The contemporary leasing market in Australia and the relationships which underpin a successful leasing enterprise are becoming increasingly sophisticated. Gone are the days when a landlord could grant a lease imposing onerous obligations on a tenant but offering little in return. Nowadays, landlords are under pressure to take on additional obligations as tenants require greater levels of assurance as to the quality of accommodation and building amenities on offer.
To ensure that a landlord lives up to its promises, one of the weapons which a tenant may seek to employ is to withhold rent where the landlord is in default. The power to withhold rent identifies an obvious tension in the landlord/tenant relationship between the tenant’s expectation of a building which will serve the needs of its business and the landlord’s anticipation of an uninterrupted income stream.
Where the landlord has defaulted, when can a tenant withhold rent?
Generally speaking, it is unwise for a tenant to withhold rent in an attempt to compel the landlord to rectify its default. Under most commercial leases, the tenant’s obligation to pay rent is expressly drawn so as to preclude any implied rights a tenant may have to withhold rent. By withholding rent where there is no express or implied right to do so, however reasonable its claim may be, the tenant risks having the lease terminated and exposing itself to a claim for loss of bargain damages.
In the absence of any express right to withhold rent, the courts have held that a tenant may successfully defend a landlord’s claim arising from non-payment of rent in two situations. The first is where a tenant is entitled to recoup out of the rent sums it has expended in carrying out repairs which should have been carried out by the landlord. The sums expended by the tenant in carrying out such repairs are treated by the courts as payment on account of rent which discharge the tenant’s obligation to pay rent. The right arises where the tenant’s claim is for a liquidated sum and the landlord has been given notice of the breach before the tenant carries out the repairs.
The second situation is the tenant’s right of equitable set-off. Equitable set-off refers to the tenant’s right in legal proceedings to offset unliquidated claims against a landlord’s claim for unpaid rent. Such claims are not limited to unliquidated claims for breach by the landlord of a term of the lease but extend to unliquidated claims under agreements or claims which are collateral to the lease. What is required is that the tenant’s claim be so closely connected with the landlord’s claim for rent that it would be inequitable or unjust for the landlord to succeed with its claim for unpaid rent without conceding the tenant’s claim.
What can a landlord do to defend its income stream?
A landlord can defend its position in either of these two situations by including a provision in the lease which excludes the tenant’s rights. Clear words are needed to achieve this, as has been highlighted in some recent decisions. The debate in those decisions is whether words such as ‘free of all deductions’, ‘without any deductions’ or ‘without any deductions whatsoever’ are effective to exclude both the tenant’s right of recoupment and its right of equitable set-off.
Unfortunately, in none of the cases was it necessary for the court to determine the precise effect of a provision obliging the tenant to pay rent ‘free of all deductions’, ‘without any deductions’ or ‘without any deductions whatsoever’.
In the decision of the Full Court of the Federal Court of Australia in Norman; in the matter of Forest Enterprises Limited v FEA Plantation Limited, the tenant failed to establish an equitable right of set-off. However, the Court discussed the competing views on the effect of such phrases in the context of a clause that required the tenant to pay rent ‘without any deductions whatsoever’. The Court observed that the weight of appellate authority does not support the view that a provision obliging a tenant to pay rent ‘without deduction’ excludes a tenant’s equitable right of set-off. The Court went on to say that the words ‘without any deductions whatsoever’ would have excluded the tenant’s equitable right of set-off had the tenant been successful in asserting such a right. The Court stressed the emphatic nature of the word ‘whatsoever’ in the clause under consideration.
In the recent case of Miwa Pty Ltd v Siantan Properties Pte Ltd, the New South Wales Court of Appeal declined to express any view about the Federal Court’s observations in Norman. Campbell JA observed that the effect of a provision in a lease obliging the tenant to pay rent ‘without any deductions whatsoever’ is an open question so far as Australian intermediate appellate courts are concerned.
However, cases such as Elite Promotions & Management Pty Ltd v 5A Investments Pty Limited suggest that the words ‘without deduction’ will exclude a tenant’s right of recoupment even though they may be ineffective to exclude set-off. It is also clear that words broader than ‘deduction’ would be effective to exclude both rights. In Sandbank Holdings Pty Ltd v Durkan, the Western Australian Court of Appeal reviewed the authorities in the context of a clause which obliged the tenant to pay rent ‘without set-off (whether arising at law or in equity) and free and clear of all deduction whatsoever’. The Court held that it was unnecessary to express a view about the conflict in the authorities, as the clause under consideration clearly excluded any right that the tenant had to set-off, or deduct claims for money had and received, against the liability to pay rent.
Points to note
The following points emerge from the recent caselaw.
n If a landlord is in default, a tenant should pay careful attention to the nature of the default and the terms of the lease before deciding to withhold rent in order to compel the landlord to rectify the default. A failure to do so may put the lease at risk of termination and expose the tenant to a claim for damages.
n It is not clear if the words ‘free of all deductions’, ‘without any deductions’ or ‘without any deductions whatsoever’ are effective to exclude a tenant’s right of equitable set-off, although such words may be effective to exclude the tenant’s right of recoupment.
n If a landlord wishes to exclude a tenant’s right of equitable set-off and its right of recoupment, the lease should expressly say so.
n When negotiating heads of agreement for a lease, it would be prudent for the parties to address rent abatement rights in specific circumstances so that the lease can be drawn to deal effectively with the parties’ expectations as to performance.
If you have any questions regarding these matters or leases in general, please feel free to contact the DibbsBarker Leasing Team Leader:
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