Assisted by Jason Vo

Usually, a lease is created in writing to establish a landlord-tenant relationship. In this article, Senior Associate Dean Claughton, outlines a case where the business owners of Gearins Hotel in Katoomba claimed they had a verbal agreement with their landlord and that their business entity known as RMHD occupied the premises, therefore they were not liable as individuals for unpaid rent.

In this recent case heard in the Supreme Court of New South Wales: Wilson v Dobson [2019] NSWSC 697 the landlords and tenants did not create a written lease, however it was found that there was actually a lease, and that there was a landlord-tenant relationship which meant the tenant was required to pay outstanding rent.

The main issues in the case of Wilson v Dobson [2019] NSWSC 697:

The landlords, the Wilsons, claimed that they had a lease with Mr Dobson and Ms Linton, and that they were their tenants under the lease as opposed to their business entity, RMHD. The landlords commenced proceedings in February 2019 to obtain possession of the hotel, and to seek payment of outstanding rent and interest from May 2016 to April 2019, when the tenants vacated the property.

The background and facts of the case:

  • The landlords purchased the property on which the Gearins Hotel in Katoomba is situated in August 2011 and are the registered proprietors of the property.
  • Mr Dobson and Ms Linton alleged that RMHD Pty Ltd (RMHD) operated the hotel business and was the tenant under the lease agreement. However, RMHD was only incorporated in December 2015, eight months after Mr Dobson and Ms Linton occupied the premises.
  • Mr Dobson is the sole director of RMHD, with both himself and Ms Linton sharing equal ownership.
  • The landlord did not agree to RMHD operating the hotel business or occupying the hotel.
  • Mr Dobson and Ms Linton managed the rates and outgoings and paid for maintenance. The tenants claimed that the landlord agreed on several occasions to forego rent.

In May 2018 the tenants' solicitor sent a letter enclosing a draft lease to the Wilsons to "formalise [their] relationship", with RMHD listed as the tenant. Mr Wilson claimed that he did not know of the existence of RMHD prior. The Wilsons did not sign the lease and did not reply to this letter.

In late November, the Wilsons' solicitor sent Notices to Quit, also known as an Eviction Notice, to all three tenants as rent was still owing.

The Tenants' Defence:

The defence claimed that it was not Mr Dobson nor Ms Linton who occupied the premises, but rather that it was RMHD which was in occupation. The tenants also claimed that there was no lease, nor the existence of a landlord-tenant relationship. They claimed due to these reasons, there was no failure to pay rent.

The Court's Reasoning and Judgement:

RMHD was not incorporated until December 2015, which was eight months after Mr Dobson and Ms Linton occupied the premises. There was a lack of evidence that Mr Wilson was "verbally" informed about the existence of RMHD prior to the tenants' solicitor's letter of late May 2018 and a lack of evidence that the landlords consented to RMHD operating the business.

The only way in which RMHD as an entity could occupy the premises was via its directors and agents, with Mr Dobson being the sole director of RMHD, and both himself and Ms Linton sharing equal ownership of the company. The court therefore found that the tenants' defence being that Mr Dobson and Ms Linton did not occupy the premises, and only RMHD was in occupation, to be unacceptable.

The evidence indicated that the arrangement between Mr Dobson and Ms Linton, and the Wilsons to be a tenancy, and that they occupied the hotel. The landlords' bank records indicated receipt of regular amounts of $2,500.00, which increased to $2,750.00 from Ms Linton and later "Hotel Gearin" which were described as "Rent and GST". The letters from the defence's solicitors regarding the crossclaim, which was never filed, stated that there was an oral agreement to lease the Hotel, a tenancy, and occupation was taken up. Therefore, the court found the agreement between the parties was a tenancy and would be determinable on one month's notice under s127 Conveyancing Act 1919 (NSW).

The landlords' bank records indicate that there were periods lacking the payment of rent. Mr Dobson claimed that there had been several agreements between the tenants and Mr Wilson that rent was foregone due to the tenants paying for the purchase of chattels and equipment for the hotel, or cost of work. There was a lack of evidence to prove either these agreements, or the expenditure paid for by the tenants. Nevertheless, the court found that in the absence of such an explicit agreement, a tenant would not usually be able to set off the cost of carrying out work or other costs against the rent, following the case of Sze Tu v Jam Studios Pty Ltd; Jam Studios Pty Ltd v Sze Tu [2018] NSWSC 868 at [189]. Therefore, the court found the defence's arguments to be unacceptable and that the tenants were therefore liable for the payment of outstanding rent for the identified periods.

Key Takeaways:

  • Although leases are usually established by the creation of a written document, and signing of such, one can be established by the verbal agreement of two parties. In this case, the only parties bound by such a lease are the parties available at the commencement of the lease agreement. To this effect, possession and occupation and regular payments of rent can substantiate the existence of such a lease agreement.
  • Ordinarily, a tenant would not be able to set off the cost of carrying out work or other expenditure against the rent unless this arrangement is explicitly agreed to by the landlord.
  • Taking the time to create a lease in writing can avoid unnecessary and costly litigation down the track, as all parties will fully understand the other's intentions under the agreement and be able to see in writing their rights and obligations under the lease.

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.