Australia: Leases: fair wear and tear

A recent Victorian Supreme Court decision looked at the repair and maintenance obligations in a Lease of a petrol station. A number of things went against the Landlord in this case, including the exception for fair wear and tear and the requirement that the lessee make repairs as necessary. The main problem for the landlord was that the current lease was a renewal, and the damage complained of occurred prior to the renewal. The repair obligation related to the condition of equipment at the date of commencement of the lease. The case shows that common expressions used in repair and maintenance clauses can have meanings that were not anticipated. Also, it serves as a lesson to take great care when adopting clauses in a renewal of lease.

Caltex v Agtan [2017] VSC 593

In this case, Caltex was the lessee of land at Kilsyth Victoria to the east of Melbourne. The original lease commenced in 1999 for a term of ten years, with two 5 year options to renew. The current lease was the second option term, commencing in 2014 and expiring in 2019.

The premises contained 6 underground fuel storage tanks. In 2011, one of these tanks was decommissioned because water was leaking into it. Caltex decided that it would be too difficult to remove that tank without adversely affecting the other tanks, and that because the station could operate effectively on 5 tanks, they decided to leave the decommissioned tank in place and just not use it.

The lease contained the following obligation at clause 19.1:

"The Lessee shall at its own expense keep and maintain the Demised Premises and appurtenances in good and tenantable repair and good and efficient working order and condition having regard to their condition as at the date of commencement of the Lease (fair wear and tear and damage by fire, storm, flood, earthquake, tempest, act of God, riots, civil commotions or act of war and without any neglect or default on the part of the Lessee alone excepted) and shall effect repairs to the Demised Premises and appurtenances as necessary including the replacement of all worn or defective parts ..."

The landlord discovered that one of the tanks had been decommissioned at the time of renewal of the lease through a rent determination report. In response to that, the landlord issued a breach notice. The landlord then executed the renewal of lease deed. Subsequent to that, the landlord issued another breach notice.

Caltex sought an order from the Court that it was not in breach of the lease for the landlord:

The Court analysed the repair and maintenance clause and found a number of problems.

  1. The exception for fair wear and tear
  2. This is commonly part of many leases, both in the repair and maintenance clauses and in the make good clauses. It makes sense when applied to many items (eg – carpet in an office, the motor in an air conditioning system) as the landlord should expect the usual deterioration over the course of a lease.

    However, it does not make sense when the landlord would want an item repaired regardless of how it became damaged. A café counter, for example, will deteriorate over time but it may be reasonable for a landlord to expect it to be replaced by the tenant when it becomes extensively damaged, even if that damage is a result of fair wear and tear.

    In this case, the damage to the underground storage tank was found to have been caused by fair wear and tear, and so clause 19.1 did not require the tenant to repair it.

    An exception for fair wear and tear does not excuse damage caused by a failure to maintain. For example, if an air conditioning system needs an annual service and a lessee fails to undertake that servicing, the resulting damage would not fall within the fair wear and tear exception.

    In this case, the underground tanks did not have cathartic protection and so the surrounding clays caused corrosion. Caltex was able to show that its maintenance obligation was limited to observation and periodic testing as there was nothing they could to do prevent the corrosion occurring.

  1. The requirement that the lessee make repairs as necessary
  2. The lease required the lessee to effect repairs as necessary. The lessee was able to show that it was able to use the premises and run the business effectively using only 5 of the 6 storage tanks, and so it was not necessary to repair the sixth tank.

    The Lessor argued that the expression "effect repairs ... as necessary" meant that Caltex was required to effect repairs when items were damaged. The Court disagreed – the phrase meant that Caltex was required to effect repairs, but only when necessary to ensure good and efficient working order of the item in question. The Court considered the item in question was the tank system, rather than the one decommissioned tank. As the tank system was operating effectively using only five tanks, the repairs were not necessary.

  1. Having regard to their condition as at the date of commencement of the Lease
  2. The overriding problem for the landlord was the fact that the lease provided that the lessee maintain the Premises and appurtenances in good and tenantable repair and good and efficient working order and condition having regard to their condition as at the date of commencement of the Lease.

    At the commencement date of the lease, the sixth tank had already been decommissioned, so to repair it would have made the tank system better than it was at the commencement date.

These are common expressions in repair and maintenance clauses as well as make good clauses. This case demonstrates that care is required when assembling or reviewing these kinds of clauses so that the actual meanings of these common expressions are not overlooked.

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.

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