Archive for category Commercial Leases
The long awaited fourth edition of the leading text on leasing law, Commercial Tenancy Law, will be published in mid December 2017 by LexisNexis. The authors of the fourth edition are Justice Croft, Robert Hay QC and Luke Virgona of the Victorian Bar. The third edition was published in 2009. As was the case with the third edition, Commercial Tenancy Law considers the law governing leases throughout Australia including the various State and Territory statutes concerning retail and shop leases.
At general law the question of whether a tenant has validly exercised an option for a further term depends upon whether the tenant has met the conditions contained in the lease for the exercise of the option. The general law has been altered by the Retail Leases Act 2003. Section 27(2) provides that:
” If a retail premises lease contains an option exercisable by the tenant to renew the lease for a further term the only circumstances in which the option is not exercisable is if –
(a)the tenant has not remedied any default about which the tenant has been given written notice; or
(b)the tenant has persistently defaulted under the lease throughout is term and the landlord has given the tenant written notice of the defaults.
Section 27 raises a number of questions: what does a notice need to say to be be a “notice” of default (ss.27(2)(a) and (b)) and how many defaults must there be for the defaults to be “persistent” and when in the term of the lease do they need to occur to be defaults “throughout the term” (s.27(2)(b)).
In Leonard Joel Pty Ltd v Australian Technological Approvals Pty Ltd  VCAT 1781 VCAT had to consider s.27(2)(a). The dispute concerned whether the tenant was in default by not furnishing the landlord with “as built” plans following alterations to the premises and whether the purported notices of default constituted “notice” of the default. After deciding that the tenant had not been in default at the time it exercised the option, the Tribunal went on to consider whether the purported default notices given by the landlord constituted “notice” of the default. The landlord’s letters requesting “as built” plans made no mention of a “default” under the lease or a “breach” of the lease.
In determining that the landlord’s letters were not “notices” of a default, Member Josephs said :
“….the potential consquences to the tenant of the landlord not being required to grant the option to renew are significant and serious and as such I find that a more narrow interpretation has to be applied to the sufficiency of the notice any default under the lease “about” which the landlord has given. It is necessary therefor that the landlord applies some rigour in its giving of notice which should make it expressly clear that a breach by the tenant is alleged and should be clear and consistent in its description of the nature of the breach, all of which is alleged to constitute the default.”
And at :
“..the landlord’s letters do not in any way refer to the possible consequence of the landlord not granting the renewal option if the alleged default is not remedied.”
While the latter statement could be interpreted as requiring that a notice refer to a possible consequence of the breach as being that any option might not be exercisable, the Member does not appear to have intended that outcome because he refers to the notice given in Computer & Parts Land Pty Ltd v Property Sunrise Pt Ltd  VCAT 1522 as being an example of “a very appropriate example of a notice”; the notice in that case did not refer to the possibility that an option might be exercisable.
What the decision does highlight is that for a notice to constitute “notice” of a default under s.27 it must communicate with “obvious clarity and sufficiency” that there is a default or a breach which must be rectified. The default or breach should be identified clearly, the relevant lease provision referred to and a request made to rectify the default. The notice should be given as soon as possible after the landlord becomes aware of the default.
Where a tenant provides services from leased premises in accordance with the permitted use the lease is likely to be a “retail premises lease” and therefore governed by the Retail Leases Act 2003 (Vic).
In every case it is necessary to identify precisely the service being provided, consider what activity is permitted under the lease and whether the service provided accords with the permitted use.
The Act applies to a “retail premises lease”. “Retail’ is not defined; however, the expression “retail premises” is defined (s.4(1)):
“….premises, not including any area intended for use as a residence, that under the terms of the lease relating to the premises are used, or are to be used, wholly or predominantly for –
(a) the sale or hire of goods by retail or the provision of services;”
The authorities provide strong support for the ‘ultimate consumer’ test as the touchstone of retailing. In Wellington Union Life Insurance Society Limited  1 VR 333, Nathan J said at 336:
“The essential feature of retailing, is to my mind, the provision of an item or service to the ultimate consumer for fee or reward. The end user may be a member of the public, but not necessarily so.”
Wellington Union concerned the provision of a service: patent attorneys providing advice to large foreign chemical companies from rented premises. In some cases the advice passed through the hands of an intermediary to the ultimate consumer. Nathan J held that the premises were “retail premises”.
In Fitzroy Dental Pty Ltd v Metropole Management Pty Ltd  VSC 344 (which also concerned the provision of a service) Croft J referred to Wellington Union at :
“The fact that the advice of the patent attorneys may pass through the hands of an intermediary to the ultimate consumer or end user was not regarded as significant, provided it came into the hands of that person in a form that could not be amended and hence remained the product of the intellect of the deliverer. More generally, this highlights and emphasises the importance of characterising the nature of the “service” that is being provided. Thus, in the context of Wellington, it would follow that if the position was that the patent attorneys provided advice to, for example, a solicitor who would, in turn, provide advice to his or her client, the ultimate consumer, using the patent attorney’s advice merely as an “input” in his or her advice, wholly or partially with additions and modifications on the basis of his or her professional opinion, the position would be different. In those circumstances the patent attorney’s advice could not, in a relevant sense, be said to pass through the hands of an intermediary to the ultimate consumer. It does not, however, follow that in these circumstances the solicitor may not be regarded as the “ultimate consumer” of the service for the purposes of his or her own practice; as is likely to be the case with other “inputs” for the practice such as, for example, legal research services, stationary and office supplies.”
Most reported cases concern whether goods are being sold by retail. At  in Fitzroy Dental Croft J considered whether the sale of goods could be said to be “retail”;
“….. a sale of “widget type A” from premises by A to B who, in turn, “converts” the good “widget type A” to “widget type B for sale to C would not involve the sale of “widget type A” to C as the ultimate consumer of that type of good. Depending on the nature of the goods involved these transactions may involve sale by wholesale to B and a retail sale to C – or, alternatively, two retail sales of different goods, “widget type A” to B and “widget type B” to C.”
And at ;
“… that the fact that a good or a service is provided to a person who uses the good or service as an “input” in that person’s business for the purpose of producing or providing a different good or service to another person does not detract from the possible characterisation of the first person (and perhaps also the second person, depending on all the circumstances) as the “ultimate consumer” of the original good or service.”
In CB Cold Storage Pty Ltd v IMCC Group Pty Ltd  VSC 23 Croft J had to again consider whether rented premises were “retail premises”. The tenant conducted the business of a cold and cool storage warehouse storage from the premises which accorded with the permitted use under the lease. The tenant’s customers ranged from large primary production enterprises to very small owner operated businesses. VCAT held that the tenant’s rented premises were not “retail premises” on the basis that a “consumer” was a person who used goods or services to satisfy personal needs rather than for a business purpose and therefore the tenant’s customers were not consumers of the tenant’s services. The tenant appealed VCAT’s decision. Croft J allowed the appeal and held that the premises were “retail premises”. The Tribunal erred in holding that customers that used a tenant’s service for a business purpose were not “ultimate consumers”; the Tribunal treated the services provided at the premises as an “input” into the tenant’s customer’s business arrangements with the consequence that the tenant’s customers were not the ultimate consumers of the tenant’s services. The matter was not remitted to VCAT because the Tribunal had been satisfied of all other matters necessary to support a conclusion that the premises were “retail premises”: the premises were being used in accordance with the lease, were “open to the public” and there were no findings to support a conclusion that the premises were not “retail premises”.
CB Cold Storage highlights the importance of identifying the nature of the service being provided and the user or consumer of that service. In most cases the provision of a service will be “retail”.
Tenants with less than 20 employees will soon have a new weapon in disputes with landlords as a result of amendments to the Australian Consumer Law: they will be able to challenge a term in a lease that is “unfair”.
The legislation effecting the changes, the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015, has received Royal Assent but the changes do not come into force until November 2016. The changes will affect contracts (including leases) entered into or renewed on and from 12 November 2016. The changes will also apply to a provision in a contract that is varied on or after that date.
The legislation extends the existing unfair contract provisions available to consumers in Part 2-3 of the ACL to small businesses with less than 20 employees when the contract is entered into. Similar changes have been made to the Australian Securities and Investment Commission Act 2001.
In determining the number of employees casual employees are not counted unless the employee is employed “on a regular and systematic basis”. To be able to challenge an “unfair” term the “upfront price payable” must not exceed $300,000 (if the lease has a duration of 12 months or less) or $1,000,000 (if the lease has a duration of more than 12 months). Because payments under a lease are usually made monthly it is unclear how the “upfront price payable” is to be calculated.
A term of a lease will be void if the term is “unfair” and the lease is a “standard form contract”. A term is “unfair” only if it:
- would cause a significant imbalance in the parties’ rights and obligations under the contract;
- is not reasonable necessary to protect the legitimate interests of the advantaged party;
- it would cause financial or other detriment to the business affected if it were applied or relied on.
A lease will be presumed to be a “standard form contract” if a party to a proceeding makes that allegation unless another party proves otherwise. In determining whether a lease is a standard form contract a court may take into account matters that it considers relevant but must take into account whether one party has all or most of the bargaining power, whether the leased was prepared by one party before any discussions occurred, whether a party was in effect required to accept or reject the terms and whether a party was given an effective opportunity to negotiate the terms.
If a term is declared void the lease will continue to bind the parties if it can operate without the unfair term.
To ensure that the legislation does not apply landlords should consider deleting lease terms that are not reasonably necessary for their protection and avoid “take it or leave it” type negotiations. Where it is unclear whether a prospective tenant is likely to have 20 employees a landlord might also consider including a term in the lease that requires the tenant to declare how many employees it does have.
Today I commented on an advisory opinion given by the President of VCAT, Justice Garde, in which His Honour decided that:
(a) a landlord could not recover from a tenant the costs of complying with essential safety measure requirements imposed on the landlord under the Building Act 1993 and its regulations;
(b) a landlord could not recover from a tenant as outgoings the costs that the landlord incurs in complying with s.52 of the Retail Leases Act 2003.
The effect of the decision is that landlords are likely to require tenants to enter into ‘gross leases’. Landlords are also likely to ask tenants to apply for a certificate from the Small Business Commissioner under s.21(5) of the RLA; the giving of a certificate enables a retail premises lease to have a term of less than five years.
That part of the opinion concerning the recovery of the cost of complying with essential safety measures will prevent a landlord under both a retail premises lease and a commercial lease from recovering the costs incurred in complying with the essential safety measure requirements.
Tenants should dispute the rent specified by a landlord at a rent review date within the time specified by the lease. Dire consequences can follow if the time periods are ignored . The rent review process for setting the market rent commonly provides for:
- the landlord to propose the new rent and, if the tenant does not object within a specified period of time, the rent proposed by the landlord is the new rent;
- the rent to be determined by a valuer if the tenant objects to the rent proposed by the landlord.
The question often arises whether time is of the essence in the construction of clauses concerning rent reviews.
The starting point is the House of Lords decision United Scientific Holdings Ltd v Burnley Borough Council (1978) AC 904. In Mailman & Associates Pty Ltd v Wormald (Aust) Pty Ltd (1991) 24 NSWLR 80 (CA) Gleeson CJ referred with apparent approval to a summary of the effect of United Scientific in the judgment of Slade LJ in Trustees of Henry Smith’s Charity v AWADA Trading and Promotion Services Ltd (1983) 47 P & CR 607, 619 as follows:
“(1) Where a rent review clause confers on a landlord or tenant a right for his benefit or protection, as part of the procedure for ascertaining the new rent, and that right is expressed to be exercisable within a specified time, there is a rebuttable presumption of construction that time is not intended to be of the essence in relation to any exercise of that right.
(2) In a case where the presumption applies, the other party concerned may, if he wishes to bring matters to a head after the stipulated time for the exercise of the right has expired, give to the owner of the right a notice specifying a period within which he requires the right to be exercised, if at all; the period thus specified will if it is reasonable then become of the essence of the contract …
(3) The presumption is rebuttable by sufficient ‘contraindications in the express words of the lease or in the interrelation of the rent review clause itself and other clauses or in the surrounding circumstances.’ …
(4) Though the best way of rebutting the presumption is to state expressly that stipulations as to the time by which steps provided for by the rent review clause are to be taken is to be treated as being of the essence (see United Scientific Holdings Ltd v Bunley Borough Council per Lord Diplock [ AC] at 936, and per Lord Salmon [ AC] at 947), this is not the only way. Any form of expression which clearly evinces the concept of finality attached to the end of the period or periods prescribed will suffice to rebut the presumption. The parties are quite free to contract on the basis that time is to be of the essence if they so wish.”
The authorities make it plain that it is a question of construction of a lease whether there is express or implied rebuttal of the presumption that time is not of the essence
In Mailman the rent review provision the lease allowed the tenant a specific time to dispute the lessor’s assessment of the market rent and spelt out the consequence of failing to dispute the assessment within than time. There was no clause stating that time was of the essence. The relevant clauses were as follows:
“Prior to the expiration of fourteen (14) days…[from the service of the lessor’s notice], the Lessee may, by notice in writing, dispute the amount set out..[in the Lessor’s notice}…(clause 2.02(b))”
Another clause provided that if the lessee did not serve a notice of dispute within the prescribed time it was deemed to have agreed that the amount set out in the notice was current market rental.
The Court of Appeal held unanimously that the lease evidenced an intention that the 14 day time stipulation was of the essence. The decisive factor was the deeming of the tenant to have agreed to the rent if it failed to serve the notice of dispute.
The issue of whether time periods in rent review clauses are of the essence was revisited recently in Sentinel Asset Management Pty Ltd v Primo Moratis  QSC 200. The tenant failed to serve a notice disputing the rent specified by the landlord within the time prescribed by the lease with the consequence that iff time was of the essence the rent would increase by 22%. The critical clause provided that:
“Unless the Tenant gives the Landlord a notice stating that the Tenant’s assessment of the current annual market rent of the Premises at the relevant Market Review Date within 30 days after the Landlord gives the its notice, the Rent on and from the relevant Market Review Date is the current annual market rent in the Landlord’s notice.”
The lease also said that if “the Tenant gives a notice…. on time” (underlining added) the parties must attempt to agree the rent in writing failing which a valuer could be be appointed to determine the market rent.
The court found that time was of the essence with the consequence that the rent specified by the landlord applied.
The court also rejected an argument that the rent specified by the landlord had to be “reasonable”. The rent specified by the landlord in its notice was higher than the rent contained in an expert valuation obtained by the landlord.
The lesson is that it is critical for tenants to respond within the time prescribed by the lease.
Leases commonly permit a landlord to terminate a lease if the landlord intends to demolish the building located on the leased premises. Section 56 of the Retail Leases Act 2003 (Vic) implies terms into a retail premises lease that provides for the termination of lease on the grounds that the building is to be demolished. Section 56(2) of the Act says:
The landlord cannot terminate the lease on that ground unless the landlord has—
(a) provided the tenant with details of the proposed demolition that are sufficient to indicate a genuine proposal to demolish the building within a reasonably practicable time after the lease is to be terminated; and
(b) given the tenant at least 6 months’ written notice of the termination date.
Tenants often claim that a proposal is not a “genuine proposal” because the landlord intends to demolish the building so that the new building constructed on the site can be used for the landlord’s own purpose or for the purpose of leasing to a new party. However, the claim is misconceived because the purpose for which a landlord wishes to “demolish” leased premises is irrelevant to the question of whether there is a “genuine proposal”.
Assuming that enough detail is provided in the notice of termination concerning the proposed demolition, the only question is whether there is a genuine proposal to demolish. The term “demolish” is widely defined in s.56(7). In Blackler v Felpure Pty Ltd (1999) 9 BPR 17,259 Bryson J said at  that the lessor “should have a genuine proposal to demolish the building within a reasonably practical time after the lease is to be terminated.” Blackler concerned s.35 of the Retail Leases Act 1994 (NSW) which contained a demolition clause in similar terms to s.56 of the Act. Bryson J identified the question for determination as whether the notice itself provided sufficient details to indicate a genuine proposal.
At  His Honour said:
The requirement to provide details is not merely a formal step imposed in the lessor’s path, but the details are to be provided so that the lessee can come to a conclusion about whether the termination will be effective, and whether the lessee should accept that it will be effective or dispute it. The sufficiency of details provided should be tested in relation to that purpose. The question is whether the details provided are sufficient to indicate a genuine proposal to demolish the building; if they are not the termination cannot take place and if they are it will be effective no matter what other details of the proposed demolition exist or could have been provided.
And at :
It is not in my view open to contention by the lessee whether the lessor’s decision to demolish, repair, renovate or reconstruct the building is reasonable or appropriate; it is sufficient if there is a genuine proposal. Nor in my opinion is it open to debate whether the lessor could in some way modify the lessor’s proposal so as to continue to accommodate the lessee after the premises have been demolished, repaired, renovated or reconstructed. The opportunity to break a lease, retake possession of take advantage of the demolition clause is a contractual opportunity made available to the lessor by the terms of the lease itself, ……, it is not injurious to the lessor’s position whether the lessor has decided to take advantage, and it is not relevant that the lessor has in view occupying the premises itself, or selling them after reconstruction, or leasing them again, even if the lease should be a business similar to the lessee’s. The demolition clause is a reality of the party’s relationship, and so is its potential operation to end the lease.
See also .
In Skiwing Pty Ltd v Trust Company of Australia  NSWCA 276 the Court of Appeal held that a proposed “refurbishment redevelopment or extension” did not lose the character of a “genuine proposal” because the commercial motivation of the lessor was to attract a tenant or particular kind of tenant. See: Skiwing at  (Spigelman CJ (with whom Hodgson JA and Bryson JA agreed). Skiwing concerned a relocation notice given under s.34A of the Retail Leases Act 1994 (NSW) which provision was described at  as a “parallel formulation” to that considered by Bryson J in Blackler. The Court of Appeal at  said that Bryson J in Blackler was “correct”.
In Blackler Bryson J also accepted at  that there was an implied duty of good faith in the exercise of the contractual right to terminate the lease. However, the duty of good faith was not breached where the landlord had an intention to occupy the premises itself or lease them out to an identified person after the works had been carried out. His Honour said at :
The defendant can exercise its power to terminate the lease with a view to its own advantage; it is for purposes of that kind that contractual entitlements generally exist.
Landlords often offer incentives to a tenant to encourage the tenant to enter a lease. Common incentives are rent free periods and contributions to the fit out. The logic behind the inducement is that landlord will benefit because the tenant will occupy the premises for the term of the lease. Landlords sometimes require a “claw back” provision in the lease so that if the landlord terminates the lease before the expiry of the term the lease incentive (or part of the lease incentive) must be repaid.
The enforceability of “claw back” clauses has been thrown into doubt by the decision of the Queensland Supreme Court in GWC Property Group Pty Ltd v Higginson  QSC 264.
In GWC the tenant and the landlord entered into a lease and on the same day entered into an incentive deed. The incentive deed was recited to “supplement the lease” and recited that the landlord had agreed, among other things, to contribute to the tenant’s fit-out and grant a rent abatement. The lease did not require the tenant to undertake a fit-out. The incentive deed also provided for repayment of part of the landlord’s contributions if the lease was terminated (other than by expiry of the term or the lessor’s default) or if the tenant parted with possession without the landlord’s consent. The obligation to repay was guaranteed by guarantors.
The landlord terminated the lease after the leased premises were abandoned by the tenant. The court decided that:
- the lease and the incentive deed had to be construed as if they were one document;
- the obligation to repay only arise if there a termination;
- the tenant could be obliged to repay the landlord’s contributions for reasons other than the tenant’s breach – for example where the tenant went into liquidation or following a natural disaster;
- the repayment obligation should not be viewed as a restitutionary payment;
- in addition to contractual damages for breach of the lease, the landlord was entitled, by the repayment clauses, to recover substantial additional payments;
- the repayment obligation were not a genuine pre-estimate of damage.
The court decided that the obligation to repay landlord’s contributions was a penalty and was therefore not enforceable.
The case contains a good discussion about the law of penalties. Thanks to Tony Burke of Burke & Associates Lawyers Pty Ltd for alerting me to GWC.
The issue of whether a lease requires a rent review or whether the review is at the discretion of the landlord often arises. The problem can avoided by clear drafting. In Growthpoint Properties Australian Limited v Austalia Pacific Airports  VSC 556 the court had to decide whether a rent review was mandatory under the lease or whether the review was at the discretion of the landlord.
Clause 4.2 of the lease provided that:
“On each Market Review Date, the Rent is to be adjusted by a market review in accordance with the Market Review Method….”
Part B of the Lease provided:
“On each Market Review Date, the Rent will be adjusted by a market review if:
(a) APAM gives written notice to the Tenant (“Rent Review Notice”) setting out APAM’s opinion of the market rent for the Premises as at the Market Review Date; and
(b) the Rent Review Notice is given to the Tenant in the period between 6 months before and 6 months after the Market Review Date.
New Rent applies unless a dispute notice is served.
The Rent stated in the Rent Review Notice applies from the Market Review Date unless the Tenant gives APAM a notice disputing the specified Rent (“Dispute Notice”) within 21 days after the Rent Review Notice is given.”
The controversy between the tenant and the landlord arose from the imperative language in clause 4.2 (“is to be adjusted”) and the use of the conditional language in Part B (“will be adjusted”).
The tenant contended that the clauses, when read together were ambiguous and that there was a conflict between the clauses. On the tenant’s construction of the lease the landlord was obliged to initiate a rent review.
The landlord submitted that the rent provisions gave the landlord an entitlement, but not an obligation, to give the lessee a rent review notice.
The court held that the rent provisions gave the landlord an entitlement, but not an obligation, to give the lessee a rent review notice.
The case is useful because it discusses in detail the principles governing the construction of leases and rent review clauses and highlights the need to examine the lease as a whole. Of particular interest is the discussion about the purpose of rent review clauses: the House of Lords in United Scientific Holdings Ltd v Burnley Borough Council  AC 904 viewed the benefit of a rent review to the landlord as being the ability to adjust rent market with the benefit to the tenant being seen as the security of a long lease.
The lease in Growthpoint was a commercial lease. If the lease is a “retail premises lease” a tenant may initiate a rent review if the landlord fails to do so within 90 days after the period provided for in the lease for the review. See: s.35(5) of the Retail Leases Act 2003.
There is a translation key(widget) on the mirrored blog for ease of reading for non-English speaking members of the public or professionals. The mirrored blog can be found at http://roberthaybarrister.blogspot.com.au/
Courts have traditionally treated an interlocutory application to restrain the calling upon or use of money secured by a bank guarantee or other performance bond as being in a special category.
The authorities were summarised in Cerasola TLS AG v Thiess Pty Ltd & John Hollandd  QSC 115 as follows:
On the basis of those authorities, it is sufficient for present purposes to note that the general rule is that a court will not enjoin the issuer of a performance guarantee from performing its unconditional obligation to make payment. A number of exceptions to that general rule have been identified. They are identified in Clough Engineering at  as:
(1) An injunction will issue to prevent a party in whose favour the performance guarantee has been given from acting fraudulently.
(2) An injunction will issue to prevent a party in whose favour the performance guarantee has been given from acting unconscionably in contravention of the Trade Practice Act 1974 (Cth).
(3) While the Court will not restrain the issuer of a performance guarantee from acting on an unqualified promise to pay if the party in whose favour the guarantee has been given has made a contractual promise not to call upon the bond, breach of that contractual promise may be enjoined on normal principles relating to the enforcement by injunction of negative stipulations in contracts.
See: also Otter Group Pty Ltd v Wylaars  VSC 98 at  where the summary was referred to with approval.
This general rule is the product of appellate authorities. See: Wood Hall Ltd v Pipeline Authority (1979) 141 CLR 443, Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd  3 VR 812; Bachmann Pty Ltd v BHP Power New Zealand Ltd (1999] 1 VR 420 and Clough Engineering Ltd v Oil and Natural Gas Corporation Ltd & Ors (2000) 249 ALR 458.
The rationale for the general rule is that by providing for security to be given, the parties implicitly agree that the party giving the security deposit shall be out of pocket pending resolution of the underlying dispute.
In Clough, the Full Federal Court said at  that “clear words will be required to support a construction which inhibits a beneficiary from calling on a performance guarantee where a breach is alleged in good faith, that is, non-fraudulently.”
The Supreme Court of New South Wales in Universal Publishers Pty Ltd v Australian Executor Trustees  NSWSC 2012 appears to have departed from the general rule in circumstances where there were no clear words preventing the landlord calling on the bank guarantee and there was no issue that the landlord was acting in good faith. The lease did not contain any negative stipulations on the landlord’s right to call on the guarantee. The tenant disputed that there was any breach. The landlord submitted that the authorities referred to above made it clear that the existence of a dispute as to whether there was an actual breach was not an answer to an invocation of the guarantee. See: para .
In Universal the tenant obtained an ex parte injunction restraining the landlord from drawing on the bank guarantee. The proceeding then concerned whether the injunction should be discharged.
Clause 19.1 of the lease required the tenant to provide an “unconditional” bank guarantee to “secure the Lessee’s obligations under this Lease”.
Clause 19.4 provided that:
19.4. In the event that the lessee:
22.214.171.124 defaults in the payment of Rent or in the performance or compliance of any other obligations under this Lease; or
126.96.36.199 breaches any other obligation, term, condition or covenant under this Lease,
the Lessor is hereby authorised to demand that the guaranteeing bank pay to the Lessor such amount that (in the reasonable opinion of the Lessor) may be due to the Lessor as a result of such default, breach or non-observance by the Lessee or termination of the Lease pursuant to it.
The Court determined that there had to be an actual breach before the landlord could form an opinion as to the amount that might be due. See: para . As to whether there was an actual breach did not depend on a judicial determination but on whether the tenant could establish that there was a serious question to be tried about whether there was a breach. See: paras  and .
The Court held that clause 19.1 did not provide for an allocation of the risk as to who should be out of pocket while a dispute as to the lessee’s asserted breach was determined. See: para .
The lesson from Universal is that the parties to a lease should ensure that the provisions concerning the drawing down of the guarantee specifically define the circumstances when the landlord can draw down on the guarantee. In particular, solicitors acting for landlords should, rather than relying on the general rule referred to above, ensure that the lease refers to the landlord’s entitlement to draw down on a guarantee where the landlord believes in good faith that the tenant has breached the lease.
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