Tenant and Landlord Disputes: Unusable Premises

By Benjamin Caddaye, Law Clerk and Alicia Hill, Principal, MST Lawyers

The recent Supreme Court of Victoria decision in Brondolino v Surf Coast Smash Masters Pty Ltd [2019] VSC 505 provides an excellent overview of the difference between ‘possession’ and ‘occupancy’, and on the calculation of compensation due and payable to a Tenant who is unable to use leased premises for the specified purpose in the context of the Retail Leases Act 2003 (Vic).

Background

Mr Anthony Brondolino (Landlord) was the landlord of commercial premises at 184-186 Johnson Street, Collingwood in Melbourne. By execution in July 2013 of a five-year lease (renewable for a further five years), Mr Brondolino let the premises to Surf Coast Smash Masters Pty Ltd (Tenant). The obligations of the Tenant were guaranteed by its Director, Ms Belinda Pitts. The terms of the lease stated that the permitted use of the premises was for ‘Panel beating, spray painting and mechanical repairs’.

Between November 2017 and June 2018, the roof of the premises was damaged resulting in the Tenant being unable to operate its panel beating business. The Landlord had the roof repaired in June 2018. However, on 19 June 2018, the Landlord also issued a Notice to Remedy Breach on the Tenant, claiming breaches of the lease, including sharing or giving up of possession of the premises. One month later on 20 July 2018, the Landlord issued a Notice of Termination. Subsequently, the Landlord initiated VCAT proceedings for an order that the Tenant vacate the premises, and that the Tenant and Guarantor pay $127,000 in outstanding rent, outgoings, lost profits and costs. Conversely, the Tenant counterclaimed from the Landlord the amount it had paid in rent and outgoings during the period the property was unusable due to the leaking roof. The Tenant claimed that a storm on or about 19 November 2017 had caused the damage to the roof resulting in flooding and leaks.

The Tribunal found in the Tenant’s favour and ordered that the Landlord pay the tenant $37,196.39. The Landlord appealed this decision to the Supreme Court.

Issues On The Appeal

The Landlord appealed on three grounds, being:

  1. The finding that the damage to the premises was caused by a Storm;
  2. The application of the Retail Leases Act to permit the Tribunal to compensate the Tenant for the rent paid while the premise was unusable; and
  3. The finding that the Tenant had not shared or given up possession.

In respect of the first ground of appeal, the VCAT had found that the roof started leaking on or after a storm on 19 November 2017 and that it had not leaked in previous years. The Landlord tried to argue that the damage to the roof was not the result of the storm, but rather due to the installation of flues in 2015 by the Tenant. Justice Croft held that all the Landlord had done on appeal was demonstrate that there was evidence to the contrary before the Tribunal. However, this was not in his view anything approaching an error of law that would allow the displacement of the Tribunal’s finding. Therefore, there was no error upon which an appeal could proceed.

The second ground of appeal was based upon the application of the Retail Leases Act, which in section 52 states that a landlord is responsible for maintaining the premises in a condition consistent with that of the premises at the beginning of the lease. However, it also states that a landlord is not responsible for maintaining those things if the need for repair arises out of misuse by the tenant.

The Landlord’s first argument proceeded on the same basis as the first ground of appeal; being that the damage had been caused by the Tenant and therefore he was not under an obligation to make any repairs. This was rejected by Justice Croft on the same basis, as he upheld the finding that the storm, and not the Tenant, had caused the damage to the roof. The second argument under the second ground of appeal was that VCAT had erroneously calculated compensation, as the Tenant could still use the premise for assessing vehicles. Therefore, there should have been a pro-rata calculation of the compensation based upon the fact there was still utility for the Tenant in the premise. This argument was rejected by Justice Croft, as the ‘inconsequential use of the premises during that time could not be said to have been capable of being put to the permitted use which the lease envisaged’.

The final ground of appeal put forward by the Landlord was that the VCAT had taken into account irrelevant considerations and had erred in finding that the Tenant had not breached the lease by giving up or sharing possession. His Honour Justice Croft outlined the important distinction between sharing ‘possession’, which would have led to a breach of the lease, and sharing ‘occupancy’, which was permitted. His Honour referred to the Privy Council in Lam Kee Ying Sdn Bhd v Lam Shes Tong, where the Council had held that ‘a covenant which forbids parting with possession is not broken by a lessee who in law retains possession, even though he allows another to use and occupy the premises. This was expanded upon by Neuberger LJ in Akici v LR Butlin Ltd, where his Lordship said that ‘it would require a very strong and clear case before a covenant against parting with possession should be construed in any other way than that adopted in Lam Kee Ying’.

The effect of these decisions was such that a very strong case was required for Justice Croft to consider the clause in the lease which prevented sharing of possession to be extended to also prohibiting the sharing of occupation. Justice Croft held that the present facts did not provide such a case, nor did the Landlord prove that any other entity other than the Tenant was ever-present at or operate a business from the premises, let alone in occupation.

Therefore, on all three grounds put forward, the Landlord was unsuccessful.

Commercial Considerations

This decision highlights in the context of retail leases that a landlord must keep the premises in the same condition as it was in when first let, and may be liable to compensate the tenant if the premises becomes unusable for that purpose. Finally, a tenant by merely sharing ‘occupancy’ of the premises is unlikely to breach a term in a lease that prevents the sharing of ‘possession’.

If you have any questions regarding this decision or any matters raised by it, please feel free to contact Alicia Hill of MST Lawyers’  Dispute Resolution and Litigation team by email or phone (03) 8540 0200