Australia: Not a fan of VCATs recent decision, the Supreme Court of Victoria has cleared the air in relation to air-conditioners in leased premises

Last Updated: 17 September 2019
Article by Nicola Carnevale

In brief

The Supreme Court of Victoria has overruled a recent VCAT decision1 centred around a landlord's repair obligations for an air-conditioning unit (A/C) and whether the tenant could terminate the lease as a result of the landlord's inaction.

What you need to know

  • Parties should take care to document their obligations clearly in order to avoid disputes during the term of the lease, especially in relation to specific agreements in relation to installation, repair and make good works as these works are often costly.
  • All correspondence, especially that relates to a perceived breach of the lease by one party, must be clear, unambiguous and outline the alleged breach of the lease and the related conduct (or lack thereof). Parties should seek legal advice in relation to perceived breaches to avoid incurring unnecessary costs.
  • Unlike the Tenant in this case, a party who is seeking to point to the actions of the other as their repudiation of the lease must continue to demonstrate that they are willing and able to perform their obligations under the lease. Failure to do so will limit their right to recover for their loss incurred by the actions of the other.

Facts

The parties entered into a lease for a Pilates and Barre Studio. Neither party disputed that A/C is required for the conduct of the business.

  • Special Condition 1 (SC) of the Lease required:
    • the Landlord to install the A/C to service the premises;
    • the Tenant will, at its own cost, take out and maintain a maintenance contract with a reputable air-conditioning contractor for the service of the A/C; and
    • the Landlord will be responsible for the associated capital repairs.
  • At the commencement of the Lease, there was a relatively new (6 years old) air-conditioning unit installed in the premises which was suitable for use.
  • During the lease the A/C was not working. The Tenant demanded that the Landlord fix the A/C. The Landlord asked if the Tenant was servicing the A/C. The Landlord received no further response from the Tenant and did not repair the A/C.
  • The Tenant terminated the lease on the basis that the Landlord had repudiated the lease.
  • It was determined in the VCAT decision that the Tenant had not entered into a maintenance contract for the air-conditioning.

Supreme Court Decision

Construction of SC 1

The Court confirmed that the appropriate test for determining the parties' intention in relation to a term of a commercial contract is "what a reasonable businessperson would have understood those terms to mean".2 Also, the term should not be interpreted as producing a commercially inconvenient or nonsense result.3

In this case, the Landlord successfully argued that the SC required the Landlord to install A/C at the beginning of the Lease. As the existing A/C was relatively new it would make no commercial sense to make the Landlord remove the existing A/C and install a completely new system.

VCAT had accepted the Tenant's position that the obligation of the Landlord to install A/C to service the premises was an ongoing obligation on the Landlord to maintain the A/C. However, the Court rejected VCAT's position and agreed with the Landlord that common sense suggests that the parties hadn't intended for the Landlord to have an ongoing repair obligation when the SC also required the Tenant to undertake a maintenance contract. Ultimately, the Landlord was not under an obligation to repair the A/C.

Repudiation

Repudiation is an objective test of whether a party's conduct is reasonably considered as an unwillingness or inability to perform the contract and therefore allows the other party to terminate. 4

Justice Croft outlined why the Landlord had not repudiated the contract:

  • Tenant had failed to give the Landlord notice of their breach.
    • The Court found that notice must be clear and unequivocal in identifying the Landlord's obligation and their alleged failures to meet those obligations.
  • Objectively, considering all of the circumstances, the Landlord was not unwilling to perform the contract.
    • The Landlord had queried whether or not the Tenant was servicing the A/C. The Court found that this did not indicate the Landlord's refusal to carry-out their obligations under the Lease.
  • Repudiation is "a serious matter and is not to be lightly inferred"5
    • There was no time stipulated for the Landlord to repair the A/C.
    • An objective assessment of the communications suggests that the Landlord believed that the Tenant was responsible for the service of the A/C.
    • The repair was relatively simple and not capital or structural in nature.
  • Ultimately, a party who is not willing and able to perform their own obligations under the contract cannot rely on the other party's breach to terminate the contract[6]. Here, the Tenant had not serviced the A/C (as per the SC) and was therefore disentitled to terminate the Lease and claim that the Landlord had repudiated the Lease for failing to repair the A/C.

Conclusion

This was an important and commercial decision from the Supreme Court of Victoria that re-established clear principles in relation to the interpretation of contractual clauses and the requirements for terminating due to another party's repudiation of the deal.

Landlords and tenants should seek legal advice in relation to the drafting of their leasing arrangements and when enforcing the obligations of those arrangements during the term of the lease.

Footnotes

1 Valuer and Retail Leases Update – Failure by landlord to repair air-conditioning allows tenant to terminate lease; also Sth Melb Pty Ltd v Red Pepper Property Group Pty Ltd [2018] VCAT 1684.

2 Electricity Corporation v Woodside Energy Limited (2014) 251 CLR 640 at [35]

3 Ibid.

4 Repudiation Reminder: Terminating a lease on the basis of repudiation

5 Shevill v Builders Licensing Board (1982) 149 CLR 620 at 633 per Wilson J; Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17 at 32.

6 DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 at 423-3.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Madgwicks is a member of Meritas, one of the world's largest law firm alliances.

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