The Lease Variation Trap

Depending upon the nature and degree of a lease variation, a new lease may be created and could spring a trap on an unwary Landlord or Tenant.

An example of a case where the variation of lease created a new lease, is the 2003 case of Vand Pty Ltd & Anor v Highpoint Shopping Centres (Leasing) Pty Ltd. A case in which we represented the Tenants.

In this case, the Landlord (Highpoint Shopping Centre) allowed the Tenants to take over the adjoining premises in order to expand the size of their cafe business. The Landlord prepared a Variation of Lease document to change the existing lease to reflect the new Retail Lease arrangement. The lease term was extended and rental was increased.

After the Tenants carried out extensive fit-out and renovation works to their new expanded premises, things initially were going quite well for the Tenants in terms of increased trade.

However, the Tenants became concerned when they found out through rumours from the Shopping Center cleaners, that the Landlord was planning to carry out extensive renovations to the food court area and surrounding buildings. The cafe was located in the food court area which had common seating and family attractions. As it turns out, the rumors were true.

The renovations that were planned by the Shopping Centre (unbeknown to the Tenants) involved removing all food court seating, removing a children's train, creche and other family oriented attractions and creating a new night club precinct immediately outside the now defunct food court area.

As a result of the removal of the food court area seating, the family attractions and introduction of a nightclub style precinct, the Tenant claimed that families stopped attending the food court area especially in the evening hours, and instead, the area became a hangout for youths and introduced, what some witnesses described as a "hoon" element to the area.

The nightclub failed as did the Tenants' cafe which closed shortly after the new night club precinct was opened.

No Disclosure, No Rent

The Landlord did not provide a disclosure statement at the time the Lease was Varied nor did the Landlord disclose the plans for the proposed redevelopment until after the Lease Variation was signed and the Tenants' fit-out works were completed.

The Tenants brought proceedings in VCAT and made several claims. The first claim was that a Lease Variation was in fact a new Lease and therefore a disclosure statement should have been given. The Tenants sought a refund of all rental paid under mistake by reason of the Landlords' failure to provide a disclosure statement from the time the Lease was varied (some $200,000 odd).

The second claim was for damages for misrepresentation on the basis that the Landlord ought to have disclosed its redevelopment or plans for the Centre before the Tenants entered the Varied Lease. The Tenants argued that had a disclosure statement been given under the then Retail Tenancies Reform Act 1998, among other things, the Landlord would have been required to disclose its plans for redevelopment and the Tenants would not have gone ahead with an extensive renovation which costs about $150,000 had they known what was about to happen. The redevelopment occurred approximately 12 months after the Tenants opened their new shop.

The Landlord argued that no conclusive decision had been made with regards to the plans for redevelopment as all that was being done was that plans and proposals were being debated until a final decision was made which occurred after the Variation of Lease and therefore, there was no obligation to disclose the information to the Tenants.

VCAT agreed that the variation of lease was in fact a new lease. As a result, the Landlord was ordered to repay all rent paid by the Tenant under mistake by reason of its failure to provide a disclosure statement to the Tenant under the Retail Tenancies Reform Act 1998. The rental paid under mistake was in excess of $200,000.

At the time of the VCAT decision, the Court of Appeal decision in Ovidio Carrideo Nominees Pty Ltd v The Dog Depot Pty Ltd (2006) VSCA was yet to be delivered. The Court of Appeal decision effectively reversed earlier VCAT and Supreme Court Decisions which allowed Tenants to recover all rent paid under mistake where a disclosure statement had not been given under the Retail Tenancies Reform Act 1998.

The Retail Leases Act 2003 that replaced the Retail Tenancies Reform Act 1998, restricted the circumstances under which a Tenant could reclaim rental paid by mistake arising from a failure of a Landlord to provide a disclosure statement.

As for the claim for misrepresentation and damages for failing to notify the Tenants of the plans for redevelopment before the Lease was varied, the Tenants were unsuccessful largely on the basis that VCAT was not convinced that the Tenants would not have proceeded with the Variation of Lease and expansion of their business premises and associated costs, had they known of the Landlord's redevelopment plans for the food court and new nightclub precinct.

VCAT also believed that the ability of the Tenants to reclaim rental paid under mistake for a Landlord's failure to give a disclosure statement was a sufficient sanction.

The version of the disclosure statement at the time the Tenants Varied their Lease under the Retail Tenancies Reform Act 1998, was not as comprehensive or as onerous on Landlords as the versions that followed especially in terms of the information that a Shopping Centre Landlord is required to disclose with regards to plans or known redevelopments or alteration works to the Shopping Centre or surrounding areas.

Richmond Football Club Limited v Verraty Pty Ltd 2011

In Richmond Football Club Limited v Verraty Pty Ltd 2011, a variation of lease also resulted in a surrender and creation of a new lease.

As a result of the Variation of Lease, the Lease became a Retail Premises Lease and subject to the provisions under the Retail Leases Act 2003.

The Tenant (The Richmond Football Club), was required to pay and was paying Land Tax and outgoings under the original Lease which was entered before the Retail Leases Act 2003. These obligations on the face of the Varied Lease, continued.

However, the Tenant sought to recover the Land Tax paid under mistake as the Retail Leases Act 2003 prohibits Landlords to recover Land Tax from a Tenant. The Tenant also sought to recover outgoings paid on the basis that the Landlord failed to provided to the Tenant a statement of Outgoings which the Landlord ought to have provided the tenant every year.

The Tenant was successful in recovering the land tax which it paid under mistake (to the extent permitted under the relevant statute of limitation period), some $125,000 odd, but failed to claw back the outgoings it had paid under mistake. The Landlord successfully resisted this claim for repayment for outgoings based on what one would call the good consideration or unjust enrichment defence raised in the decision of Ovideo Nominees v Dog Depot.

Given that the lease was extended for some ten years following the lease variation, not only did the Landlord have to repay back the Land Tax it was previously allowed to recover (and keep) from the Tenant, it was prohibited from recovering any more Land Tax from the Tenant for the duration of the varied lease.

Conclusion

It goes without saying that care needs to be taken when negotiating and preparing lease documents to make sure all parties receive the deal they bargained for and to avoid being caught in a Lease Variation Trap.

This is particularly important for Landlords as often, the Retail Leases Act 2003 will restrict a landlord's ability to recoup expenses, costs and other payments from a Tenant that would otherwise be recoverable if the Retail Leases Act 2003 did not apply.

Tenants must also be wary as well for instance, making sure that the creation of the new lease following a Lease Variation, does not require consent from a mortgagee.

For more information concerning the above cases or if you require advice concerning your Lease Agreement, please do not hesitate to contact us.

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