Casenote: Tenant’s Ability to Terminate a Lease
Insights by Andrew Henshaw
Struggling with a landlord? You may be able to terminate the lease
Heavily entrenched in our legal system is the idea that if a party is not complying with its obligations under a contract, the non-breaching party may, when the circumstances allow and when the breach is sufficiently severe, terminate the contract and seek damages to compensate the non-breaching party for the breach.
In the area of retail and commercial leasing, this concept is generally invoked by the landlord when the tenant has not complied with its obligations, whether it is the tenant’s failure to pay rent or outgoings, failure to maintain the premises or keep the premises in a state of good repair.
However, it is our experience that in circumstances where the landlord has not kept the premises in structurally good repair or refuses to undertake structural repairs to the premises, for example water penetration, pest infestation, maintenance of temperature control systems or plumbing or electricity issues, the tenant feels rather lost in their ability to pursue and enforce its rights.
The Victorian Civil and Administrative Tribunal’s (VCAT) decision in S 3 Sth Melb Pty Ltd v Red Pepper Property Group Pty Ltd (Building and Property)  VCAT 1684 held that, by failing to repair an air-conditioning unit, the landlord (Pepper Property) had repudiated the lease, allowing the tenant, S 3 Melb Pty Ltd (S 3 Melb) to terminate the lease. This represented a substantial win for tenants and provided clarity as to when a tenant may rightfully terminate a lease.
The case was successfully appealed, but do not lose hope! The Victorian Supreme Court handed down its decision on 22 February 2019 (Red Pepper Property Group Pty Ltd v S 3 Sth Melb Pty Ltd  VSC 41). The appeal turned on the construction of the lease rather than attacking the tenant’s legal right to terminate a lease in a situation where a landlord breaches their obligations under a lease.
We explore the key facts and reasoning of the Supreme Court, and the implications of the case, below.
Key facts and findings
Some of the key facts to be aware of are:
- the lease required that Pepper Property install air conditioning to service the premises within 8 weeks from the date of signing the lease on the proviso that S 3 Melb must service the air conditioner every 6 months through the establishment of a maintenance contract;
- as part of the landlord’s works at the commencement of the lease, Pepper Property upgraded the existing air conditioning system and arranged for the air conditioner to be serviced and tested;
- the air conditioner failed approximately 12 months after the commencement of the lease and S 3 Melb demanded that Pepper Property repair the air conditioner;
- Pepper Property asserted that they had complied with their air conditioning obligations by upgrading the air conditioning system including installing three-phase power to the unit, installing a ‘Smart Temp’ wall controller and having the system serviced during the handover of the premises to S 3 Melb;
- Pepper Property queried whether S 3 Melb had met their maintenance obligations by entering into a maintenance contract. S 3 Melb failed to provide a substantive response to this query. Pepper Property did not repair the air conditioner; and S 3 Melb sought to terminate the lease on the basis that Pepper Property breached a fundamental term therefore repudiating the lease by failing to meet its repair obligations
VCAT concluded that ‘the Landlord had disavowed its obligation to repair the air conditioning system, notwithstanding repeated requests being made by the tenant for the Landlord to honour its obligations under the Lease’ and that the Landlord had therefore repudiated the Lease.
In contrast, the Supreme Court’s decision turned on the construction of the special condition and principals of repudiation. The Court found that:
- while the lease specified that Pepper Property was responsible for the costs of capital repairs of the air conditioner, Pepper Property:
- had satisfied its obligations by upgrading the existing system at the commencement of the lease;
- did not have an ongoing obligation to repair or maintain the air conditioner (subject to the tenant complying with their regular service obligations); and
- therefore had not breached a fundamental term of the lease; and
2. VCAT has misapplied the doctrine of repudiation on the basis that ‘a party is not at law entitled to accept another party’s repudiation if the first party is not itself willing and able to perform the contract’.
This decision is a timely reminder:
- of the crucial importance of accurate and unambiguous drafting of special conditions;
- the importance of both parties to a lease having a thorough understanding of their rights and obligations under the lease; and
- that a lease cannot be terminated if the party wanting to terminate is not willing or able to perform its own obligations under a lease.
A well drafted and comprehensive lease has the power to create long lasting relationships between landlord and tenant. Our collective experience dictates that it is not worth cutting corners when establishing long term relationships, and a landlord and tenant relationship is one relationship which can assist your business’ growth long term.
Andrew leads Velocity Legal’s Sydney practice.
If you are in a fight with the ATO or looking to restructure your business, you should have Andrew in your corner. Andrew is passionate about getting wins for his clients, solving difficult legal issues, and giving his clients clear and confident guidance. Andrew is a Chartered Tax Advisor, holds a Masters of Law from the University of Melbourne and is the author of ‘Life, Death and Taxes’. Andrew is also a passionate snowboarder and is always up for the next adventure in life.