When a Landlord fails to investigate a defect

This was a very recent case considered by the Court of Appeal’s decision just two weeks ago in Brotherhood of St Laurence v Sarina Investments Pty Ltd [2024] VSCA 46 (26 March 2024). The question arose of whether a tenant can terminate a lease if the Landlord has breached its repair covenant. Most default and termination clauses in leases only allow the Landlord to terminate the lease for a tenant’s breach, not the other way around.  It is more difficult for a tenant to terminate a lease for a Landlord’s breach as they need to establish the Landlord has by their conduct or omission, repudiated the lease, which is quite a hurdle.

What is Repudiation?
It is a tricky legal concept and occurs when one party refuses to meet its contractual obligations under an agreement. The non-defaulting party can then accept that conduct (or failure to act) as demonstrating an intention that the defaulting party no longer intends to be bound by the contract, thereby allowing the non-defaulting party to terminate the agreement. It must be a serious breach and requires evidence of a clear intention to no longer be bound by the terms of the contract. The courts are slow to infer a lease has been repudiated by a Landlord. However, there are signs the Court and VCAT are more willing to do so where a Landlord has failed to repair or maintain the premises. This gives tenants greater leverage than they had previously to fight a Landlord’s claim for breach if the tenant decides to walk out of a lease due to dilapidated premises where the Landlord fails to “maintain” the premises. Leases often contain a covenant requiring either the Landlord or the tenant to ‘repair and maintain’ certain aspects of the premises. Disputes often arise as to what ‘maintain’ means and to what extent this obligation requires investigation and preventive maintenance.

Brotherhood of St Laurence case – March 2024
In this case, the tenant the Brotherhood of St Laurence (BSL) occupied part of an office building and obtained an engineer’s report into cracking in part of the concrete slab on the second level, identifying a suspected structural defect recommending further investigation.  BSL provided the report to the Landlord. The Landlord obtained its own report from the same engineer, which also recommended further investigations.  However, the Landlord did not undertake the recommended investigations nor took any further action despite requests and concerns raised by BSL for almost 12 months.   BSL alleged the Landlord repudiated the lease (by failing to act) and they accepted that repudiation and terminated the lease. The Landlord argued BSL’s purported termination of the lease was itself a repudiation, which the Landlord accepted and terminated the lease.

It was a tit for tat approach, but who was right?
It was only after BSL issued proceedings that the landlord engaged a new engineer who completed further investigations. Ironically, it was concluded that, in fact, there was no structural defect and that the concrete slab was sound. The Court of Appeal made three key findings:

1. The Landlord’s obligation to ‘maintain’ the building has a “pre-emptive” or “preventive” element. It does not arise only once a defect arises, despite most Landlord’s repair covenants requiring the tenant to give notice of a defect. One way to distinguish maintenance from repairs is that ‘maintenance’ is like your regular car service and safety inspection; and ‘repairs’ are remedying any defects identified by the mechanic.

2. In this case, the Court found the Landlord had an obligation to undertake further investigation of the suspected defect as they were put on notice by the tenant. This included taking proactive measures and investigating the matter. Therefore, the Landlord here had an obligation to ‘maintain’ part of a leased premises and should have followed up on the report given by the tenant.

3. By the Landlord failing to do so, the Landlord repudiated the lease, allowing the tenant to accept that repudiation, terminate the lease and sue for damages. 

The court found the failure by the Landlord was sufficiently serious to justify termination by the tenant due to:
a. safety issues to the tenant as it was an office;
b. the length of time over which the Landlord failed to act (almost 12 months);
c. that the tenant raised the matter on a number of occasions over that 12 month period and the Landlord refused to act;
d. the tenant had its own OH & S obligations to its employees;
e. the Landlord gave no comfort or indication they would take any steps over that period; and
f. In all of the circumstances, the Landlord’s conduct showed an unwillingness to perform their obligations under the maintenance obligations in the lease.

Section 52 of the Retail Leases Act 2003 (Vic) implies into every retail premises lease an obligation on the Landlord to ‘maintain’ many aspects of the retail premises. Similar obligations are found in many commercial leases and impose an obligation to ‘maintain’ on both landlords and tenants.   

This decision is significant for tenants and could be used as leverage in a dispute where the Landlord fails to respond to maintain the premises, or where the tenant has to vacate premises and they are sued by the Landlord, or if they have to vacate and seek relocation costs. The decision may also assist as a counterclaim to a landlord’s rent and damages claim.

With thanks to Sam Hopper Specialist Barrister who provides updates on Retail Leases Act matters.

Contact: Robert Toth | Special Counsel | Accredited Commercial Law and Franchise Specialist | [email protected] | mobile – 0412 67 37 57

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