Commercial Property Blog

Legal Tips and Traps

What obligations must I be aware of when terminating a lease?

Posted by Mario Rashid-Ring on 4 Mar 2019

Assisted by Tom Dearden.

The failure to comply with obligations arising under a lease is a common catalyst for disputes within tenancy matters, with aggrieved parties sometimes going as far as terminating their leases.  

When thinking about terminating a lease, it is important for parties to both exercise caution and avoid terminating without first obtaining relevant legal advice.  Seeking professional legal advice prior to making a decision to terminate will provide parties with assurance that the opposing party's failure to comply with the lease obligation does actually give them the right to terminate.

If legal advice is not sought, and a party is subsequently found to have terminated the lease invalidly, it may allow the other party to seek compensation.

Even once a lease has been terminated, there may be further obligations that the parties must continue to comply with.  For example, terminating tenants are usually required to pay any rent in arrears and to make good the premises.

In the recent decision of S 3 Sth Melb Pty Ltd v Red Pepper Property Group Pty Ltd (Building and Property) [2018] CVAT 1684, it was found that the landlord's failure to provide an air-conditioning system that properly serviced the premises was a fundamental breach of the lease, granting the tenant the right to terminate and collect its security deposit of $22,000.  However, it was at the same time held that the tenant owed the landlord a sum for unpaid rent, and was required to sufficiently make good the premises.

The Facts

The relevant facts were as follows:

  • The tenant was the owner and operator of a Pilates and barre studio.  
  • The lease contained a special condition requiring that the landlord would install an air-conditioning system to adequately service the premises, and that the tenant would be responsible for maintaining the air-conditioning system.  
  • Both parties agreed that instead of installing a new air-conditioning system, the landlord would recommission an existing air-conditioning unit.  
  • Shortly afterwards, issues with the air-conditioning unit arose, to the point where the air-conditioning unit would only work for 20 minutes.  This lead to the tenant losing customers.
  • The tenant notified the landlord of the issues and sought that the landlord repair the air-conditioning unit.
  • The landlord responded by claiming that it was the tenant's responsibility to maintain the air-conditioning unit.
  • The tenant replied that the unit was so old and in such a poor state of repair that it did not adequately service the premises.
  • There was no further communication between the parties regarding this issue.  
  • 10 weeks after the tenant notified the landlord of the issues, the tenant terminated the lease, on the grounds that the landlord had repudiated the lease by failing to provide an air-conditioning system that adequately serviced the premises.  The tenant then vacated the premises, without repairing or reinstating the premises to its original condition prior to the lease.  
  • The landlord rejected the tenant's termination and contended that the tenant's vacation amounted to a repudiation of its obligations under the lease.  The landlord subsequently sought to terminate the lease on this basis.  

The Decision

The tribunal held that that the landlord's failure to repair or replace the air-conditioning system so that it adequately serviced the premises constituted a repudiation of its obligation under the special condition.  The landlord's failure to act after having been aware of the issues for 10 weeks would in the eyes of a reasonable person convey that the landlord had disavowed itself of its obligation.

Accordingly, the tenant's termination of the lease was considered valid, and the tenant was in turn entitled to recover its security deposit of $22,000.

However, it was also held that the landlord was entitled to damages in the sum of $22,506.30, on account of the tenant failing to make good the premises, and similarly for unpaid rent owed at the time of the termination.  Ultimately, the tenant was required to pay the landlord $506.30.

Conclusion

Whilst it can sometimes be difficult for parties to navigate their respective obligations under a lease, it is essential that that in circumstances where a party does intend to terminate a lease, it does so validly.  Likewise, it is important that parties continue to comply with any obligations that survive the termination, such as the payment of rental arrears, or work required under any relevant make good clauses.
 
If you require assistance in navigating the terms of your lease and identifying your obligations as either a tenant or landlord, Coleman Greig's Commercial Property team can provide high quality advice and help to ensure that you are not exposed to a claim.

Similarly, if you are currently in a dispute with the other party to your lease, Coleman Greig's Litigation and Dispute Resolution team can assist you by entering into negotiations in order to resolve the issue before proceedings are commenced.