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Was the rent abatement for no air conditioning the end of the matter?

The air conditioning system in a leased premises failed as the lease was being entered into. The landlord and tenant agreed on an abatement that would apply until the air conditioning system was fixed, and the lease continued on that basis. The tenant leased a number of adjoining premises and intended to sublease them all together for use as a medical centre. The lack of air conditioning in this particular small premises meant that it was unable to be used as part of the medical centre. The tenant subleased it to accountants instead, but obtained significantly less rent. Later, the tenant claimed additional compensation for loss resulting from the failure of the air conditioning system.

Could the tenant claim additional loss, even though they appeared to have accepted an abatement as compensation for the lack of air conditioning?

Meadsview Pty Ltd v Fenton [2018] VCAT 1249

The landlord leased a small strata premises to a medical centre proprietor for a term of three years commencing on 4 March 2013, with two options to renew.

The premises used a split system air conditioning system, with the external compressor located in the car park at the rear of the building. Before the lease was executed the compressor broke down and required replacement. A dispute arose between the landlord and the Owners’ Corporation about the location of the external compressor.

The dispute between the landlord and the Owners’ Corporation was not resolved until after the end of the initial lease, and air conditioning was restored to the premises on 14 September 2016. The tenant exercised the option on 1 Dec 2015, even though the air conditioning system was still not working.

When the initial lease was entered into, the premises did not have an operating air conditioning system. Both parties knew about the lack of air conditioning and the issues with the Owners’ Corporation, however the landlord had indicated that they were hopeful of the issue being resolved.

The dispute between the landlord and the Owners’ Corporation did not resolve, it escalated. Shortly after the lease was executed the landlord notified the tenant that the dispute about the location of the compressor would need to be resolved by Court proceedings, and that the landlord proposed three possible options for the tenant in relation to the lease:

  1. Opt out of the lease and have all funds returned;
  2. Continue the lease without air conditioning, at an agreed rental amount; or
  3. Reduce the rental on the lease until the matter is rectified.

The tenant selected the third option. The landlord proposed a $20 per week reduction in rent; the tenant said they would accept a $40 per week reduction; the landlord agreed. This was approximately 10% of the rent.

The premises were not able to be used as part of the medical centre because of the lack of air conditioning. The tenant’s business was to sublease rooms to medical practitioners. The sublease rents were determined by a percentage of the fees charged by those practitioners.

Instead of using the premises as part of the medical centre, the tenant subleased the premises to accountants for use as an office. The money paid by these accountants for the subleases exceeded the amount due under the headlease. The accountants installed a portable air conditioner.

Even though the accountants paid the tenant more rent than the tenant needed to pay the landlord, the tenant claimed that if the air conditioning was working they could have used the premises as part of the medical centre and sublet to medical practitioners and much higher rates.

The tenant’s claim was based on the following:

  • The landlord leased to Meadsview for $21,000 per annum, reduced by approximately $2,000 until the air conditioning system was fixed;
  • Meadsview intended to lease to Medi-Admin (a related corporation that operated the medical centre) for approximately $110,000 per annum;
  • Instead, subleases were granted to accountants for approximately $23,000 per annum;
  • The tenant claims the difference between the rent they could have achieved from a sublease to the medical centre and what they actually received (approximately $87,000 per annum for 3 years).

The tenant could not be successful in this case due to a number of reasons:

  • Unclear documentation
  • No consent to sublease
  • Permitted use was “office premises”

However, their main argument was that the abatement was not intended to compensate the tenant for the lack of air conditioning for the entire lease term.

This case was complicated by unclear documentation.

The lease was to Meadsview Pty Ltd. There was a sublease of the combined premises from Medi-Admin to Melbourne Pathology. There was no document between Meadsview and Medi-Admin. The tenant claimed that they were related parties and that using Medi-Admin on the sublease was just a mistake, it should have been Meadsview. The Tribunal did not accept this.

The result of this unclear documentation was that the loss was not suffered by Meadsview, but by Medi-Admin. It was Medi-Admin that was expecting to sublease the premises to medical practitioners, and it was Medi-Admin who has not been able to do this. However, Medi-Admin has no contractual relationship with the landlord, and so cannot make a claim based on the lease.

The landlords did not consent to the subleases.

It was suggested that if they knew the premises was to be sublet at higher rent, they would have refused consent to the sublease and sought to renegotiate the rent.

In addition, the permitted use under the headlease was for office premises – the tenant had no right to sublease the premises for use as a medical centre.

Those three issues meant that the tenant could not be successful in their claim. However, the tenant’s main claim was also rejected by the Tribunal.

The tenant’s main claim

The tenant claimed that the agreement for the $40 abatement was only a “commercial accommodation for a temporary nuisance”. The landlord was obliged by the lease to provide air conditioning. Even though the tenant had agreed to proceed without air conditioning, the tenant considered the landlord was obliged to rectify the issue within a reasonable time. After a reasonable time, the lack of air conditioning became a breach of the lease, and the tenant should be entitled to damages.

The tenant argued that the lack of air conditioning means the premises were unable to be used as intended, and the abatement was only 10% – they argued that the tenant would not have bargained away the use of the premises for a mere 10% reduction. They considered there was an implication that the landlord would have the air conditioning system operating after a reasonable time. Notwithstanding the agreement of an abatement, the tenant considered that after a reasonable time, the landlord became in breach of the lease by not providing air conditioning and damages should be payable as a result of that breach.

The tribunal rejected the tenant’s argument. The words in the abatement were clear – it was for a lack of air conditioning until the matter was rectified. The tenant’s claim would require the Tribunal to imply additional terms into the abatement agreement.  The Tribunal considered both parties to be experienced business people and capable of negotiating for their best interests.

The tenant knew that the landlord could not provide air conditioning until its dispute with the Owner’s Corporation was resolved. The Tribunal also noted that the abatement agreement did include a timeframe: “… until the matter is rectified”. Implying a limit of a reasonable time would be inconsistent with this agreement. The Tribunal considered the words surrounding the grant of the abatement reflected the parties intentions, and could not find a reason to insert additional implied terms.

One final issue for the landlord: misrepresentation – while the landlord and tenant both knew that the air conditioning was not working at the time the lease was entered into, the tenant claimed the landlord misrepresented the possibility that the issues would be resolved with the Owners’ Corporation. The Tribunal found no problem with this in this case because the tenants obtained more rent from subleasing to the accountants than they owed under the lease, and so had suffered no loss. The tenant did not provide any evidence of any lost opportunity.

While this case contains a number of complicating factors, the Tribunal found that the agreement by the parties for an abatement until the air conditioning issue is resolved was clear and binding. Usually, lawyers would draft such an agreement with releases in favour of the landlord making it clear that the lessee may not claim any additional compensation for the lack of air conditioning. Although the landlord has been successful in this case (at this stage) we would still recommend that agreements to provide abatement for disturbance be carefully drafted, including precise descriptions of the disturbance and its duration.

Matthew Rafferty, Partner

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