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What is required of a Landlord to ensure vacant possession is provided on lease commencement?

What is required of a Landlord to ensure vacant possession is provided on lease commencement?

Aug 5, 2024 | Real Estate, Construction

What is required of a Landlord to ensure vacant possession is provided on lease commencement?

Background

The Queensland Court of Appeal (QCA) recently considered in Bagata Pty Ltd & Anor v Sunstorm Pty Ltd [2024] QCA 17 whether an expert determination that decided an industrial tenant had a right to vacant possession at the commencement date was valid. The QCA’s decision provides us with an important warning on handing over premises to tenants in subpar conditions, commentary on the construction of lease terms and highlights a key risk regarding alternative dispute resolution clauses.

What happened?

Bagata Pty Ltd and Runner Pty Ltd (the Landlord) were the owners of a property in Murarrie QLD, which was leased (the Lease) to Sunstorm Pty Ltd (the Tenant). As part of the Lease, the Tenant received an incentive in the form of early access prior to the commencement date of 1 July 2022.

The Landlord, however, failed to remove significant equipment from the premises including 7 industrial presses, 3 compressors and over 50 pallets of stock by the commencement date, which resulted in a dispute between the parties on the question of whether the remaining goods had to be removed.

The terms of the Lease stipulated that a dispute was required to be resolved by expert determination. The questions before Mr Thirgood (the Expert) were as follows:

whether the Landlord was required to provide vacant possession of the premises at the commencement date;
whether vacant possession of the premises had been delivered to the Tenant; and
whether the Tenant’s manufacturing activities fell within the permitted use under the Lease.
The Expert made a determination that the Tenant was entitled to vacant possession and the Tenant’s activities fell within the permitted use. The Expert’s determination was intended to be conclusive and binding “in the absence of manifest error” per the Lease. The Landlord brought a case in the Queensland Supreme Court to set aside the determination and was unsuccessful.

The final decision

The Landlord brought an appeal to the QCA which was dismissed with costs for the reasons outlined below.

The findings

Manifest error

The Landlord argued that the primary judge was wrong in concluding that the Expert was allowed to arrive at an erroneous construction of the Lease as long as the error was not clear and obvious.

However, the QCA did not agree with this argument. The QCA agreed with the primary judge who concluded a manifest error had to be both “demonstrated and apparent”, and that an error of law was not sufficient to constitute a “manifest error” unless the error was apparent or obvious from a reading of the reasons.

Vacant possession

The Landlord argued that the Tenant did not have a right to vacant possession and delivering vacant possession to the Tenant at the commencement date was not a term of the Lease. In addition, the Landlord argued that the Tenant had accepted the condition of the premises on an ‘as is/where is’ basis.

In defining the Tenant’s right to vacant possession, the QCA relied on Lord Greene MR’s judgment in Cumberland Consolidated Holdings Ltd v Ireland where it was held that the right of vacant possession was ultimately the “right to actual unimpeded physical enjoyment”. The QCA found that the term “vacant possession” as used by the Expert meant only the absence of the Landlord’s property from the premises.

In regard to the delivery of vacant possession to the Tenant, the QCA reasoned that the Lease in following ordinary construction of contract principles should be constructed from what a reasonable businessperson would understand the terms to mean. The QCA agreed with the Expert that the clause stating the Tenant “acknowledges that the Premises and the Landlord’s Property were in Good Repair” simply meant that the Tenant accepted the condition of what was being leased, instead of providing the Landlord with any right to store their property on the premises.

In regard to the ‘as is/where is’ provision, the QCA upheld the Expert’s finding that the clause of the Lease acknowledging the Tenant accepts the Premises in an ‘as is/where is’ condition ‘simply acknowledges that the Tenant accepts the condition of what is being leased’, rather than affirming the Landlord’s right to store property on the premises. The QCA noted that the condition of the property being leased is distinct from the contents on the property of the Lease, and the Landlord’s property obstructed the usability of the premises, rather than its condition.

Permitted use

The reference schedule of the Lease defined the permitted use as “Industrial – warehouse and ancillary office”. The Landlord argued that the ‘warehouse and ancillary office’ component limited the meaning of ‘Industrial’, and therefore prevented the Tenant’s installation and use of equipment at the premises.

The QCA found that the Landlord’s argued construction of the permitted use would remove all meaning from the word ‘Industrial’. This would be inconsistent with the early access licence granted in the Lease which provided for the installation and operation of certain plant and equipment. It was also established that the Landlord knew that the Tenant was in the business of manufacturing artworks, and it would make no commercial sense for the Landlord and the Tenant to agree to a permitted use that prevented such manufacturing.

Final thoughts

The case highlights three important takeaways.

1. The inclusion of alternative dispute resolution clauses by landlords must be considered carefully. Where an unfavourable decision has been made, unless the error is truly blatant, it is likely that courts will continue to uphold the decision. Additionally, in states such as New South Wales and Victoria, leases may have legislated dispute resolution procedures which can produce more consistent dispute results.

2. Subject to the terms of the lease, landlords should be wary about the provision of premises to a Tenant where there is significant or obstructive property left on the premises as this may not constitute vacant possession. Clauses designed to protect the landlord such as specifying a premises is to be provided on an ‘as is/where is’ basis speaks only to the condition of the premises and not its contents, and is unlikely to assist with the determination of whether the premises is delivered with vacant possession.

3. Maintaining specificity in the permitted use of a lease is key to protect landlords from tenants using their premises for a prohibited use and to protect tenants from accidentally using the premises for a prohibited use. Where there is a broad permitted use, the court will interpret it to make commercial sense, which is generally in its plain meaning.

Generally, the case serves as a reminder that careful lease drafting is important in order to define both landlord’s and tenant’s obligations and intentions. Had the lease contained clauses expressly allowing the landlord to maintain its property on the premises rather than a broad as is/where is clause, it is unlikely that this dispute would have occurred.

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Unfair Contract Terms in Construction Contracts: Are you aware of the risks?

Unfair Contract Terms in Construction Contracts: Are you aware of the risks?

Jun 19, 2024 | Construction, News, Real Estate

Unfair Contract Terms in Construction Contracts: Are you aware of the risks?

If you work in the construction industry as a developer, builder or subcontractor, it is highly likely that the newly expanded unfair contract term (UCT) regime will apply to you. The introduction of the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) (the Act) heavily expanded the scope of the UCT regime and created new, heavier penalty provisions. The penalty provisions set out in the act amend those found in Schedule 2 of the Competition and Consumer Act 2010 (Cth). 

 The construction industry’s use of standard contracts, engagement of small businesses through subcontractors and regular interaction with consumers means that the risk of liability from the UCT regime is high. 

The Unfair Contract Term Regime

The amendments to the UCT regime by the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) commenced on 9 December 2023. 

As set out in the Act, a contract term is unfair if:  

  1. it would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
  2. it is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
  3. it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

All three elements must be proved by an applicant for a court to find the term unfair. The court is allowed to consider any factors it deems relevant but must consider the extent to which the term is transparent and the contract as a whole. Following the Act’s introduction, the maximum penalties for corporations that enforce an unfair contract term is now the greater of $50,000,000, three times the value of the benefit received or 30% of the company’s adjusted turnover during the breach period. 

What is a standard form contract?

The Act clarifies that a person contravenes the UCT regime if the unfair contract term applied, or relied on, is a term of a standard form contract. 

In order to define what a standard form contract is, the court is able to take into account any factor. However, they must consider the following factors: 

  1. the balance of bargaining power;
  2. whether the contract was prepared by one party;
  3. whether the other party was required to accept or reject the contract in the form presented;
  4. whether the other party was permitted to negotiate the contract; and
  5. whether the terms take into account any specific transaction or party details.

For example, if you are a low volume residential home builder then the home building contracts that your clients sign may still constitute a standard contract despite only being used every so often. 

Now, courts are permitted by law to determine a standard form contract despite the existence of:  

  1. an opportunity for a party to negotiate changes to terms of the contract that are minor or insubstantial;
  2. an opportunity for a party to select a term from a range of options determined by another party; or
  3. an opportunity for a party to another contract to negotiate terms of the other contract.

As an example from a builder’s perspective, even if your home building contract allows for the homeowner to select from a range of terms, or if you give one homeowner the power to negotiate but another home owner does not have power to negotiate, your contract may still be a standard term contract. 

Who does the UCT regime apply to and what’s changed?

The UCT regime applies to small business contracts and consumer contracts. 

A contract is a consumer contract if the contract is for a supply of goods or services or a sale or grant of an interest in land, and the individual who is acquiring the good, service or interest acquires it predominantly for personal, domestic or household use or consumption. Examples may include residential leases, home building insurance contracts or home building contracts. 

Following the Act coming into effect, the definition of small business contract was changed to a far wider scope. The definition of a small business is now a business that employs fewer than 100 persons or has a turnover of less than $10,000,000. There is no longer a price cap on the contract price, meaning that any contract regardless of the price may be subject to the UCT regime


Next Steps

As a result of these changes, it is highly likely that even if you or your company are not a small business, the party on the other side may be. This means that the UCT regime along with its associated penalty provisions may apply to your contractual arrangements. For example, in subcontractor – head contractor relationships where the subcontractor is likely a small business.  

In the alternative, you may be one of these small businesses who have previously been affected by unfair contract terms, and these amendments may provide some additional leverage to ensure that your contracts remain fair. 

To ensure that you as a business are protected from these changes, we recommend: 

  1. reviewing your contracts that fit the standard term contract definition for any unfair contract terms; and
  2. reviewing your client or customer base to assess whether they (or you) have less than 100 employees or an annual turnover of less than $10,000,000.00.

 

If you have any questions, please contact the team at Keighran Legal + Advisory.

 

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Off-the-plan unit sales: Don’t be accused of misleading conduct

Off-the-plan unit sales: Don’t be accused of misleading conduct

Mar 13, 2024 | Uncategorized

Off-the-plan unit sales: Don’t be accused of misleading conduct

In the case of Lonergan v JQZ Eleven Pty Ltd [2022] NSWSC 14 the NSW Supreme Court determined whether an off-the-plan seller engaged in misleading conduct and considers whether the purchaser is entitled to receive a reduction in the purchase price due to (alleged) misleading representations. 

How did this issue arise? 

In November 2016, David and Victoria Lonergan (the buyers) entered into a contract with JQZ Eleven Pty Ltd (the seller) to purchase a three-bedroom unit ‘off the plan’ on level 18 of the development for $1,518,000. Shortly prior to entering into the contract to purchase the unit, the buyers inspected a completed display suite with the seller’s sales agent. On completion of construction of the unit three years later and prior to completion of the contract of sale, the buyers inspected the completed unit.  

As a design feature, the units on every third floor of the unit complex were to have black privacy shutters installed on their balconies. This feature was particularly attractive to the plaintiffs due to sun exposure health concerns. The buyers relied on information provided by the seller’s agent that privacy screens would be installed on Levels 18 (which on completion, were not). There was also a 50 square centimetre column that encroached on living room space and amenity and two columns on the balcony that were not included in the display suite the buyers had originally inspected nor was it disclosed in the contract of sale.  

After the buyers’ inspection, a notice to complete was issued by the seller and the buyers subsequently requested an extension of the settlement date and a reduction in purchase price of 2% in consideration of the issues raised with the unit. The seller refused and argued that the buyers had contractually acknowledged that the display suite was merely “indicative of the general style, quality and finish” and that plans “are not final, [and] are for marketing and illustrative purposes only”. 

 

What did the Court decide? 

The critical issue for the Court to determine was whether the seller engaged in misleading in relation to failure to include the privacy shutters and the construction of the column structure, when considered against the contract of sale and the display suite. The Court found that the substantial structural columns located in the living areas, in places that impede on living space, are the kind of feature a potential buyer would assume would be included in the display suite or floor plan if they were in fact needed. 

The Court found that the draft strata plan had been prepared before structural engineering input but “it is probable that its technical employees would have expected the likely need of structural columns” that would diminish their amenity to purchasers. The Court accepted the buyers’ evidence that they entered into the contract believing the unit would be constructed with no substantial columns in the living room or on the balcony. The Court accepted that if the buyers had known the truth, they would not have entered into the contract for the purchase of the unit.  

The Court advised that a “clear and prominent warning” that columns would or may be constructed should have been included in the contract. The seller was ordered to refund the deposit plus interest and was also required to pay the buyers’ cost of the proceedings.

Schedule of Finishes 

In relation to the representations of the inclusion of the black privacy screens made by the agent, the Court was not satisfied that the provision of the black privacy screens ought to have been understood by the purchasers as a “finish” that should have been specified in the Schedule of Finishes, as the Schedule of Finishes did not ordinarily deal with the exterior structure of the development. The buyers were entitled to believe, that as the intention was that the black privacy screens would only be installed on the balconies on every third level, they were not a feature intended to be set out in the Schedule of Finishes.  

What does this decision mean for developers? 

In order to minimise the risk of exposure to claims of misleading conduct, there is a clear obligation on developers to ensure that all written and oral representations and statements are accurately disclosed to a buyer in the contract of sale. Any failure to provide a clear and prominent warning of issues that may arise in the completed form may gives rise to claims for misleading conduct. 

If you have any questions, please contact the team at Keighran Legal + Advisory.

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Rare High Court decision handed down: Guidance for community and government housing providers and residential landlords

Rare High Court decision handed down: Guidance for community and government housing providers and residential landlords

Feb 5, 2024 | Uncategorized

Rare High Court decision handed down: Guidance for community and government housing providers and residential landlords

Background

A rare decision regarding compensation for non-pecuniary loss has been recently handed down from the High Court of Australia. The case considers whether recovering compensation for distress and disappointment is limited to damages caused by physical inconvenience. The landmark decision will potentially have significant implications for government and community housing providers in all Australian jurisdictions, as well as private residential landlords.

 

What happened?

Ms Young (the Applicant), an elderly Indigenous woman and public housing tenant in the remote Aboriginal community of Ltyentye Apurte, near Alice Springs, had been residing in a property that did not have a back door for a period of 68 months. The Applicant instead relied on a mesh-steel door she had installed herself which was not secure. It was submitted that the landlord, a statutory housing corporation established under the Housing Act 1982 (NT), failed to take reasonable steps to provide and maintain the security devices and ensure the property was reasonably secure. The Residential Tenancies Act 1999 (NT) (the Act), requires the premises to be secure, and this requirement had been incorporated as a term in the prescribed tenancy agreement. On this basis, the Applicant applied to the Civil and Administrative Tribunal of the Northern Territory (the Tribunal) seeking compensation damages for the landlord’s failure to comply with a statutory imposed term of a residential tenancy agreement, which caused distress and disappointment to the Applicant.

 

The elements to prove

For a successful claim of compensation for distress and disappointment caused by a breach of contract, the prior law required that an applicant must satisfy the common law elements that the loss;

  • resulted from physical inconvenience caused by the breach; or
  • the object of the contract is to ‘provide enjoyment, relaxation or freedom from molestation’.

In this instance, the Applicant challenged the established common law principles that cater only to applicants who suffer physical (not mental) inconvenience. The Applicant argued that compensatory damages should be awarded for tangible and intangible loss suffered by a party due to another party’s broken contractual promise.

 

The findings

The Tribunal dismissed the application, holding that the back door was not a “security device” within the meaning of the Act. On appeal, the Supreme Court of the Northern Territory overturned the decision of the Tribunal and found that the landlord breached the term of the tenancy agreement by failing to ensure there was a back door fixed in the external doorway of the property. The Supreme Court held an external door is indeed a security device, awarding the Applicant $10,200 in compensation for distress or disappointment. The landlord subsequently appealed this decision, and the Court of Appeal set aside the compensation awarded, holding that section 122(1) of the Act did not entitle the tenant to damages for distress or disappointment, the Court of Appeal held that a central objective of a residential tenancy agreement was not to provide pleasure, entertainment, or relaxation, and therefore compensation was not available unless it was consequential upon physical inconvenience. The Applicant then made a final appeal to the High Court of Australia.

 

The final decision

In a majority decision, the High Court rejected the Court of Appeal’s interpretation, and held that the relevant term of the residential tenancy agreement was to provide the tenant with the peace of mind that comes with secure premises. The High Court ruled that the landlord breached that obligation and acknowledged that the Applicant had a right to seek compensation because of that breach, which includes compensation for disappointment and distress. The High Court finally awarded $10,200 in compensation and ordered that the respondent pay the costs of the first and second grounds of the appeal, in favour of the Applicant.

 

The New South Wales position

For comparative purposes, in New South Wales, section 191(3) of the Residential Tenancies Act 2010 (NSW) outlines the possible considerations the NSW Civil and Administrative Tribunal (the NSW Tribunal) may apply when determining whether a landlord has satisfied their obligation to ensure the residential premises is reasonably secure. The NSW Tribunal must consider the physical characteristics of the premises, insurance of property, likelihood of break-ins and unlawful entry, and the action taken or those that should have reasonably been taken by the tenant and landlord in the security of the premises.

 

What does this decision mean for landlords?

This case is now the leading authority in respect of non-pecuniary loss and will have significant implications for the residential tenancy sector. The legal development in this case has already prompted a class action investigation to review over housing conditions for Indigenous tenants living in public housing in remote communities. We expect more cases like this will emerge in the near future.

 

Final thoughts

Considering this landmark decision, large scale public and government housing providers must be aware that the assessment of damages for breach of residential tenancy terms may be subject to determination against common law principles. A breach of contract may cause the aggrieved party to suffer disappointment and distress arising from a breach of a tenancy agreement, and under the guidance of this leading authority, seek compensation for non-pecuniary loss.

 

 

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Approval Conditions & Sunset Clauses – Is there a difference?

Approval Conditions & Sunset Clauses – Is there a difference?

Sep 29, 2023 | Construction

Approval Conditions & Sunset Clauses – Is there a difference?

Transformer Development Group Pty Ltd v Tait Street Investments Pty Ltd [2023] VCC 878.

In Victoria, the recent case of Transformer Development Group Pty Ltd v Tait Street Investments Pty Ltd [2023] VCC 878 confirms that pre-conditions to completion of an off the plan development are not necessarily to be interpreted as sunset clauses. The case considers the extent to which section 10 in the Sale of Land Act 1958 (Vic) (the SLA) applies in such circumstances.

Transformer Development Group Pty Ltd (the Purchaser) entered into 18 contracts of sale with Tait Street Investments Pty Ltd (the Vendor) for 18 lots in an off-the plan development in Bonshaw, Victoria. All contracts were materially the same, and each provided that the contract was subject to and conditional upon the vendor obtaining approval from any necessary authority to construct services such as electricity, gas, water, and sewerage within each lot in the subdivision.  The dispute arose when the Vendor was unable to procure such approvals and required the contracts be rescinded pursuant to the contractual terms.

 

The Vendor’s right to rescind

The special conditions made provisions for the Vendor’s right to rescind. Specifically, special condition 5.2 stated that construction approval was required to be “on terms acceptable to the Vendor in its absolute discretion” and procured within 24 months from the day of sale and if it was not procured in such time, the Vendor had the right to rescind. The Vendor engaged in ongoing and continued discussions with relevant authorities to obtain approval to construct services to enable completion of Stage 8 as per the Plan of Subdivision. The original intention was to provide services via construction of infrastructure within the development, and at the time of entering into the sale contracts with the Purchaser, the relevant authorities were supportive of this. The authorities later indicated they would not approve this approach and on this basis the Vendor was ultimately unable to procure such service approvals and would have the right to rescind under the contracts.

 

The Purchaser’s position

The Purchaser contended that the Vendor was unable to rely on the contractual right to rescind as it was wholly inconsistent with section 10 of the SLA, which restricts a developer’s ability to rescind a residential off the plan contract without either consent from the Purchaser or approval from the Supreme Court. The Purchaser also argued that special condition 5.2 had the effect of shortening the sunset date by a year and sidestepping the rescission scheme mandated by section 10 of the SLA.

 

The Court’s decision

The Court held that the SLA and the contract were not inconsistent. The Court affirmed that the definition of a sunset clause is strictly a provision in a residential off the plan contract which allows for the contract to be rescinded if the plan of subdivision has not been registered by the nominated sunset date. In contrast, the contractual provisions in contention relate to the requirement to obtain approvals from authorities to allow developments to proceed, not a failure to register the plan of subdivision by a certain date. As a result, the subject matter of the special conditions and the definition of “sunset clause” are different and there are no inconsistencies between the two.

 

What does this mean for developers?

This is fantastic news for developers in Victoria and may be encouraging for developers in NSW as well. It confirms that the sunset clauses legislation in Victoria is specifically for dealing with sunset clauses, and pre-conditions such as clauses pertaining to obtaining necessary approvals are not covered by the sunset clauses legislation and parties are therefore permitted to negotiate contractual provisions. As the legislation in NSW and Victoria is relatively similar on this point, the courts in NSW may use this case as a guide to interpret the similar s 66ZS contained in the Conveyancing Act 1919 (NSW).

As a final note of caution, this judgement may be overturned in the future by superior courts with differing interpretations. But for now, and with an impeding increase in development projects, this case provides developers with comfort that they may launch projects with off-the plan contracts which are subject to conditions being met without the fear that Courts will hold such provisions unenforceable.

 

If you have any questions, please contact the team at Keighran Legal + Advisory.

 

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