Court rules in favour of shopping centre owner in repudiation case

Cooper Grace Ward’s dispute resolution team recently acted for a major shopping centre owner by successfully defending a Supreme Court case challenging the termination of a lease.

In BMG SP Pty Ltd v YFG Strathton Pty Ltd [2023] QSC 52, a tenant brought proceedings against the shopping centre owner seeking to set aside the owner’s termination of the lease on the grounds of repudiation.

The case is noteworthy because the landlord sought to immediately terminate the lease for repudiation, rather than through the notice to remedy breach regime prescribed by the Property Law Act 1974 (Qld).

Justice Crowley held that the tenant’s failure to progress their fitout works, along with the tenant’s repeated demands that the landlord provide concessions, amounted to a repudiation of the lease.

Facts

The landlord owned a major retail shopping centre and the tenant entered into a lease to establish a mini-golf and dining venue in the centre.

Under the lease, both the landlord and the tenant were required to complete certain fitout works to renovate and refurbish the relevant tenancy to enable the tenant to commence trading.

The tenant was required to complete their fitout works diligently, continuously and with all reasonable speed before the commencement date.

There were many delays in the completion of the fitout works attributable to the tenant. These included several occasions where the tenant halted its fitout works and stated it would not recommence unless the landlord provided contributions and concessions.

The landlord terminated the lease relying on the tenant’s conduct during dealings over many months.

The tenant subsequently commenced court proceedings seeking a declaration that the landlord’s termination was invalid. The tenant also sought a declaration that specific repayment clauses that entitled the landlord to repayment of part of its fitout contribution were unenforceable as penalties.

During the trial:

• the tenant argued that its demands were merely an attempt to robustly negotiate in good faith
• the landlord argued that a representative of the tenant had engaged in aggressive behaviour towards the landlord and its contractors
• the landlord argued that it was justified in the decision to accept the tenant’s repudiation and terminate the lease, rather than issue a notice to remedy breach, because of the significant delays in the tenant’s fitout works and the tenant’s aggressive behaviour.

Decision

The Court held that the tenant’s conduct demonstrated its unwillingness to be bound by essential terms of the lease. In particular, the tenant evinced an objective intention to refuse to comply with its fundamental obligations to:

• carry out the tenant’s fitout works ‘diligently, continuously and with all reasonable speed’
• complete the tenant’s fitout works by the required time
• abide by the parties’ contractual agreements.

Justice Crowley very carefully considered the tenant’s conduct as a whole and in the context of the relationship between the parties that spanned many months.

In doing so, his Honour found that the tenant, while failing to progress the tenant’s fitout works and continuing to be in breach of the lease, demanded further concessions as a pre-requisite to resuming the fitout works that it was already contractually obligated to do.

The Court did not accept the tenant’s submissions that its forceful correspondence was simply an attempt to robustly negotiate in good faith. His Honour noted that while the landlord had attempted to find a mutually agreeable way forward, the tenant conversely made non-negotiable demands and was not prepared to progress the project unless and until the landlord agreed to a substantial variation of the lease. The tenant’s conduct went beyond mere negotiations and evinced an intention to perform a contract only if and when it suited it to do so.

As a result, his Honour held that, as the conduct amounted to repudiation, the landlord’s termination of the lease was lawful. This ultimately meant that the landlord was entitled to re-let the premises.

The lease and an incentive deed also contained repayment clauses that, in the event that the lease was terminated, entitled the landlord to claim repayment of part of its fitout contribution. This type of clause is relatively common in commercial leases in Queensland.

The tenant argued that these repayment clauses were unenforceable pursuant to the doctrine of penalties as these could not be construed as a genuine pre-estimate of the landlord’s loss due to early termination of the lease.

His Honour, relying on the earlier case of GWC Property Group Pty Ltd v Higginson [2014] QSC 264, agreed with the tenant’s submissions and found that the fitout contribution was not a conditionally given benefit, but rather was part of the consideration provided by the landlord for the tenant’s entry into the lease.

Therefore, the repayment clause conferred an additional advantage on the landlord as it would not have received repayment of the fitout contribution had the lease otherwise run its term. The landlord instead, over the term of the lease, would have effectively recouped the fitout contribution through the total rent received from the tenant.

However, his Honour noted that the landlord would still be entitled to pursue the tenant to claim damages for breach of contract, including loss of bargain damages, irrespective of the unenforceability of the specific repayment clauses.

Comments

This case demonstrates that a tenant’s demands that a landlord provide concessions may, in circumstances such as these, amount to repudiation of the lease. The difference between hard bargaining tactics by a tenant and repudiatory conduct will turn on whether the tenant has evinced an intention to no longer be bound by the lease, including where the tenant has evinced an intention to carry out its obligations under the lease only if and when it suits the tenant to do so.

Where a tenant has been in default of their obligations under a lease, the landlord may be entitled to immediately terminate the lease by accepting the tenant’s repudiation. This approach, like in this case, may be preferrable where a landlord wants to remove a tenant from the premises as early as possible. The alternative would involve issuing a notice to remedy breach, which would give the tenant an opportunity to remedy the breach and allow the tenant to stay in the premises for a longer period.

Making out a case based on repudiation is complex and difficult and requires careful consideration of all the relevant circumstances. It is important that commercial landlords obtain legal advice before terminating a lease as wrongful termination can give a tenant various legal rights against the landlord.

Further information

If you would like further information, please contact Rocco Russo, Miranda Klibbe or Bridget Camilleri who successfully ran this case for the shopping centre owner.