When a commercial tenant moves out, it is not uncommon for the landlord and tenant to come to an arrangement about the outgoing tenant’s make-good obligations that takes account of the incoming tenant’s fit-out requirements. For example, the parties will often agree that, instead of restoring the premises to their original condition, the outgoing tenant can simply make a financial contribution to the incoming tenant’s fit-out.
The case of Pourzand v Telstra Corporation Ltd  WASC 210 shows the severe consequences for landlords if those arrangements are not finalised before work starts.
The tenant’s lease was due to expire at the end of March 2010 and the tenant had effectively moved out of the premises by June 2009. In early September 2009, with around seven months left on the lease, the tenant was considering an arrangement with the landlord where the tenant would pay out the remainder of their lease term and a sum of money to represent their make-good obligations. The tenant was also considering the possibility of sub-leasing the premises for the balance of the lease term.
In September 2009, the landlord started performing some minor work on the premises, including the replacement of carpet and, to facilitate that, the removal of some partitions and ceiling tiles. A representative of the tenant was aware of this minor work being carried out, but understood that no substantial work would start until a ‘deal’ had been done between the tenant and the landlord about the make-good obligations and the balance of the rent.
Without any specific agreement from the tenant, the landlord went ahead with substantial renovation works. Shortly afterwards, an employee of the tenant discovered the premises ‘in a state of utter devastation’. The Court found that ‘it is no exaggeration to say that the major work involved [the landlord’s] contractors tearing the demised premises apart’. The tenant terminated the lease the next day.
The landlord sued for the rent payable for the balance of the full lease term. The tenant’s defence was that the lease had been properly terminated. The landlord’s response was that the termination was not valid because the tenant had in fact approved of the works taking place. The landlord does not appear to have argued, for example, that even if the works were not actually approved, the tenant’s conduct led the landlord to assume that they were.
The Court found that the tenant could not be said to have approved of the work because the most that the tenant knew was that minor work to remove carpeting would be done. The tenant had no advance knowledge of the extent of work being undertaken. The Court also found that the tenant had made clear to the landlord that the proposed arrangements to allow the works to take place needed to be approved by the tenant, and that such approval had not yet been given.
The landlord’s fundamental obligation under the lease was to provide the tenant with exclusive possession of the premises. The substantial renovation works made the premises completely unusable. By performing those works, the landlord had effectively renounced its obligations under the lease.
Accordingly, the Court held that tenant was entitled to terminate the lease, and the Court rejected the landlord’s claim for the rent for the balance of the lease term.
The case shows that while flexible arrangements regarding the changeover of tenants can be useful, it is critical to ensure that the arrangements are completely finalised and documented before any work is performed. Failing this, landlords run the risk of not being able to recover any contribution from the outgoing tenant towards the cost of the works, and potentially losing the final months’ rent.
If you require advice regarding commercial leasing disputes, or for more detailed information, please contact Rocco Russo or Michael May on +61 7 3231 2444.