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.
The weakness of a party’s case in a retail tenancy dispute can be taken into account in determining whether or not it has “conducted” a “proceeding in a vexatious way” that would entitle the other party to a cost order under s.92(2) of the Retail Leases Act 2003 (Vic).
Part 10 of the Act contains the dispute resolution provisions. Except as provided in s.92(2) the Act requires each party to a retail tenancy dispute to bear its own costs of the proceeding. See: s.92(1). Costs may be awarded in a retail tenancy dispute under s.92(2) if:
“…the Tribunal is satisfied that it is fair to do so because;
(a) the party conducted the proceeding in a vexatious way that unnecessarily disadvantaged the other party to the proceeding; or
(b) the party refused to take part in or withdrew from mediation or other form of alternative dispute resolution under this Part.”
Judge Bowman in State of Victoria v Bradto Pty Ltd and Timbook Pty Ltd  VCAT 1813 referred to the distinction in s.92(2)(a) between a proceeding which is conducted in a vexatious way and the bringing or nature of the proceeding being vexatious. His Honour held that a proceeding is conducted in a vexatious manner “if it is conducted in a way productive of serious and unjustified trouble or harassment, or if there is conduct which is seriously and unfairly burdensome, prejudicial or damaging”.
In 24 Hour Fitness Pty Ltd v W & B Investment Group Pty Ltd  VSCA 216 the Court of Appeal considered an appeal from a decision by VCAT in which costs had been awarded on an indemnity basis pursuant to s.92(2)(a). The Tribunal’s decision was based in part on a finding that the applicant had commenced an action for damages in circumstances where the applicant, properly advised, should have known it had no chance of success and persisting in what should, on proper consideration, have been seen to be a hopeless case. The applicant contended that there was a difference between instituting a proceeding that was vexatious, or making a claim that fails, and the conduct of the proceeding which is vexatious. It argued that the Tribunal focused more on what were perceived to be the prospects of success than on the actual conduct of the proceeding.
The Court of Appeal rejected the applicant’s contentions holding that the Tribunal had considered the conduct of the proceeding in addition to the “hopelessness of the applicant’s claim” and that there was no error in also considering the hopelessness of the claim because “the strength of the applicant’s claim for damages was a relevant factor to take into account”.
At  the Court of Appeal said:
“It would be artificial to attempt to evaluate the manner in which the proceeding was conducted without having regard to the strength of that party’s case. In the present circumstances, it was relevant that the applicant pursued the damages claim, in circumstances where it was bound to fail.”
If it appears that a proceeding is hopeless the applicant should be notified at an early stage that the application is hopeless and should be withdrawn.
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.
Landlord cannot recover essential safety measure costs or the costs of complying with s.52 of Retail Leases Act 2003 (Vic)
Landlords cannot require tenants under retail premises leases to undertake and pay for the work that a landlord must perform to comply with the essential safety measure requirements contained in the Building Act 1993 (BA) and its regulations. Nor can a landlord require a tenant to pay as an outgoing the costs that the landlord has incurred in complying with s.52 of the Retail Leases Act 2003 (RLA).
The BA and its regulations impose obligations on landlords to maintain buildings in a manner that complies with safety requirements that are commonly known as “ESM requirements”.
Section 52 of the RLA implies into a retail premises lease a requirement that the landlord maintain in a condition consistent with the condition of the premises when the lease was entered into the structure of, and fixtures in the premises and plant together with plant and equipment in the premises.
In a decision that will upset landlords and delight tenants the President of VCAT, Justice Garde, resolved long standing controversies in deciding that:
(a) a requirement in a retail premises lease that a tenant perform ESM requirements that the landlord must perform under the BA or its regulations is void;
(b) a requirement in a retail premises lease that a tenant pay for ESM requirements that the landlord must perform under the BA or its regulations is void;
(c) if the obligation relating to the ESM is that the landlord must ensure that a result is achieved or a standard met the landlord may agree with the tenant to achieve that result, or meet the standard, and the tenant will be obliged to perform the lease at the landlord’s expense;
(d) in the circumstances referred to in (c), the tenant can deduct the costs incurred in the performance of the term from the rent or recover the costs of from the landlord;
(e) a landlord cannot recover as outgoings the cost incurred by the landlord in complying with s.52 of the RLA.
The decision will have major consequences for tenants and landlords. In particular, tenants are likely to seek to recover from landlords any EMS costs that have been paid by the tenant together with costs that the landlord has incurred under s.52 and required the tenant to pay as outgoings.
I will be writing more about this decision.
The question of whether the “profits method” of determining rentals for hotel premises contravenes s.37(2) of the Retail Leases Act 2003 (Vic) has finally been determined by the Supreme Court of Victoria.
Under the “profits method” the valuer estimates the income and expenses of the business with the difference between the two estimates being the net profit. The method entails the cost of fitting out and similar work being brought into the calculation since it is a cost which will be born by the lessee in order to make a profit. The usual means of doing this is to estimate the capital cost involved and “rentalise” it over the period of the expected life of the equipment with the “rentalised” sum being an item of expenditure to be put into the notional accounts. See: Hill and Redman’s Law of Landlord and Tenant.
Uncertainty has surrounded the use of the “profits method” because s.37(2) directs the valuer to determine the current market rent as the rent that would be reasonably be expected to be paid for the premises if they were unoccupied and also directs the valuer “not to take into account the value of goodwill created by the tenant’s occupation or the value of the tenant’s fixtures and fittings”.
In the important decision of Epping Hotels Pty Ltd v Serene Hotels Pty Ltd  VSC 104 (which was an appeal from VCAT) Croft J decided that the valuer’s use of the “profits method” in determining the rent of a hotel and gaming venue did not infringe s.37(2).
His Honour agreed with the Tribunal that the critical question was whether the valuer had taken into account the value of the sitting tenant’s fixtures and fittings contrary to s.37(2).
The valuer had excluded the acquisition costs of the sitting tenant’s gaming machines and gaming entitlements from the rent determination but had taken into account the fittings and fixtures that the hypothetical future tenant owned.
His Honour held that while the valuer had not followed strictly the methodology referred to above, the valuer had not taken the sitting tenant’s fixtures and fittings into account and had properly assumed that the premises were unoccupied. Therefore the valuation did not breach s.37(2).
The decision will be a great relief for valuers of hotels and similar premises.
His Honour also decided that the Tribunal had erred because it had not taken into account a supplementary report by the valuer: the supplementary report formed part of the valuer’s reasoning in the rental determination.
In Cassegrain v Gerard  HCA 2 the High Court of Australian had to decide whether a wife’s title as a joint proprietor with her husband was defeasible by reason of the husband’s fraud. The case contains an interesting discussion about when the fraudulent acts of an agent can be attributed to the principal and also the nature of a joint tenancy.
Section 42(1) of the Real Property Act 1900 (NSW) provides that the estate of a registered proprietor is paramount. It provides that, subject to some exceptions:
“Notwithstanding the existence in any other person of any estate or interest which but for this Act might be held to be paramount or to have priority, the registered proprietor for the time being of any estate or interest in land recorded in a folio of the Register shall, except in case of fraud, hold the same, subject to such other estates and interests and such entries, if any, as are recorded in that folio, but absolutely free from all other estates and interests that are not so recorded“. (emphasis added)
Section 118(1) provides that:
“Proceedings for the possession or recovery of land do not lie against the registered proprietor of the land, except as follows:
(d) proceedings brought by a person deprived of land by fraud against:
(i) a person who has been registered as proprietor of the land though fraud; or
(ii) a person deriving (otherwise as a transferee bona fide for valuable consideration) from or through a person registered as proprietor of the land through fraud.”
The vendor transferred the land to the husband and wife as joint tenants for consideration to be satisfied by debiting the husband’s loan account with the vendor. The husband knew that the vendor did not owe him the amount recorded in the loan account. The husband then transferred his interest in the land to his wife for a nominal consideration. The questions were whether the wife’s title, first as joint proprietor with her husband, or second deriving from or through her husband under the subsequent transfer, was defeasible by the vendor.
Much attention was given in argument to whether the husband was the wife’s “agent”. In Assets Company Ltd v Mere Roihi  AC 176 at 210 Lord Lindley that:
“the fraud which must be proved in order to invalidate the title of a registered purchaser for value … must be brought home to the person whose registered title is impeached or to his agents. Fraud by persons from whom he claims does not affect him unless knowledge of it is brought home to him or his agents.” (emphasis added)
The argument was about whether the fraud was “brought home” to the wife because the husband was fraudulent and was her “agent”. It was not disputed that the husband acted fraudulently in both the first and second transfers.
The court rejected the contention that the husband’s fraud could be sheeted home to the wife as a matter of agency. The court referred to the statement by Street J in Schultz v Corwill Properties Pty Ltd 1969] 2 NSWR 576 where his Honour said :
“It is not enough simply to have a principal, a man who is acting as his agent, and knowledge in that man of the presence of a fraud. There must be the additional circumstance that the agent’s knowledge of the fraud is to be imputed to his principal. This approach is necessary in order to give full recognition to (a) the requirement that there must be a real, as distinct from a hypothetical or constructive, involvement by the person whose title is impeached, in the fraud, and (b) the extension allowed by the Privy Council that the exception of fraud under s 42 can be made out if ‘knowledge of it is brought home to him or his agents’.”
There was no evidence that the wife was knowingly engaged in the husband’s scheme to deprive the vendor its land for nothing.
The majority (French CJ, Hayne, Bell and Gaegler JJ) held that the wife’s title as joint tenant was not defeasible by showing that the husband had acted fraudulently because the fraud had not been brought home to her.
Keane J dissented on this issue. His Honour decided that the land was acquired by the wife and the husband as joint tenants and as joint tenants they acquired a single estate. The title was acquired by fraud “sheeted home” to the wife, not because the wife claimed the title through her husband, but by virtue of the joint tenancy of the single estate to which they were entitled.
The vendor succeeded in recovering the land because the whole court decided that s.118(1)(d)(ii) applied: the wife had acquired an interest as tenant in common as to half from the husband who had been registered as proprietor through fraud.
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.
There have been many cases about whether a mortgage procured by fraud secured any money in circumstances where the mortgagee is innocent of the fraud. The latest case is Perpetual Trustees Victoria Limited v Xiao Hui Ying  VSC 21 (Ying) where Hargrave J refused to follow the Victorian decision of Solak v Bank of Western Australia  VSC 82.
There is no question that a lender mortgagee has an indefeasible mortgage when registered provided the mortgagee is not involved in the fraud. The question is whether any amount is secured?
In NSW and Victoria the issue has been resolved by determining whether the payment covenant in the forged collateral agreement is incorporated into the registered mortgage.
In Ying the mortgage incorporated a memorandum of common provisions which contained a covenant for payment by reference to any amounts owing under any other agreement between the mortgagor and the lender. The other agreements were also forged.
The thrust of the NSW decisions is that, where the loan agreement on which the lender relies is forged and therefore void, there is no “secured agreement” and therefore no “secured money” within the meaning of the payment covenant in the mortgage. See: Perpetual Trustees Victoria v English  NSWCA 32. The same logic has been applied where the loan agreement (but not the mortgage) is forged. See: Perpetual Trustees Victoria Ltd v Cox  NSWCA 328. In Solak Pagone J reached a contrary conclusion to the NSW courts. In Solak the mortgage and the loan agreement were forged. Pagone J distinguished the NSW cases on the basis that the mortgage, memorandum of common provisions and loan agreements all defined the mortgagor/borrower as ”You” and “You” was in each case the forger purporting to be Mr Solak. The mortgage was therefore effective as a security.
In Ying Hargrave J disagreed with Solak and followed the NSW decisions. His Honour said that Solak was “plainly wrong” and that there was nothing secured by the mortgage in Solak because there could be no amount owing under a forged loan agreement and there was also nothing secured by the mortgage in Ying. In Ying the plaintiff mortgagee was ultimately successful on the ground that the mortgagor held the mortgaged land on trust for the forger (the husband of the mortgagor) and that the mortgagee was entitled to have the value of the mortgaged land applied to partial repayment of its loans.
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.