 2003 did not come into effect until 1 May 2003 and therefore the Ministerial Determination (which is dated 29 April 2003) could not be valid. 

The determination is stated to have been made under s 5(1)(f).  In my view the argument put to Judge Anderson was not correct. The Ministerial Determination says that it does not come into effect until 1 May 2003. Section 5(1B) says that an instrument made under 5(1):

may provide that it has effect on and from 1 May 2003 or such later date (whether before, on or after the date on which the instrument is made) as is specified in the instrument as the date on which it comes into effect.

Sections 13(2) and (3) of the Interpretation of Legislation Act 1984 appear to cure any potential problems. Sam's blog can be found here

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Author: Robert Hays Barrister subject to copyright under DMCA.