Court enforces protection of sub-tenants in an Australian first: What does it mean for landlords?

Where a landlord seeks to terminate a head lease, section 125 of the Property Law Act 1974 (Qld) (Act) provides the court with the power to protect sub-tenants.

On 5 August 2011, the Supreme Court of Queensland (Court of Appeal) ordered that a landlord grant a new lease to the sub-tenant after the tenant went into liquidation (Leahy v Fimiston Investments Pty Ltd & Anor [2011] QSC 22).

The case involved land on which a service station and mechanic’s workshop was operating. The land was inherited by the landlord, Ms Leahy, from her mother. At the time, the service station was leased for 20 years to Mr Winner – who notably, was also appointed trustee of the landlord’s mother’s estate (and later removed from the role at Ms Leahy’s request). Mr Winner in his role as trustee consented to an assignment of the lease to Fimiston Investments Pty Ltd and to part of the premises (the mechanic’s workshop) being sub-leased back to Austwin Management Services Pty Ltd (of which Mr Winner was sole director and shareholder).

As Fimiston Investments went into liquidation and owed money under the lease to the landlord, Austwin and Mr Winner were contractually obliged to indemnify the landlord in respect of Fimiston Investments’ breach. The landlord eventually terminated the lease and sought to repossess the whole of the service station. Part of Austwin’s response to this was to make an application under section 125 of the Act for relief against forfeiture in respect of the mechanic’s workshop.

The court ultimately upheld the trial judge’s decision that the sub-tenant was entitled to relief and the landlord was therefore obliged to enter into a lease with the sub-tenant for the remaining term for just the mechanic’s workshop.

In reaching its decision, the court agreed with the major factors considered by the trial judge:

1. the likelihood of the sub-tenant suffering significant loss as a result of the sudden forfeiture (as it had conducted a business from the premises for some 25 years) together with the impact upon the two employees if the business was forced to close;

2. the difficulty of finding similar premises in the area available for rent within a short period of time; and

3. even though affording relief to the sub-tenant would restrict the landlord’s capacity to deal with the whole of the premises, the imposition on the landlord would not be as great, as the term of the sublease was due to expire in July 2012.

The result of this appeal serves as a good reminder that landlords need to be cautious when consenting to sub-leases as, in certain circumstances, the sub-tenant may instead become the tenant. Therefore, landlords should ensure that sub-tenants are thoroughly investigated and deemed as suitable as if they were a tenant under the lease.

If you would like to discuss this legal alert in more detail, please contact a member of our Property, Planning and Environment team on 07 3231 2444.