There are a couple of issues that often come up in landlord and tenant cases that were both considered by the Court of Appeal’s decision last week in Brotherhood of St Laurence v Sarina Investments Pty Ltd [2024] VSCA 46 (26 March 2024).
First, tenants occasionally try to terminate a lease when the landlord has breached its repair covenant. However, default and termination clauses in leases invariably allow the landlord to terminate the lease for the tenant’s breach, but not the other way around. As a result, tenants need to establish that the landlord has repudiated the lease. Repudiation of a lease, particularly by a landlord, is something of an evolving area in the law of landlord and tenant.
Repudiation has been recognised as a basis for terminating a lease for some time. However, the courts have indicated that they will be slow to infer that a lease has been repudiated by a tenant (eg see Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 57 ALR 609 at 621) and, in my experience, it is even more difficult to establish that a landlord has repudiated a lease. However, a few cases have indicated that the courts and VCAT may be willing to find that a landlord has repudiated by failing to repair or maintain the premsies (see the discussion in Versus (Aus) Pty Ltd v A.N.H. Nominees Pty Ltd [2015] VSC 515 at [118] to [135]; see also Hann-Woodlock v ADMR Pty Ltd [2011] VCAT 1776).
Secondly, leases often contain a covenant requiring either the landlord or the tenant to ‘repair and maintain’ certain features at the leased premises. There is an ongoing debate over what is required by a requirement to ‘maintain’ parts of the premises, and the extent to which this obligation requires investigation and preventive maintenance.
Facts
The tenant occupied part of an office building and obtained an engineer’s report into cracking in part of the concrete slab on the second level, which identified a suspected structural defect and recommended further investigations. On receipt of the report from the tenant, the landlord obtained its own report from the same engineer, which also recommended further investigations. However, the landlord did not undertake the recommended investigations.
The tenant ultimately said that the landlord was repudiating the lease and that it accepted that repudiation and terminated the lease. The landlord, in turn, said that the tenant’s purported termination of the lease was itself a repudiation and which the landlord accepted, and purported to terminate the lease.
It was only once proceedings were issued that the landlord engaged a new engineer who completed further investigations and concluded that, in fact, there was no structural defect and that the concrete slab was sound.
Findings
The Court of Appeal made three interesting findings.
First, the obligation in the lease to ‘maintain’ the building in which the leased premises was located has a pre-emptive or preventive element and is not enlivened only once a defect arises. This is important, because most landlords are absentee landlords and repair covenants are always construed as covenants to repair on notice.
With respect to this issue, the Court held, after reviewing authorities considering the word ‘maintain’, that:
84. … these authorities demonstrate that a duty to maintain has a pre-emptive or preventive element and is not enlivened only once the thing required to be maintained falls into disrepair. In this way, a duty to maintain is to be distinguished from a duty to repair, which arises only upon the occurrence of a defect whereas a duty to maintain is continuous. … While a duty to maintain may not prescribe the particular means of maintaining something, it does not follow that there is no obligation to carry out any maintenance until the relevant thing falls into disrepair.
Although the finding was about the construction of the particular lease in that case, and parties to other leases should be slow to apply construction cases as though they create a binding precedent, the case does suggest that parties to a lease with an obligation to ‘maintain’ in addition to an obligation to ‘repair’ should have contracts in place to regularly inspect the premises for problems that may arise in the future as part of its regular maintenance. (Think of ‘maintenance’ as like the regular service on your car, which includes a safety inspection; and of ‘repairs’ as remedying any defects in the car that you or your mechanic have identified.)
Secondly, in the circumstances of this case, the landlord had an obligation to undertake further investigations of the suspected defect.
On this issue, the Court held that:
90. In our view, Sarina was required to undertake investigations in response to being put on notice of a possible structural defect. This is where, as set out above:
(a) the scope of a duty to maintain a building in a structurally sound condition will vary depending on the circumstances (in particular, the nature of the thing which the subject of the duty); and
(b) that obligation includes taking preventive or proactive measures to prevent a structural problem occurring.
91. Indeed, in our view, once it is accepted that the maintenance obligation includes preventive measures, and that these measures vary in the circumstances of each case, these preventive measures may include investigating reasonably suspected defects. This may require obtaining expert reports in appropriate circumstances to determine whether remedial works are required. This does not require reading additional words into the maintenance covenant; rather, this obligation is inherent to a duty to maintain.
This does not necessarily mean that landlords need to go hunting for potential defects in the property in advance of them occurring (over and above regular inspections). In this case, it was significant that the tenant had provided an engineer’s report recommending further investigations, and that the contents of that report had been confirmed in a further report to the landlord.
It follows that a party with an obligation to ‘maintain’ part of a leased premises should be careful to follow up on recommendations that are made by contractors inspecting the leased premises – both from your own contractors and those provided to you by the other party.
Thirdly, by failing to do so, the landlord had repudiated the lease, allowing the tenant to accept that repudiation, terminate the lease and sue for damages.
On this question, the Court held that:
[101] We have concluded Sarina’s breach of the maintenance covenant was sufficiently serious to justify termination. First, the maintenance covenant was of high importance. It related to the structural soundness, and therefore safety, of the Premises for which the only permitted use was as a commercial office.
[102] Second, we consider that Sarina’s breach was significant and subsisted for a substantial duration. In our view, the breach commenced after Sarina had a reasonable opportunity to consider and respond to the first NSIENT report provided on 18 March 2020.[1] The breach continued until 3 March 2021, when BSL terminated the Lease. We note that throughout this period BSL continued to raise Sarina’s failure to address the issues described in the NSIENT reports.
[103] The consequence of this breach was also significant, in light of all of Sarina’s conduct. By March 2021, BSL could not have had any comfort that Sarina’s breach in failing to investigate the structural soundness of the Building would be remedied in the foreseeable future. It is relevant that BSL was under the OH&S obligation, which Sarina was made aware of, at least in general terms, from July 2020. In all these circumstances, we have formed the view that BSL was entitled to accept Sarina’s repudiation and terminate the Lease on 3 March 2021. In our view, BSL became entitled to terminate for repudiation upon receipt of Sarina’s email of 18 December 2020 at the latest.
[104] For completeness, for much the same reasons, we consider that Sarina’s conduct from March 2020 through to early 2021 also evinced an unwillingness to perform its obligations under the maintenance covenant so as to constitute a renunciation of the Lease.[2]
This is a particularly interesting finding for leasing practitioners. As referred to above, it is rare for a landlord to be found to have repudiated a lease for failing to repair or maintain the premises. However, this decision goes a step further, and finds that the landlord had repudiated the lease by failing to conduct further investigations into the potential defects.
The Court was, no doubt, influenced by the perceived degree of the landlord’s delinquency (it had, after all, failed to follow the advice that it received in its own report) and the severity of the potential damage, even though the defect was not ultimately established (it appears that the potential slab damage presented a genuine safety risk). Consequently, these circumstances might not arise again any time soon.
Comments
These findings are interesting for retail and commercial leasing practitioners.
First, s 52 of the Retail Leases Act 2003 (Vic) implies into every retail premises lease an obligation on the landlord to ‘maintain’ many aspects of the retail premises. Similar obligations are found in many commercial leases and impose an obligation to ‘maintain’ on both landlords and tenants.
Consequently, findings about the extent of an obligation to ‘maintain’ a property, particularly the obligation to follow-up on recommended repairs, will affect a significant number of practitioners.
Secondly, a finding in an appeal court of repudiation by a landlord in these circumstances could be a significant bargaining tool for tenants who have vacated dilapidated premises.
In particular:
- it could be used by an aggrieved tenant who wishes to sue their landlord for relocation costs after it vacates; and
- perhaps more significantly, a tenant who abandons a dilapidated premises is often willing to walk away, but finds itself subsequently sued by the landlord for rent arrears and damages until the property can be re-let. The Court of Appeal’s decision adds significant weight to a counterclaim by a tenant that can be used defensively against the landlord’s rent and damages claim. It is in this context that, in my view, this aspect of the decision is likely to have significant consequences for landlord and tenant litigation.
[1]Alternatively, it commenced after Sarina had a reasonable opportunity to consider and respond to the second NSIENT report, provided on 26 November 2020.
[2] See Koompahtoo (2007) 233 CLR 115, 135–6 [44] (Gleeson CJ, Gummow, Heydon and Crennan JJ); [2007] HCA 61.
This post originally appeared on Sam Hopper's blog
