Duty to maintain commercial property – what happens if a landlord neglects this duty?

It is common for a commercial lease to stipulate that the landlord has responsibility for maintaining the structure and integrity of a property and is required to bear the costs of doing so.  Due to the broad nature of these terms, there may be ambiguity when it comes to the interpretation and application of these clauses which may, in turn, place a strain on the landlord-tenant relationship.

Even if the landlord is not maintaining the property as required in breach of the lease, the terms of the lease agreement may not allow the tenant to terminate the lease for breach noting that often the default and termination clauses allow the landlord to terminate a lease for breach but do not contain a mutual right for the tenant.  However, in these circumstances, the tenant may claim that the landlord has shown a desire to no longer be bound by the terms of the lease agreement and thus repudiated the lease.

What is repudiation of a lease agreement?

Repudiation of a lease agreement occurs where a party to the lease demonstrates a clear intention to no longer be bound by the terms of the lease.  If a party repudiates the lease, the other party to the lease has the option to either continue on with the lease or accept the other party’s repudiation and terminate the lease (whilst reserving the right to seek compensation/damages).

To classify a breach of lease as a “repudiation of lease”, the breach of lease must be serious.  This element of seriousness will not be satisfied merely by non-payment of rent, but may include circumstances where:

• the premises are abandoned and no rent is paid; or
• legal proceedings are issued to avoid a lease agreement; or
• there is intentional non-payment of all outgoings.

In the past, the Court has been reluctant to find that a landlord has repudiated a lease due to a failure to maintain the property. However, in the recent case of Brotherhood of St Laurence v Sarina Investments Pty Ltd [2024] VSCA 46 (Sarina Investments case), the Supreme Court of Victoria held that a landlord’s failure to maintain a commercial property constituted a repudiation of the lease.[1]

What happened in that case?

By way of brief background of the facts in the Sarina Investments case:

• Sarina Investments Pty Ltd (Landlord) was the proprietor of a three-level commercial building in Fitzroy (Building).
• Pursuant to a lease agreement dated 14 August 2014 (Lease), the Landlord leased the middle level of the building (Premises) to the Brotherhood of St Laurence (Tenant).
• The Tenant used the Premises as headquarters for various community programs where approximately 49 employees worked from time to time.
• The Lease included terms that the Landlord:
  • must maintain the Building in a structurally sound condition and endeavour to keep it wind and water tight;
  • must use best endeavours to keep the Landlord’s property, building services, plant and essential services in, or to, the Building in good working order and available to the Premises at all times; and
  • is responsible for all capital and structural repairs to the Building and Premises.
• In January 2020, the Tenant notified the Landlord that there was damage to the exterior wall of the Premises and that concrete debris had fallen onto the ground.
• Subsequently, engineering reports were prepared by a consulting engineer at the expense of the Tenant, which stated that there had been movement in a slab of the Building and that further investigations were required to determine the cause for such movement.
• The Landlord was provided with a copy of the reports. However, the Landlord failed to act in response to such recommendations and ignored the multiple complaints made by the Tenant.
• The Tenant was concerned about the health and safety risks that the state of the Building posed, and accordingly, the Tenant vacated the Premises and ceased paying rent.

The Tenant claimed that the Landlord repudiated the Lease and that it accepted that repudiation and terminated the lease.

Ultimately, the Court agreed with the Tenant, and concluded that the Landlord’s failure to investigate the slab, despite being put on notice, amounted to a repudiation of the lease.  As a result, the Tenant was then able to accept the repudiation of the lease by the Landlord and elect to terminate of the Lease. In reaching the decision, the Court considered that:

• the Landlord had an ongoing obligation to maintain the Building, which contains a ‘pre-emptive or preventative element’;
• the Landlord’s obligation to maintain the Building was distinguishable to a duty to repair, and was not only enlivened when something fell into a state of disrepair; and
• pursuant to the Landlord’s obligation to maintain the Building, the Landlord was required to conduct appropriate investigations within a reasonable timeframe of being informed that there may be structural problems with the Building.

What does this mean for me?

Pursuant to occupational health & safety requirements, many commercial tenants will be required to monitor the structural integrity of a property and ensure that it does not pose a safety risk to its occupants.  Accordingly, if the landlord is not complying with its obligations to maintain the property, the tenants may be concerned with what avenues they have.  

Importantly, section 52 of the Retail Leases Act 2003 (Vic) implies into every retail premises lease an obligation on the landlord to ‘maintain’ many aspects of the retail premises. This will not apply to non-retail premises.

If a landlord breaches their duty to maintain the property, the landlord may, depending on the circumstances, be deemed to have repudiated the lease.  In this instance, the landlord will be exposed to both loss of rental income, in having lost its tenant for the property; and liability of damages owed to the tenant, to compensate them for any reasonably foreseeable loss suffered as a result of the breach of the lease.

The Sarina Investments case provides some comfort to commercial tenants, as it shows them that they are entitled to hold a landlord accountable for their duty to maintain a property, even if the terms of lease do not provide an express right to do so.  The case may, in effect, equip tenants with greater negotiating power when it comes to concerns regarding the maintenance of a commercial property.

What should the landlord of a commercial property do?

To ensure they comply with their obligations to maintain a commercial property (if the lease provides for this), the landlord may wish to:

• conduct regular inspections of the property to identify potential works that need to be caried out;
• conduct sufficient investigations within a reasonable time following a complaint lodged by the tenant;
• seek the recommendations of qualified experts; and
• sufficiently address the concerns of the tenant, including by providing them with updates in a timely manner (if no work is required, inform the tenant of this).

Require assistance?

If you require advice regarding options for or implications of ending your commercial lease or failure by a landlord to adequately maintain premises, contact the Litigation and Dispute Resolution team at Coulter Legal today.

[1] Brotherhood of St Laurence v Sarina Investments Pty Ltd [2024] VSCA 46.