Repair and maintenance obligations under a commercial lease

Commercial tenancies, particularly for large properties with long tenancies that may extend over decades, can present challenges for landlords and tenants when it comes to repairs and obligations.

The standard commercial leases in Victoria (REIV leases) provide for premises to be maintained to the same standard at which the premises was leased. The obligations are expressed to be upon the tenant. However the ‘tenant obligations’ clauses don’t take into account the usual wear-and-tear and deterioration which occurs over time.

Condition reports

Even with a detailed condition report, a premises will deteriorate over the years, and may lead to disputes. Without a condition report, the terms of the lease and relevant legislation become more important.

Maintenance and repair

‘Maintenance’ and ‘repair’ are separate but related concepts. Maintenance refers to taking steps to avoid deterioration of the building and its systems through preventative and corrective measures. For example: painting, cleaning, servicing and maintaining equipment, clearing drains and gutters, and replacing light bulbs. These are all standard obligations on a tenant in commercial leases.

‘Repair’ refers to portions of a premises which require fixing. Anything damaged by the tenant must be repaired by the tenant. However when a component is worn out and requires repair, a dispute may arise about whether the cause is poor maintenance or reasonable wear and tear, despite regular maintenance.

Wear and tear

What is fair wear and tear?

The line between deterioration caused by fair wear and tear and deterioration caused by a tenant’s use of premises is sometimes difficult to draw. The issue was considered by VCAT in Bretair Pty Ltd v Cave (No 2) (Retail Tenancies) [2013] VCAT 1808 where the Tribunal found no obligation upon the landlord to repair the subject 'structural' pavement, and the tenant's claim was dismissed. Relevant extracts below:

[29] In Westpac General Insurance v Cooper [2006] ACTSC 91 Tamberlin J observed:

...the onus is on the lessor to establish the condition of the premises at the time the tenancy commenced and prove that the premises were not in a similar condition when the tenant left. The clause provides an exception for “fair wear and tear.” The burden of demonstrating that the exception applies generally rests on the tenant: see Vines v Djordevitch (1955) 91 CLR 512 at 519–520. The phrase “fair wear and tear” has been interpreted as the reasonable use of the premises by the tenant and the ordinary operation of natural forces: see Regis Property Co Ltd v Dudley [1959] AC 370. The effect of the clause is that the tenant is bound to keep the house in good repair and condition, but is not liable for minor changes to the premises that constitute reasonable wear and tear.

[30] In Regis Property Co Ltd v Dudley (cited above) Lord Denning stated:

I have never understood that in an ordinary house a “fair wear and tear” exception reduced the burden of repairs to practically nothing at all. It exempts the tenant from liability for repairs that are decorative and for remedying parts that wear out or come adrift in the course of reasonable use, but it does not exempt him from anything else. (410)

[31] In Australian Tenancy Practice and Precedents (MJ Redfern & DI Cassidy (Butterworths) 1987 at 2856) the learned authors state:

Reasonable fair wear and tear involves changes to the premises brought about by reasonable use by the tenant and the ordinary operation of natural forces. It includes such dilapidations as fretting of the mortar joints in external brick walls, the deterioration of external paintwork and the occurrence of dry rot. (2856)

Standard REIV retail leases usually contain a clause which requires the tenant to keep the premises in the same condition as at the start of the Lease unless its condition deteriorates as a result of 'fair wear and tear'.

The lease will usually require (subject to careful reading) the tenant to ensure the premises are kept in the same condition as at the start of the lease unless:

the deterioration results from fair wear and tear; or
the making good of the premises requires the tenant to carry out structural repairs or make payments of a capital nature.
The carve-out to the above point is that a tenant may be liable for structural repairs or capital payments if caused by their negligence, use of the premises or breaches of the lease.
Tenants are commonly exempted from liability for reasonable ‘wear and tear’ where building components wear out during reasonable use (eg air-conditioner fans or other components). Other common items which cause argument are finishes and surfaces like paint, tiles, bench tops, hardware etc. Check the lease and schedules carefully to see if there are obligations around these items.

Subject to the lease, tenants generally take care of items which require mechanical maintenance such as boilers, air-conditioners, extraction fans and oil-sumps. Landlords usually address structural repairs such as foundations, walls, fences, driveways, roofs, etc. However much turns on the particular items and circumstances. If further damage is likely to flow from the wear and tear, the tenant must take necessary steps to prevent further damage.

Disputes about maintenance and repair

Good intentions and understandings of the standard of repair at the start of the lease can diverge over the years. Tenants will often attempt to pass off a failure to ‘repair and maintain’ as ‘wear and tear’.

Here are some useful principles for addressing these sorts of disputes:

Read the lease closely, especially the tenant obligations. They may specify a standard or frequency of repair or maintenance. Check also for any references to qualified contractors, operations manuals, and any special conditions.
If the tenant is in default of the lease, there are a few options:

One option is to issue a ‘soft’ notice. This usually involves a standard letter giving the tenant 14 days to remedy the breach (or breaches), which should be specified with precision in the letter. This may be appropriate where there is a good relationship with the tenant and the issue is something which could be easily repaired, is not urgent, and the tenant needs a little nudge.
The second option is a formal notice of breach pursuant to section 146 of the Property Law Act. This option is appropriate if a ‘soft’ approach fails, or the matter is more serious such as rental defaults or larger maintenance issues. Click here for my post on issuing s 146 notices.

Retail Leases Act – section 52

Section 52 of the Retail Leases Act sets out the landlord’s liability for repairs with a ‘keep in repair’ principle. The landlord is responsible for maintaining the premises in a condition consistent with the condition of the premises when the lease was entered into (s 52(2)), especially:

Structures
Fixtures
Plant & equipment
Appliances, fittings and fixtures provided by the landlord relating to gas, electricity, water, drainage or other services.

VCAT cases on this section include Computer & Parts Land Pty Ltd v Aust-China Yan Tai Pty Ltd [2010] VCAT 2054 where the Tribunal held that a deteriorating roof and air-conditioning system had to be repaired by the landlord due to a special condition in the lease. The landlord had agreed to fix these items prior to the tenant’s occupation but had failed to do so. The tribunal found that:

The condition of the premises is measured by the objective intention of the parties for the purpose of section 52 (paragraph 79).
In other words, the standard for section 52 is what was agreed, not the condition the premises was entered into at the time of the lease (paragraphs 104 to 108, 146).
The tenant can rely not only on the condition of the premises, but an agreement to put the premises into a particular state as at the start of the lease (paragraph 101).

Similarly, in Savers INC v Herosy Nominees Pty Ltd [2011] VCAT 1160 the Tribunal held that:

section 52 should not be ‘read down’ to benefit the tenant; and
the parties can agree to a wider obligation than that imposed by section 52, such as maintaining the premises to a higher standard.
The case raises a potential conflict between section 94 of the RLA which prohibits parties from contracting outside the operation of the RLA, and section 52. However the case refers to authority to support the proposition that it is not possible to contract out of the covenant implied by s 52 (paragraph 115).

Savers Inc refers to two other decisions (at paragraphs 118-119) which support the view that s 52 is not to be read beneficially in favour of the tenant, including Ross-Hunt Pty Ltd v Cainjan Pty Ltd [2009] VCAT 829 and Computer & Parts Land (see above). However the Tribunal concluded that “If the parties with to contract for more than is provided under s 52 they are free to do so.”

In Alea Pty Ltd v Hosking (Building and Property) [2017] VCAT 1425 (20 September 2017) the Tribunal found that the there was a term “imported into the lease by s52(2)(a) of the Retail Leases Act, that they would maintain the structure of the premises in a condition consistent with the condition of the premises when the lease was entered into” which was breached by the landlord respondents (paragraph 119).

The landlords had failed to rectify, as soon as practicable, defects in the premises including the roof, the brick wall and the toilet, which had exposed them to liability under s 54(2) of the RLA to pay ‘reasonable compensation for loss and damage (other than nominal damage)’ that the tenant had suffered because of that failure.

In Versus (Aus) Pty Ltd v A.N.H Nominees Pty Ltd (remitted) (Retail Tenancies) 2017 VCAT 859 the Tribunal re-heard a proceeding on remitter from the Supreme Court following a successful appeal of VCAT's earlier decision.

In the 2014 VCAT hearing, the Tribunal had found that the landlord did not breach section 52 regarding a claim about the presence of mould and water ingress at the relevant premises, which the tenants used to operate a lingerie business (paragraph 30).

In the 2017 remitted proceeding, the Tribunal again found that the landlord had no contractual or statutory obligation to remove excessive levels of mould and moisture ingress. The landlord’s obligation was to maintain the premises in a condition consistent with the premises at the time the lease was entered into in 2006 (paragraph 31).

The tribunal also found no breach of the covenant of quiet enjoyment, as there is no remedy where the state of affairs existed at the date the lease was entered into (paragraph 70).

The Tribunal accepted that the tenant bears the onus of proving that the premises were (or are) in a worse condition than at the commencement of the lease, in order to rely upon and establish a breach of s 52 (paragraph 34).

The “essential ingredient” in order to establish an action against the landlord is that the condition of the premises has changed from its condition at the time of entering into the lease (para 37).