Archive for September, 2011

Relief against forfeiture of an option to renew not available to a tenant

The issue of whether it is possible for a tenant to obtain relief against forfeiture of an option for a further term is often raised in circumstances where the tenant was in breach of the lease when the option was exercised. In Lontav Pty Ltd v Pineross Custodial Services [2011] VSC 485 Dixon J rejected a submission that relief against forfeiture of an option was available to the tenant. His Honour said [at 109] that:

an option clause will usually be properly characterised as an irrevocable offer, which the offeree (the tenant) may accept, provided it has performed any condition precedent. Once in breach of a condition precedent, a tenant’s purported exercise of the option amounts, at best, to a counter offer by the tenant to extend the lease, subject to acceptance by the landlord. In the context of this lease the condition precedent is in these terms. The tenant is not entitled to exercise an option to renew so long as there is at the date of serving the written notice of exercise of the option ‘any existing breach of non-observance of any of the conditions, covenants, agreements and provisos on the part of the Lessee herein contained’. (italics added)

Even if the forfeiture, or right of forfeiture, has been waived the tenant is not able to exercise the option.

While His Honour noted that in Beamer Pty Ltd v Star Lodge Supported Residential Services Pty Ltd [2005] VSC 236 Hollingworth J had assumed that an option if forfeited could be the subject of relief against forfeiture, His Honour said  [at [114]] that:

the authorities show that the nature of a contractual right to a further term to be an irrevocable offer by the landlord that is not a proprietary right. The loss of such a contractual right will not involve unconscionable or inequitable conduct by a landlord in taking a benefit, by exercising strict legal rights, which might attract an equity to relief against forfeiture.

It is submitted the same reasoning will apply where a tenant fails to exercise an option by the date specified in the lease: that is the landlord’s irrevocable offer cannot be accepted because there is a non-observance of a condition precedent to its exercise.


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Detailed examination required to determine if a tenant has parted with possession of leased premises

Most leases preclude the tenant from parting with possession of the leased premises  without the prior written consent of the lessor. It is not always easy to determine whether a tenant has parted with possession and invariably a detailed examination of the facts is required. In Lontav Pty Ltd v Pineross Custodial Services Pty Ltd [2011] VSC 278 Hargrave J undertook such an examination following which he held that the tenant had not parted with possession despite strong prima facie evidence that it had done so. In Lontav the tenant had been negotiating with a potential purchaser of the  tenant’s hotel business. The tenant and the purchaser had an understanding that no sale could take place until the purchaser had obtained  the necessary liquor licencing approvals and the landlord’s approval. Even though it was not clear that a purchase price had been agreed a “deposit” was paid. The purchaser also engaged solicitors to help him transfer the liquor licencee and a company was incorporated to hold the liquor licence (“the proposed assignee”). The tenant sought the landlord’s approval to an assignment of the balance of the term of the lease to the proposed assignee. The lessor refused to consider the proposed assignment until all overdue rent and outgoings were paid in full.  The tenant signed the application to transfer its liquor licence to the proposed assignee.  The liquor licence transfer application form required that there be confirmation that “settlement has occurred” before a licence would be issued. Hargrave J interpreted this to mean that there had to be confirmation that the sale of business contract had been settled and the tenant had assigned the lease. By mistake a new liquor licence was issued to the proposed assignee.  The principal of the tenant was diagnosed with a serious illness with the consequence that the tenant and the principal of the proposed assignee (“the manager”) entered into a management agreement to manage the tenant’s business. This agreement required the manager to guarantee the financial commitments  made by the tenant and lossess incurred by the tenant from the date of his appointment. The manager commenced managing the hotel business and despite him not being authorised by the management agreement to do so, he paid rent and staff using the proposed assignee’s bank account rather than the tenant’s bank account. The proposed assignee also paid for significant renovations and was noted on an insurance certificate as an insured. Hargrave J approached the question of whether the tenant had parted with possession by determining whether the management agreement, if implemented according to its terms, had the effect tht the tenant retained legal possession of the premises. His Honour decided that because of the seriousness of the illness suffered by the principal of the tenant, no variation to the management agreement should be inferred from the tenant’s acquiescence in the manager’s departure from the management agreement. His Honour decided that upon the proper construction of the managament agreement the tenant had not parted with possession, but  because of other breaches of the lease the landlord was entitled to terminate the lease and had done so. The tenant was granted relief against forfeiture. 

For those interested in examining when a tenant can be said to have parted with possession have a look at the Queensland Court of Appeal decision in ACE Property Holdings Pty Ltd v Australian Postal Corporation [2010] QCA 55.

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Tenancy in common trumps joint tenancy

When property is purchased in joint names and one party dies the question of whether the proprietors held the land as joint tenants or tenants in common invariably arises. The answer is significant because if the parties were joint tenants the whole of the land remains with the surviving joint tenant. The law concerning joint tenancies and tenancies in common was recently reviewed in detail in Sacks v Klein [2011] VSC 451.  In Sacks two brothers purchased a flat as as joint proprietors as an investment. The mortgage loan was made to them jointly and severally. One brother died and the survivor claimed to be entitled to be registered as the sole proprietor and was so registered. The administrator of the deceased’s estate sought a declaration that the survivor held the land on trust for himself and the plaintiff as tenants in common in equal shares. Sacks contains an excellent summary of the relevant legal principles and provides a good example of the analysis that needs to be undertaken in determining what the parties’ intentions were when the land was purchased. In summary the legal principles are:

(a)  Where  property is conveyed to two or more persons who are named as transferees without further specification as to whether they hold the title as joint tenants or tenants in common, they are deemed by operation of s.33(4) of the Transfer of Land Act 1958 to hold the legal estate as joint tenants. But that section does not preclude the operation of equity.

(b)  In the absence of evidence that the transferees hold a different intention, equity will follow the law.  However, equity favours tenancies in common and even “slight circumstances” are enough to indicate that the parties do not intend to hold property as joint tenants.

(c)  Prima facie, the provision of purchase money in equal shares is consistent with an intention to hold property as joint tenants. But equity will presume an intention to hold the beneficial interest as tenants in common where, among other things, a mortgage is made to them jointly, or where the property is acquired by partners or participants in a joint undertaking.

(d)  The application of the equitable presumption was not confined to formal business structures; an informal  joint business venture or undertaking would still give rise to equities leaning towards a tenancy in common of the beneficial interest.

(e)  The equitable presumption may be rebutted by evidence of a common intention by the co-owners to acquire the property as joint tenants; the common intention must be actual and not presumed. If there is ambiguity at to the existence of a common intention the court will lean towards a construction which creates a tenancy in common rather than a joint tenancy.

(f)  If the parties describe their interests in words which suggest distinct shares are to be held, their words prevent the creation of a joint tenancy. The evidentiary threshold needed to establish a division is easily met because:

….anything which in the slightest degree indicates an intention to divide the property must be hold to abrogate the idea of a joint tenancy and to create a tenancy in common” (Robertson v Frazer (1871) LR 6 Ch A 696 at 699).

Hargrave J  held that the brothers purchased the land as a joint business undertaking and therefore the equitable presumption of tenancy in common applied with the consequence that the survivor had to rebut the presumption by “clear and cogent” evidence. Despite finding that the brothers agreed to be registered as joint tenants Hargrave J held that the brothers intended to divide their interests in the flat equally and therefore the administrator’s claim succeeded.

Thanks to Elizabeth Michael for mentioning this case to me.

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Registrar of Titles fails to comply with Model Litigant Guidelines

The Registrar of Titles has been criticised by the Court of Appeal for its conduct in a proceeding brought by a plainiff under s.110 of the Transfer of Land Act 1958.  Section 110 provides, among other things, that a person who sustains loss or damage by reason of an amendment of the Register is entitled to be indemnified. Solak alleged that an imposter fraudulently obtained a loan in his name from a bank  and secured the loan by a registered mortgage over his land. The claim to have the loan agreement and mortgage discharged failed due to the indefeasibility provisions of the Act. See: Solak v Bank of Western Australia [2009] VSC 82. Solak then commenced a proceeding against the Registrar seeking an indemnity under s.110 for the loss he suffered by registration of the mortgage. The Registrar was not a party to the first proceeding. Among other things, the Registrar was going to argue that Solak had suffered no loss because non-compliance with the Consumer Credit Code resulted in the mortgage being unenforceable; this had not been argued at trial and therefore there was the risk of inconsistent judgments. The Registrar successfully applied for summary dismissal on the grounds of Anshun estoppel. See: Solak v Registrar of Titles (No. 2) [2010] VSC 46. It is unusual for a party to assert Anshun estoppel in proceeding where it was not a party to the earlier proceeding.  In Solak v Registrar of Titles [2011] VSCA 279 the Court of Appeal overturned the summary dismissal decision and held tht the Registrar had not complied with the Model Litigant Guidelines that govern the behaviour of the State of Victoria and its agencies in litigation. Warren CJ (with whom Neave JA agreed) held that there were “a number of serious difficulties….in relation to the Credit Code point” particularly because of its potential to undermine the doctrine of indefeasibility [38]-[39]. Hargrave AJA held that the Credit Code point was “wholly without merit” [94]. After reviewing the cases on Anshun estoppel Warren CJ said at [70]:

“All of the Australian cases to which the Court was referred where a defendant was not a party to the first proceeding was able to rely on Anshun estoppel in the second proceeding involved the estopped plaintiff attempting to assert in the second proceeding some proposition inconsistent with the judgment in the first proceeding. Even if such a collateral attack by the plaintiff is not a necessary precondition for Anshun estoppel, its absence is a significant factor militating against a finding that Anshun estoppel has arisen”.

Solak was not attempting to assert a proposition inconsistent with the judgment in the first proceeding. Her Honour held that the first proceeding determined the enforceability of the mortgage and it was at that point that Solak suffered loss and the Registrar could not undo this by showing in a subsequent proceeding that the mortgage was unenforceable. Warren CJ held that the Registrar had failed to comply with its obligations as a model litigant because the Credit Code point was so tenuous. Her Honour said [88]: 

It is puzzling that the government agency entrusted with administering the Torrens system would advance the Credit Code point. Furthermore, the Registrar appears to have forgotten that he is administering a beneficial fund. The purpose of the fund is not to accumulate money but to provide compensation to persons who are deprived of an interest in land by the operation of the indefeasibility provisions. The Registrar’s primary role is to ensure that persons who are entitled to compensation receive it. The responsibility to protect the fund from unmeritorious claims is not paramount. The Registrar ‘has no legitimate private interest of the kind which often arises in civil litigation. [He] acts, and acts only, in the public interest'”.

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Can a landlord’s failure to comply with s.52 consitute repudiatory conduct?

Does a landlord’s failure to comply with its obligations under s.52 of the Retail Leases Act 2003 to maintain premises in “a condition consistent with the condition of the premsies when the retail premises lease was entered into” constitute repudiatory conduct? This issue was raised in C & A Delaveris Pty Ltd  v Bretair Pty Ltd  [2009]VCAT 1663 [28], [79] and [80] but not ultimately decided.  The implication of a statutory obligation as a lease covenant “invites the application of the full range of the general law principles with respect to competing covenant obligations” (Croft and Hay Retail Leases Victoria, para  [70,005]). In Delvaris the Tribunal considered the relationship between the usual “no deductions” rent covenant and a statutory repair covenant.  The tenant withheld rent because of a failure to carry out urgent repairs.  Delvaris concerned ss25 and 47 of the predecessor to the 2003 Act but those provisions are the same as ss.52 and 94 of the 2003 Act.   Section 94 renders void any provision that is contrary to or inconsistent with the Act. In refusing an application for possession the Tribunal said at [84]:

“It is in accordance with well established practice to allow a setoff of the liquidated sum incurred by a tenant in meeting a repair obligation owed by the landlord and reducing the rental liability accordingly Lee-Parker v Izzet [1971] 1 WLR 1688, 1692-3 per Goff J. The amount of the outlay is liquidated and so the complication relating to unliquidated setoffs do not exist.”

 By reason of s.94 of the Act, where set-off and similar arguments are raised with respect to s.52, the section’s terms or operation cannot be abrogated by lease provisions such as a rent clause that requires the payment of rent “without deduction”. Deputy President Macnamara said the following about this issue at [79]:

 “It seems to me arguable first, that the withholding or at least delay of the payment of rent was justified and secondly, that there were no threats of illegal action which could be regarded as economic duress in the circumstances. It will be recalled that the covenant to pay rent under this lease was a covenant to pay ‘without deductions’. The authorities are not at one as to whether the inclusion of these words is sufficient to prevent any equitable setoff being relied upon to impeach the demand for rent. For the reasons which I gave in Wytell Pty Ltd v Glowinski [2006] VCAT 454 the balance of authority in Victoria favours the view that the words ‘without deduction’ exclude a tenant from relying upon equitable setoffs to impeach the demand for rent. Here, however, the covenant which the tenant alleged was being breached was one which in accordance with Section 25 of the 1998 Act as amended, the lease was ‘taken to provide’, that is, it was a statutory implied covenant. Section 47 of the 1998 Act provides that a provision in a retail lease is void to the extent that it claims to ‘exclude the application of any provision of this Act’. In my view, the inclusion of the words ‘without deduction’ in the covenant to pay rent is avoided by Section 47 to the extent that it limits the effect that the statutory implied covenant to repair would otherwise have, hence a breach of the repair covenant would be available as a setoff in the present case….it is clear that withholding rent in the circumstances described or delaying its payments was not a flagrant breach of the terms of the lease and obviously illegal. More pertinently since this step was taken to compel the lessor to do what I have held it was obliged to do any way under the terms of Section 25.”


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Put in repair obligations not contrary to s.52 of the Retail Leases Act 2003

In Retail Leases Victoria (Croft and Hay, LexisNexis) expressed the view (at para [70,005]) that a repair obligation imposed on a tenant that went beyond the obligation imposed on a landlord under s.52 of the Retail Leases Act 2003 would not be void under s.94 on the basis that it was contrary to or inconsistent with s.52. The authors suggest that a provision in a lease that imposed a “put in repair” obligation on the tenant and which obliged it not to pick up the landlord’s “keep in repair” obligation under s.52, but rather, to place the premises, plant and equipment and fixtures and fittings in a higher standard of repair than they were in “when the retail lease was entered into” would be effective. Croft and Hay state (at para [70,005]) that a repair covenant that required the tenant to make up the “gap” between the fruits of a landlord’s “keep in repair” covenant and a “put in repair” covenant” might be effective provided the lease provisions clearly established a capital works obligation on a tenant at its expense for the purposes of s.41(2). In the authors’ view there appeared to be no reason why the landlord could not enforce this obligation and, if necessary, recover the cost of the tenant’s repair obligations as an “outgoing” (as defined in s 3) under s 39 . Croft and Hay’s views were adopted by VCAT in Computer & Parts Land Pty Ltd v Aust-China Yan Tai Pty Ltd [2010] VCAT 2054 (at para [199] to [205]; see in particular para [203]) in deciding that a clause in a lease which required the tenant to contribute $3300 towards the cost of an air-conditioning system was a “put in repair” obligation with the consequence that the tenant had to reimburse the landlord for that cost.

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