Tenant rejects Lease on basis of VCAT decision: Supreme Court Overturns

By Paul O'Connell December 09, 2019

Earlier this year we reported on a VCAT hearing wherein VCAT determined that a tenant was able to repudiate a lease based on the failure by the landlord to repair faulty air conditioning, which you can read here.

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The landlord subsequently appealed to the Supreme Court of Victoria in the case of Red Pepper Property Group Pty Ltd v S 3 Sth Melb Pty Ltd [2019] VSC 41 (22 February 2019) and has been successful in overturning VCAT’s decision.

The Supreme Court held that the tenant was not permitted to terminate their lease on the basis that the landlord had failed to repair the air-conditioning unit. This decision was based on a number of key matters accepted by Justice Croft;

  1. Whilst the Lease stipulated that the landlord was required to install air-conditioning to service the premises, it was the tenant’s obligation to take out and maintain a maintenance contract to service the air conditioning on a 6 monthly basis. Subject to the tenant’s compliance with this requirement, the landlord would then be responsible for carrying out any capital repairs;
  2. By law, a landlord is not obliged to carry out a repair until it has received notice of the defect that would be sufficient to ‘put a reasonable person on enquiry as to whether repair works are needed’;
  3. The tenant had not provided the landlord with a notice requiring the landlord to undertake repairs;
  4. The landlord did not outright refuse to repair the air-conditioning, it repeatedly asked the tenant to advise whether it had maintained its service contract as obliged to do under the lease. The tenant failed to answer that legitimate question and the Court found that the tenant had in fact failed this particular obligation of their Lease. 

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The Supreme Court’s decision allowed the landlord to then claim at VCAT against the tenant for the following:

  • costs associated with reletting the premises;
  • rent and outgoings forgone after termination; and
  • the difference between rent payable under the Lease for the balance of the term and the rent expected from the new lease.
The quantum of damages sought by the landlord was then decided upon in the case of S3 Sth Melb Pty Ltd v Red Pepper Property Group Pty Ltd (Building and Property) [2019] VCAT 1794 in November this year. The landlord was ultimately successful in obtaining an order for $151,009.47 in costs and damages against the tenant.

Points to consider

  • Notwithstanding the provisions of the lease wherein the tenant is to maintain the air conditioning, it can be problematic if fixtures and fittings are not maintained. If there is doubt, arrange a maintenance contract.
  • For a tenant to walk away from a lease is no simple matter and should not be undertaken lightly.
  • It should be noted that after the tenant had vacated the premises, the landlord engaged technicians to inspect and repair the air-conditioning unit which was completed quickly and relatively inexpensively. The tenant could have always arranged to have the repairs undertaken themselves and then sought to recover the costs of doing so from the landlord as provided in Section 52(4) of the Retail Leases Act.
  • Maintaining a good relationship between both the tenant and landlord whilst not always easy, can help to resolve problems such as this which was very expensive for both parties over a fairly minor sum of money to undertake the repairs.

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Paul O'Connell

Written by Paul O'Connell

Paul brings a broad range of skills and experience having held roles in the Commercial Property Industry as a Finance Broker, Sales & Leasing Consultant and Property Manager.

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