Archive for February, 2013

Damages assessed on breach of collateral contract to grant a new term

In an earlier post I referred to two cases in which the operator of restaurants in the Melbourne Casino and Entertainment Complex  succeeded in claims that they were entitled to additional 5 year terms despite their leases not containing such a term. See: Cosmopolitan Hotel (Vic) Pty Ltd v Crown Melbourne Limited and Fish and Company (Vic) Pty Ltd v Crown  Melbourne Limited [2012] VCAT 225. The tenants, who operated the restaurants “Waterfront” and “Cafe Greco”, succeeded in claims that Crown had breached a collateral contract that they would be granted an additional 5 year term after the expiry of the 5 year term provided for in their leases. The tenants claimed that they were induced to spend millions of dollars on fit-outs because of a promise that there existing leases would be renewed. At the end of the intial 5 year term Crown refused to renew the leases and the area occupied by restaurants was leased to new tenants. Crown denied the existence of any collateral contract. Damages and interest have now been assessed with the tenants being awarded a total of more than $2,000,000. See: Cosmopolitan Hotel (Vic) Pty Ltd v Crown Melbourne Limited and Fish and Company (Vic) Pty Ltd v Crown  Melbourne Limited (VCAT, unreported, 8 February2013).

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Recovery of outgoings and the November 2012 LIV Lease

The November 2012 LIV Lease excuses a tenant from performing any work that is the responsibility of the owner under the Building Act 1993. See: clause 3.3.3 which provides that the tenant is not obliged “to carry out any work that applicable legislation makes the responsibility of the landlord”. The new LIV Lease  also excludes from outgoings recoverable from the tenant “capital expenses and expenses whose recovery from the tenant would be contrary to applicable legislation”. See: the definition of “building outgoings in clause 1.1.  However, the LIV Lease includes in the definition of “building outgoings” the costs of “maintaining and repairing the building and the landlord’s installations and carrying works as required by relevant authorities…” (sub-paragraph (c) of the definition).

Thus it appears that provided recovery is not contrary to the Act, costs incurred by the landlord in complying with the owner’s obligations under the Act are recoverable from the tenant under the LIV Lease.  The question remains whether a landlord can or cannot recover from the tenant its costs in complying with owner’s obligations under the Act. The recent case of McIntyre v Kucminska Holdings Pty Ltd  [2012] VCAT 1766 did not determine that question. In McIntyre the lease required the tenant to arrange for an essential safety measure report and to purchase whatever fire fighting equipment was required in order to comply with the report. Section 251 of the Act provides that:

“(1)      If the owner of a building or land is required under this Act or the regulations to carry out any work or do any other thing and the owner does not carry out the work or do the thing, the occupier of that building or land or any registered mortgagee of the land or the land on which the building is situated, may carry out the work or do the thing.

(2)        An occupier may-

(a)        recover any expenses necessarily incurred under subsection (1) from the owner as a debt due to the occupier; or

(b)        deduct those expenses from or set them off against any rent due or to become due to the owner.

…….

(6)        This section applies despite any covenant or agreement to the contrary.”

Section 251 is enlivened if the landlord does not carry out the work or thing that the Act requires it to do. In McIntyre the Tribunal had to consider regulation 1217 of the Building Regulations 2006 which states:

“The owner of a building or place of public entertainment must ensure that any essential safety measure required to be provided in relation to that building or place under the Act or these Regulations or any corresponding previous Act or regulation-

(a)        is maintained in a state which enables the essential safety measure to fulfil its purpose; and…”

Senior Member Riegler said at [64] that:

“In my view, the words of the provision [Regulation 217] made it clear that the obligation to bear the cost of the essential safety measures ultimately rests with the owner of land. I do not consider it open for a landlord to contract out of that obligation, even if at first instance the lease requires the tenant to undertake the work required in order to comply with whatever essential safety measures are applicable…”

And at [69]:

“In my view, s 251 of the Building Act 1993 does not necessarily prohibit a landlord from placing such an obligation [to arrange for a essential safety measures report and to purchase fire fighting equipment] on a tenant, save and except that the Landlord must reimburse the Tenant for the costs associated therewith, failing which the Tenant is entitled to set-off those costs against rent due and payable under the lease.”

And at [71}:

“I do not consider that a contractual obligation, placed on the tenant to undertake whatever work is required in order to comply with an essential safety measures report, offends s 251 of the Building Act 1993. The contractual and the statutory obligations are able to sit side-by-side.”

In summary, the Senior Member’s view is that:

(a)          the owner landlord cannot contract out of its obligation under the Act;

(b)         if the owner landlord is required by the Act to do any work and the lease requires the tenant to do that work, the tenant must do the work but is  entitled to recover its costs from the landlord under s 251.

Assuming that the landlord does the work required by the Act or engages a person (other than the tenant) to do the work, it remains an open question whether a landlord can recover from the tenant as an outgoing the costs of complying with the Act. In my view there is nothing in the Act that suggests Parliament intended to interfere with a landlord’s right and a tenant’s right to bargain about the recovery of costs.

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