Where it is not possible for the premises to be used for the tenant’s permitted use – can the lessee terminate?
RM Brothers Pty Ltd v SEBT Pty Ltd; SEBT Pty Ltd v R M Brothers & Morris  NSWCATCD 43
In this case, the water supply to the premises was never adequate for the lessee to operate a self-serve frozen yogurt business. The lessor disclosed that the lessee would need to install a pump to obtain an adequate water supply to the premises, and that this was how the previous tenant operated. The lessee acknowledged this, and entered into the lease. The lessee was never able to obtain an adequate water supply and did not open for trade. The lessor terminated for failure to pay rent and claimed damages.
The Lessor’s Disclosure Statement included: “Water connection and associated drainage works as set out in clause 31 of the Lease”. Clause 31(a) provided that at the commencing date “the Premises is not connected to the water supply and associated drainage of the building” and that the Lessee was permitted at its expense to arrange “a direct water connection to the Premises with associated drainage or access to the buildings water supply with the installation of a pump device”.
At some stage, the lessee’s designs went away from a pump system and instead included new water pipes to be installed across the common property of the building and also within the ceiling cavity of another premises. The works were delayed and ultimately never completed.
The lease commenced on 15 August 2015. A rent free period applied until 14 October 2015 and a half rent period applied until 14 December 2015. The lessee did not commence paying rent as required under the lease. After a few notices demanding payment, the lessor terminated the lease by re-entry on 12 February 2016. The lessee had not completed its works or commenced trading from the premises at that time.
The lessor claimed approximately $150,000 in loss of bargain damages.
The Lessee argued that there was an implied term that rent would not be payable until the lessee had an adequate supply of water provided the lessee had taken all reasonable steps to achieve a water supply. The Lessee submitted that the delays in obtaining an adequate water supply were caused by the time taken by the lessor to approve the works and the time taken by the building’s body corporate to pass a by-law permitting the works to the common area.
A term can be implied into a lease if it is reasonable, necessary, so obvious that it goes without saying, and not contrary to an express term of the lease.
In this case, it may seem obvious that the lessee cannot operate without a water supply. However, the lessee would have been able to arrange a water supply using a pump system (but chose not to) and the issue is not whether the lessee can operate its business, but whether the lessee should be paying rent. The implied term proposed by the lessee contradicted the express term requiring payment of rent. The Tribunal did not agree with the lessee’s implied term argument.
In essence, the Tribunal did not think it was obvious that the lessee should be excused from paying rent because it could not operate its business from the premises.
The Tribunal noted that the lessor had repeatedly told the lessee that there was a need for a pump system to supply water. This was in the initial emails, in the disclosure statement, in the lease and in much of the correspondence. The Tribunal could not find any misleading or unconscionable behaviour on the part of the lessor. The Lessor was entitled to terminate the lease and won its claim for damages.
At one point while the works were held up, the lessee expressed frustration in an email, stating that she felt she was “set up for failure”. We do not know why the lessee elected not to use a pump system, however it comes across clearly in the case that that system could have been installed easily. The lessor clearly disclosed the water supply issue, and the solution. The failure seems to have been as a result of the lessee’s choices.
The case demonstrates the important role of ‘conditions precedent’ clauses rather than relying upon implied terms. Courts are reluctant to imply terms into agreements. A lessee needs to ensure that the premises has everything that is required for the lessee to be able to use the premises as intended (authority approval, lessor works, or services installation or availability). A lease will still be binding and the rent must be paid even if the lessee is unable to use the premises.
This case also shows the importance for the lessor to describe and disclose any limitations with the premises – the result may have been different if the lessor had not so often stated that the lessee would need to install a water supply using a pump system.
Matthew Rafferty, Partner