Australia: Market rent reviews: is time of the essence?

In the recent case of Sentinel Asset Management Pty Ltd v Primo Moraitis Fresh Pty Ltd [2014] QSC 200, the Supreme Court of Queensland considered a dispute between a landlord and tenant over a market rent review. The case serves as an important reminder of the need for parties to appropriately diarise and act strictly within the timeframes set out in their lease.

Background

In accordance with its lease, the landlord had given a notice to the tenant on 16 April 2014 (Landlord's Notice), setting out the landlord's assessment of the current annual market rent for the premises. If the landlord's assessment prevailed, the rent would be increased by 22% from $1,061,347 to $1,296,295 per annum from the market review date of 7 May 2014.

The tenant had 30 days to provide its own market assessment. If it failed to do so, then from the relevant market review date, the rent would be as stated in the Landlord's Notice. The 30-day period expired on 21 May 2014. The landlord did not receive any response from the tenant until 22 May 2014, when the tenant advised it was seeking its own market rent assessment. The tenant's market rent assessment was not provided to the landlord until 16 June 2014, almost two months after the tenant had received the Landlord's Notice.

Relying on the lease, the landlord took the view that the rent stated in the Landlord's Notice should be taken to be the market rent. The tenant did not agree, and sought a declaration from the Court that the Landlord's Notice was invalid.

Was the Landlord's Notice effective?

Despite the clear terms of the lease, the tenant argued that the Landlord's Notice was ineffective as it did not specifically advise the tenant of its right to obtain its own assessment within 30 days, or contain a warning that, if it did not do so, the landlord's assessment would be deemed to be the current market rent.

The tenant also argued that because the Landlord's Notice did not state that strict compliance with the 30-day limit was insisted upon, the landlord had in effect represented that the time limit was not an essential term.

The Court noted that the Landlord's Notice specifically referred to the premises, the lease over the premises, the particular clause in the lease relating to rent, the date upon which the new rent would take effect and the amount assessed by the landlord.

In considering the validity of a notice of this type, the Court applied the test in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749. The Court noted that under that test, the question asked is whether "a reasonable recipient, who is credited with knowledge of the terms of the lease, and taking into account the surrounding circumstances, would have doubt as to the meaning of the notice or have regarded it as equivocal."¹

The Court also looked to the case of Finishing Services Pty Ltd v Lactose Fresh Pty Ltd [2006] FCAFC 177 in considering whether the Landlord's Notice was required to specifically refer to the particular clause in the lease or specify the timeframe in which the tenant must act under that clause. The Court found that a landlord is not obliged in a notice to advise the tenant of its rights.

It was therefore held that the Landlord's Notice was "entirely fit for purpose, and the tenant's arguments about its alleged defects or shortcomings are without merit." ²

Is time of the essence under the lease?

The tenant clearly failed to comply with the terms of the lease as it did not give its assessment to the landlord until almost two months after receiving the Landlord's Notice.

The Court considered the nature and effect of the time limit imposed under the lease and whether it was of the essence, that is, whether the time limit was critical or could simply be ignored by the parties.

The Court cited the New South Wales decision of GR Mailman & Associates Pty Ltd v Wormald (Aust) (1991) 24 NSWLR 80 which held that, when a lease contains a mechanism which dictates the consequences of failing to do something within a certain period (for instance, the tenant not submitting its own market rent assessment within a certain period), it is indicative that time is an essential consideration and is "of the essence" for that purpose.

The Court held that the relevant clause in the lease was to be construed in the same way and that the time limits imposed were essential terms, requiring strict compliance by the tenant. The Court determined that, by its conduct, the tenant breached an essential term of the lease and could not escape the repercussions of the breach.

Was the Landlord's Notice unreasonable?

The tenant argued that a 22% rent increase was not a reasonable or genuine assessment of the kind that the lease required, and that the figure adopted by the valuer appeared to have incorrectly included a land tax component.

However, the lease did not state that any assessment of market rent must be "reasonable". It also did not suggest that the tenant was entitled to require the landlord to justify the reasonableness of its conduct in assessing the rent, particularly given the mechanism in the lease for the tenant to challenge the landlord's assessment within a specified time.

In order to determine whether the landlord acted reasonably in arriving at its market review figure, the Court determined that the language of the lease needed to be considered. The relevant market rent review clause in the lease provided for a negotiating process between the parties, which could be escalated to an independent umpire if the negotiating process remained unresolved. While the initial figure put forward by the landlord was higher than the tenant expected or considered reasonable, this was not itself evidence that the landlord had been unreasonable.

It was held that the landlord's assessment did not involve any breach of the lease terms, as there was neither an express or implied requirement in the lease that the parties exercise "reasonableness" in the assessments, nor any "persuasive authority to that end". Further, there was no evidence to suggest that the landlord acted unreasonably or other than honestly and in good faith. As the Court observed, "[t]he fact that the respective assessments differ is not, itself, evidence of unreasonableness – a conclusion more readily available in this case, where that possibility is specifically envisaged in the mechanism set up for rent determination under the lease." ³

The tenant's application failed and the new rent was determined to be the amount stated in the Landlord's Notice.

Conclusion

It is important for landlords and tenants to ensure that timeframes associated with rent reviews are appropriately diarised, to ensure deadlines are not missed and unnecessary disputes do not arise.

Footnotes

¹Sentinel Asset Management Pty Ltd v Primo Moraitis Fresh Pty Ltd [2014] QSC 200 at [16]
²Sentinel Asset Management Pty Ltd v Primo Moraitis Fresh Pty Ltd [2014] QSC 200 at [18]
³Sentinel Asset Management Pty Ltd v Primo Moraitis Fresh Pty Ltd [2014] QSC 200 at [39]

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.