Victorian Civil and Administrative Tribunal|2009-05-04

Ross-Hunt Pty Ltd v Cianjan Pty Ltd (Retail Tenancies) [2009] VCAT 829 (4 May 2009)

Retail Tenancies List; Air-conditioning system for office premises defective and inadequate performance; Whether constituting a breach of lessor's obligation to grant quiet enjoyment; Whether constituting a breach of term included in retail premises lease by Section 52 of the Retail Leases Act 2003; Comparator for the purposes of Section 52 of Retail Leases Act is most recent renewal of lease not original; Entry into of first lease between party; Unit break down immediately following renewal of lease lessor liable for damages

Ross-Hunt Pty Ltd v Cianjan Pty Ltd (Retail Tenancies) [2009] VCAT 829

Within 14 days of this day the parties must bring in short minutes to bring effect to these reasons.
Adjourned to directions hearing 9.30 am, 20 May 2009.

Mr M. Strang of Counsel instructed by McKean & Park

Mr D. Williams of Counsel instructed by Gadens Solicitors

Ross-Hunt Pty Ltd carries on a real estate agency business from the ground floor, 1 Norfolk Road, Surrey Hills, part of which ground floor it leases from Cianjan Pty Ltd which is the respondent in this proceeding. The parties executed a lease agreement on 17 July 1996 letting the premises to Ross-Hunt for a term of three years commencing 1 August 1996. The lease reserved options for eight further terms each of two years. Clause 13 of the lease provided for the annual rental to be adjusted by an increase of 4% on each anniversary. Ross-Hunt Pty Ltd occupied the premises for the initial term and exercised option to renew. It remains in occupancy of the premises to this day. The most recent lease term commenced 1 August 2007 after a regular exercise of an option to renew.
The demised ground floor area is in modern built format and is entirely sealed. It includes two 6kw refrigerated air-conditioning units to service the premises. They are now approximately 20 years old.
On 12 September 2007 Mr David Brown of Hastie Services Pty Ltd, a specialist in air-conditioner service attended a service call at the premises at the request of Ross-Hunt. He found that one of the 6kw units, the one to the rear of the premise had a burnt out compressor. He found the other unit, the one located to the front operative but not responding properly to its controls. Mr Brown was critical of other elements of the air-conditioning service. He noted for instance that the damper which is designed to admit fresh air as part of the atmosphere circulated by the units was apparently permanently closed. He said:

In any event there was no filter fitted to the outside air intake so that any fresh air which was admitted would not be filtered of particulates and other impurities to be found in the external atmosphere. The units had no 'P' trap and no condensate safety tray.

More generally Mr Brown advised that even when fully operative these units were 'under gunned' and inadequate to provide a proper service for the demised premises. He recommended that the unit with the burnt out compressor had reached the end of its economic life and should be replaced, indeed he advocated the replacement of both units. One of his colleagues quoted the cost of a replacement and upgrade to assist and which would apparently provide a 20kw output at $11,734.00.
In July 2007 an occupational health and safety inspection took place. It was found that there was very little air movement in the premise. Mr Ross of Ross-Hunt wrote to Cianjan calling upon it to replace and upgrade the air-conditioning system. The managing director of Cianjan, Mr Neumann responded in a letter dated 22 November 2007. He drew attention to lease provisions which he said had the effect that it is:

Your responsibility as lessee to maintain the air-conditioning as part of all fixtures and fittings.

Permission for you at your cost to complete whatever works necessary to the air handling system to comply with relevant work safety acts and general staff comfort.

You will understand that we cannot offer any contribution towards replacements and or maintenance works on equipment under your control since 1996, particularly as the rental payments you currently pay are very much below market rental for the premises you occupy and enjoy.

Presumably the assertion that the rental is below market derives from the fact that the terms of the lease do not provide for any review to market, merely a percentage escalation per year.

Ross-Hunt approached the Small Business Commissioner who convened a mediation to resolve the dispute; but the mediation was unsuccessful. As a result Ross-Hunt filed the application commencing this proceeding on 27 October 2008. It sought orders

That the landlord, at its expense, replace and install the air-conditioning system including duct work and controls at the premises. 2. That the Tenant seeks reimbursement from the Landlord for the hire of air-conditioning units from 16 January 2008 to 18 March 2008 at a cost of $8,118.00.

That the Tenant seeks reimbursement from the Landlord for the cost of plumbing work to rectify a burst fire service on 27 August 2007 of $3,714.74.

Alternative to A, the Landlord reimburse the Tenant for replacing the air-conditioning system at today's cost (which was quoted at $11,734.00 plus GST on 12 November 2007).
At the hearing, Mr Williams of Counsel who appeared on behalf of the respondent landlord objected to a consideration of the claim for reimbursement for 'a burst fire service'. He said this claim was not reflected in the pleadings and proper notice had not been given of it; it was also not the subject of any mediation convened by the Small Business Commissioner. In the circumstances I directed that this element of the claim would not be dealt with.

Mr Strang, Counsel for the applicant did not place reliance upon any express covenant to repair in the lease. It seems that there is no repair covenant by Cianjan contained in the lease, rather he contended that Cianjan's refusal to repair and upgrade the air-conditioning system constituted a breach of the covenant for quiet enjoyment in the lease or alternatively that it constituted a breach of the covenant taken to be included in the lease by virtue of Section 52 of the Retail Leases Act 2003.
It does not appear that the parties executed any additional lease deeds upon the successive exercises of option to renew hence the terms of the present renewal are to be found in the original 1996 Deed of Lease which provides at Clause 3:

AND THE LESSOR HEREBY covenants with the Lessee that the Lessee paying the rent and observing the covenants hereof then the lessee shall peaceably hold and enjoy and demised premises during the term without any interruption by the lessor or any person claiming under or in trust for the lessor.

Aside from this express covenant, the covenant for quiet enjoyment by a lessor is regarded as inherent in the very nature of a lease of a piece of real estate.
According to the learned authors of Bradbrook, Croft and Hay, Commercial Tenancy Law (third edition):

The covenant imposes an obligation on the landlord to put the tenant into possession and allow the tenant to remain peacefully in possession during the term of the lease free from interruption ... the covenant is prospective in nature and amounts to an obligation on the landlord not to do anything after the date of the grant which substantially interferes with the tenant's occupation; the covenant does not provide a remedy where the state of affairs existed at the date of grant of the lease.

In support of the proposition that Cianjan's actions or perhaps more appropriately omissions in refusing to repair or upgrade the air-conditioning system constituted a breach of the quiet enjoyment covenant, Mr Strang at the hearing relied upon two authorities: one a decision of the High Court of New Zealand, Westpac Merchant Finance Limited v Winstone Industries Limited [1993] 2 NZLR 247 and a decision of the Commercial Tribunal of South Australia, J.W. Gillespie & A. Eady v Salvatore & N. Barca Digested (1993) 15 AdelL Rev 277-8. Pursuant to leave reserved the following day Mr Strang delivered a decision of the Federal Court of Australia in Hawkesbury Nominees Pty Ltd v Battik Pty Ltd [2000] FCA 185, a decision of a Full Court consisting of Gallop, Hill and Gyles JJ.
In the first of those cases Westpac was it seems a mortgagee in possession of premises let to Winstone. It sued Winstone for arrears of rent. Winstone contended that it was entitled to cancel the lease and deny liability on the basis of Section 7 of the Contractual Remedies Act 1979 (NZ). The cancellation was said to be based on breaches of covenant by the lessor relative to obligations to repair the roof and the exterior of the premises which were imposed by express covenant and also a failure on the part of the lessor to abate the leakage of water from a damaged water main leading to the ingress of water into the leased factory area. Anderson J of the New Zealand High Court held that there had been a breach or breaches of covenant by the lessor but they were not such as to justify or authorise cancellation of the lease under the Contractual Remedies Act. Hence he gave judgment for the plaintiff. His Honour said:

... the lessor had obligations to abate the entry of water into the demised premises through the defective pipe which lay under the lessor's land and did not form part of the demised premises, by reason of the covenant for quiet enjoyment. Having regard to all the circumstances, compliance with that covenant for quiet enjoyment effectively required replacement or repair of the defective pipe because the terms of the lease and the commercial realities of the letting of the premises contemplated that the lessee would have the benefit of a water supply to the premises. Since that supply could not be maintained consistently with the abatement of the breach of the covenant for quiet enjoyment without replacement or repair of the defective pipes the lessor had a duty to repair in terms of the lease albeit that such duty did not arise specifically by virtue of Clause 22.

[1993] 2 NZLR 247, 252 [emphasis added]

Clause 22 was a covenant by the lessor to repair the roof and the exterior of the premises. The reference to interruptions to the water supply arose out of a notice served by Wellington City Council on 11 June requiring the occupier to repair the pipe failing which the water service would be disconnected on 15 June 1990. In fact the service was disconnected between 15 June and 22 June.
The decision in Gillespie's case is as previously observed digested only. In the digest of the facts it is said:

There had also been problems with the air-conditioning of the premises.

The respondents had a valid defence in that the applicants' [lessors] were in breach of an implied warranty as to quiet enjoyment of the premises. This had occurred by reason of the disconnection of air-conditioning facilities, and the respondent's liability was reduced accordingly. This matter was a dispute within a shopping centre.

The third of the decisions referred to and relied upon by Mr Strang was the Hawkesbury Nominees' case. The Full Court was considering an appeal from a decision of a Judge of the Supreme Court of the Australian Capital Territory in favour of a lessee for damages against the lessor. The premises in question were used as a restaurant serving Italian style food The Trial Judge had held that there had indeed been a breach of the covenant for quiet enjoyment by reason of a combination of factors which included a failure to repair the exhaust ducting system, a failure to operate the air-conditioning and fresh rear ventilation system satisfactorily and the effects of the decision to relocate an exhaust fan in an attempt to minimise the leak of odours from the ducting exacerbating the inefficiency of the system at the range hood level. The appeal as to liability was dismissed though it was successful as to the quantum of damages. The principal judgment was delivered by Hill J with whom Gallop J concurred. At paragraph [41] Hill J said:

There will be a breach of the covenant for quiet enjoyment or alternatively the implied covenant not to derogate from the grant where acts or omissions of the lessor are such as to render the demised premises unfit for the purpose for which the leased premises are intended to be used.

There was some argument based on the fact that the plaintiff was a tenant by assignment and was not tenant at the time that the exhaust fan was relocated. His Honour rejected an argument that the assignee tenant could not rely upon what had occurred before he took his assignment. At paragraph [47] His Honour said:

In one sense there was really only one breach (albeit a continuing breach), that is to say the relocation [of the exhaust fan]. The failure to then rectify the problem need not be seen as a separate breach which gives rise separately to an action for damages.

Whilst Mr Strang did not refer to it, reference may also be made to a decision of Yeldham J in the Common Law Division of the Supreme Court of New South Wales in Martins Camera Corner Pty Ltd v Hotel Mayfair Limited [1976] 2 NSWLR 15 where failure to maintain and clean the drainage system on the roof of premises being an area retained under the control of the lessor led to a flood in the leased premises which were used as a shop. His Honour held in the circumstances that amongst other things the lessee had a claim for damages for breach of the covenant for quiet enjoyment. At [1976] 2 NSWLR 15, 24 His Honour referred to and relied upon a statement from paragraph [13] pages 578, 579 of the then current edition of Woodfall:

A landlord who retains possession and control of the roof is under a duty to take care that it is not in such condition as to cause damage to tenants, and is liable to injury caused by a non-clearance of a rain gutter within a reasonable time.

An even more dramatic illustration of the same point is to be found in the judgment of Tadgell J in M.E.K. Nominees Pty Ltd v Billboard Entertainments Pty Ltd (1993) V Con R 54-468. The lessor sought leave to enter final judgment for possession of leased premises for non-payment of rent. His Honour found there was an arguable defence based upon an unliquidated cross-claim for damages for breach of the covenant for quiet enjoyment where the demised premises being a basement level theatre were partially flooded by a sewage overflow emanating from land controlled by the lessor.
Whilst these various authorities fixed lessors with liability for breach of the quiet enjoyment covenant for failure to repair and maintain they do not support Ross-Hunt's claim here. In all cases except Gillespie's it is clear that the acts or omissions of the lessor relative to repair and maintenance took place in areas that were not part of the demised premises but rather were retained under the lessor's control. Precisely what was involved in Gillespie's case is unclear; one part of the digest suggests merely there were problems with air-conditioning, another suggests that the air-conditioning was cut off. If a shopping centre tenancy were supplied from a central air-conditioning service under the control of the lessor and the lessor cut the service off (as at least one part of the digest suggests occurred), this would clearly be a breach of the covenant for quiet enjoyment.
The situation here is different. This is a question of repair and maintenance to the demised premises which are under the control of Ross-Hunt not in the occupation of Cianjan. The claim for breach of the covenant for quiet enjoyment fails. The covenant for quiet enjoyment does not by a sidewind create a lessor's covenant to repair the demised premises.
This leaves the claim based on Section 52 of the Retail Leases Act. That section provides, inter alia:
1. (1) A retail premises lease is taken to provide as set out in this section.

(2) The landlord is responsible for maintaining in a condition consistent with the condition of the premises when the retail premises lease was entered into -

(a) the structure of, and fixtures in, the retail premises; and

(b) plant and equipment at the retail premises; and

(c) the appliances, fittings and fixtures provided under the lease by the landlord relating to the gas, electricity, water, drainage or other services.

(3) However, the landlord is not responsible for maintaining those things if -

(a) the need for the repair arises out of misuse by the tenant; or

(b) the tenant is entitled or required to remove the thing at the end of the lease.

As initially enacted in 2003 the section obliged a lessor to maintain structure, fixtures, plant and equipment, appliances and so forth 'in good repair'. In 2005 however, the section was the subject of retrospective amendment by Act No. 2 of that year which modified the obligation to an obligation to maintain:

In a condition consistent with the condition of the premises when the retail premises lease was entered into.

Mr Williams on behalf of Cianjan Pty Ltd submitted that if this air-conditioning system were to be regarded as worn out, inadequate or both, this was the condition in which it found itself at the time that the current lease was entered into, namely on 1 August 2007. The system was he submitted in the same condition now as it was on 1 August, hence there could be no question of any breach of Section 52.
Mr Strang sought to escape from this cul de sac by both legal and factual submissions. On the legal side he relied upon Section 9 of the Retail Leases Act which provides as follows:
1. Meaning of renewal of a lease

(1) In this Act, the renewal of a retail premises lease means the renewal of the lease -

(a) under an option granted under the lease for a further term; or

(b) under an agreement to renew the lease on substantially the same terms and conditions, except as to rent, for a further term entered into by all of the parties to the lease.

(a) after a retail premises lease expires, there is a break in the tenant's possession of the premises; and

(b) the tenant resumes possession of the premises for a further term (whether or not on the same terms and conditions as under the expired lease) -

the resumption of possession of the premises is taken not to be a renewal of the expired lease and is instead taken to be the entering into of a new lease for the purposes of this Act.

(3) The renewal of a retail premises lease is not to be taken to be the entering into of a retail premises lease for the purposes of section 17 (landlord's disclosure statement).

For the purposes of Section 52, he submitted the relevant retail lease was to be taken to have been entered into when the initial term was created in 1996 not when it was renewed from effect from 1 August 2007. Given that Section 9 is an exegesis on the meaning of the word 'renewal' in the Retail Leases Act and not upon the meaning in the statute of the phrase 'entered into' it was not clear to me exactly what reliance could be placed on the section. The only reference in Section 9 to entering into a retail premises lease is to be found in sub-section (3) which is a limited deeming provision for the purposes of one section, namely Section 17 of the Act and for that reason appears to have no application at all to Section 52. I reject the submission that Section 9 has anything to say as to the true construction of Section 52.
The section which does and which is nearby is Section 7 which provides as follows:
1. When retail premises lease is entered into or assigned

For the purposes of this Act, a retail premises lease is entered into or assigned when -

(a) under the lease or assignment, the tenant enters into possession of the premises with the consent of the landlord; or

(b) under the lease or assignment, the tenant begins to pay rent for the premises; or

Since until 1 August 2007 Ross-Hunt was in possession and was paying rent 'under' the previous lease term and not the now current lease term neither paragraphs (b) and (c) of Section 7 can have the effect of bringing the date upon which the relevant lease was entered into forward until before 1 August. Had the parties executed a new lease for the new term it may be that paragraph (c) would have had some operation and would have brought forward the date upon which the current lease could be regarded as having been entered into. Since no such new lease deed was executed paragraph (c) has no operation. The result then is that for the purposes of applying Section 52 the relevant lease is the current lease and it was entered into on 1 August 2007.
Mr Strang sought to avoid this conclusion by arguing that the Retail Leases Act in general and Section 52 in particular should be regarded as 'beneficial' legislation and therefore given the benevolent construction in favour of the tenant. He referred to the well known authorities on 'beneficial' legislation. In my view this is not the appropriate approach to construing a provision such as Section 52. The Retail Leases Act and cognate legislation regulates the rights and liabilities between one another of landlords and tenants; it is a zero sum game. A right given to a tenant is an obligation imposed on the landlord. An immunity given to a landlord is a right removed from the tenant. The policy of a statute such as the Retail Leases Act is to draw what Parliament regards as a proper balance between the rights and liabilities of landlords and tenants in the particular area regulated by the Retail Leases Act. There is no broad outer area from which 'beneficial' principles can be drawn. The only way in which it can be determined exactly how the balance between the rights and liabilities of landlords and tenants has been struck by Parliament is to analyse in accordance with normal statutory maxims the words which Parliament has used. Carrying out that process leads me to the view that Mr Williams' construction of Section 52 should be adopted. Hence it is only if it can be demonstrated on the balance of probabilities that there has been a deterioration of the state of these air-conditioning appliance since 1 August that the applicant Ross-Hunt will be entitled to any relief under Section 52.
Mr Sharp of Ross-Hunt gave evidence that he had come almost by default to be in charge of building issues relative to its tenancy. He says he became aware that the air-conditioning system was operating less effectively approximately three days before Mr Brown attended and made his observation that the compressor of one of the units had burnt out. He conceded that the air-conditioning system was not used by Ross-Hunt for heating and therefore was used only very occasionally in the winter months. He was willing to concede the possibility that the compressor had been burnt out since the last warm weather prior to September 2007 which he put around about February.
Upon this evidence Mr Williams on behalf of Cianjan Pty Ltd submitted I could not properly conclude that the burn out took place more probably than not after 1 August. Mr Williams conceded that burn out was a particular event not a process or a continuum hence it occurred at a particular moment and necessarily occurred when the air-conditioning system was operating. It could not occur whilst the system was shut down which according to Mr Sharp it was for most of the previous winter. Again, Mr Williams conceded it was the common experience with machinery and electronics that failures frequently occurred when re-starting after a long shut down and that maintaining equipment in operation seemed calculated to avoid this style of break down.
With some hesitation I conclude that it is more probable than not that the burn out in the compressor occurred when the air-conditioning system was turned on again for the first time since the long substantial shut down for winter hence at or about the time that Mr Sharp made his observation and summoned Mr Black to investigate. That being the case since on this finding of fact both units were operating as at 1 August it was incumbent upon Cianjan Pty Ltd to take action to repair the rear unit.
Mr Nelson, Cianjan's own expert witness assessed the cost of replacing the compressor unit and installing dryers into the air-conditioning system which he judged was the necessary remedial work at $3,500 to $4,000. Given that human experience tends to be that costs come out in reality at the upper rather than the lower end of estimate I believe that the applicant should be awarded damages in the sum of $4,000 on this count. The other damages claim made was based upon the cost of hiring supplemental air-conditioning equipment during the last summer which was fixed in the sum of $8,118.00. Whilst the making of such an outlay seems to have been referred to in passing in the course of the hearing I cannot see that it was deposed to in the course of the hearing before me or dealt with in the evidence within. The incurring of this type of expense over last summer was not however denied. Subject to the parties agreeing that such expenditure was made or my being directed to proof that it was incurred I believe that the amount claimed in the application on this score should also be allowed as damages for breach of Section 52. I will direct that the parties bring in short minutes to give effect to my reasons. If they can agree upon a particular amount which should be awarded an order to this effect may be made in chambers failing which I will fix this matter for a further hearing to consider the precise amount which should be ordered.

Ross-Hunt Pty Ltd v Cianjan Pty Ltd

At a glance

Court

Decision date

Source

Judgment (57 paragraphs)

Ross-Hunt Pty Ltd v Cianjan Pty Ltd (Retail Tenancies) [2009] VCAT 829 (4 May 2009)

Parties