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When a commercial tenant moves out, it is not uncommon for the
landlord and tenant to come to an arrangement about the outgoing
tenant's make-good obligations that takes account of the
incoming tenant's fit-out requirements. For example, the
parties will often agree that, instead of restoring the premises to
their original condition, the outgoing tenant can simply make a
financial contribution to the incoming tenant's fit-out.
The case of Pourzand v Telstra Corporation Ltd [2012]
WASC 210 shows the severe consequences for landlords if those
arrangements are not finalised before work starts.
Background
The tenant's lease was due to expire at the end of March
2010 and the tenant had effectively moved out of the premises by
June 2009. In early September 2009, with around seven months left
on the lease, the tenant was considering an arrangement with the
landlord where the tenant would pay out the remainder of their
lease term and a sum of money to represent their make-good
obligations. The tenant was also considering the possibility of
sub-leasing the premises for the balance of the lease term.
In September 2009, the landlord started performing some minor
work on the premises, including the replacement of carpet and, to
facilitate that, the removal of some partitions and ceiling tiles.
A representative of the tenant was aware of this minor work being
carried out, but understood that no substantial work would start
until a 'deal' had been done between the tenant and the
landlord about the make-good obligations and the balance of the
rent.
Without any specific agreement from the tenant, the landlord
went ahead with substantial renovation works. Shortly afterwards,
an employee of the tenant discovered the premises 'in a state
of utter devastation'. The Court found that 'it is no
exaggeration to say that the major work involved [the
landlord's] contractors tearing the demised premises
apart'. The tenant terminated the lease the next day.
The case
The landlord sued for the rent payable for the balance of the
full lease term. The tenant's defence was that the lease had
been properly terminated. The landlord's response was that the
termination was not valid because the tenant had in fact approved
of the works taking place. The landlord does not appear to have
argued, for example, that even if the works were not actually
approved, the tenant's conduct led the landlord to assume that
they were.
The Court found that the tenant could not be said to have
approved of the work because the most that the tenant knew was that
minor work to remove carpeting would be done. The tenant had no
advance knowledge of the extent of work being undertaken. The Court
also found that the tenant had made clear to the landlord that the
proposed arrangements to allow the works to take place needed to be
approved by the tenant, and that such approval had not yet been
given.
The landlord's fundamental obligation under the lease was to
provide the tenant with exclusive possession of the premises. The
substantial renovation works made the premises completely unusable.
By performing those works, the landlord had effectively renounced
its obligations under the lease.
Accordingly, the Court held that tenant was entitled to
terminate the lease, and the Court rejected the landlord's
claim for the rent for the balance of the lease term.
Significance
The case shows that while flexible arrangements regarding the
changeover of tenants can be useful, it is critical to ensure that
the arrangements are completely finalised and documented before any
work is performed. Failing this, landlords run the risk of not
being able to recover any contribution from the outgoing tenant
towards the cost of the works, and potentially losing the final
months' rent.
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and 2011
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Finalist - ALB Australasian Law Awards 2008, 2010 and 2011 (Best
Brisbane Firm)
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Law Firm (revenue less than $50m)
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guide to the subject matter. Specialist advice should be sought
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