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Client Update: Parting with possession in Victorian retail leasing

5 September 2011

In brief: The Victorian Supreme Court recently considered whether a tenant had parted with possession of premises, enabling the landlord to re-enter them. Special Counsel Christine Adamson (view CV) and Lawyer Sara Ironside report.

The facts

In Lontav Pty Ltd v Pineross Custodial Services Pty Ltd 1, the tenant (Mr Tenuta) leased retail premises in Port Melbourne. In 2009, Mr Mohammad approached Mr Tenuta, expressing interest in buying the business, which operated from the premises. The sale could not occur until the following two conditions were satisfied:

  • liquor board approval for the transfer of the liquor licence to Mr Mohammad; and
  • the landlord's consent to the assignment of the lease.

Mr Mohammad took steps to obtain the required approvals and consents. However, the landlord would not approve the proposed assignment until all overdue rent and outgoings under the lease were paid in full. The landlord also expressed some concern about Mr Mohammed's suitability as an assignee.

In October 2010, Mr Tenuta was diagnosed with cancer. The liquor licensing approval was resolved but the landlord continued to refuse to consent to the assignment.

In November 2010, Mr Mohammad met the tenant, and it was agreed that the parties would enter into a management agreement (the agreement), whereby Mr Mohammad would manage the business as agent for the tenant. This arrangement was partially due to the need to preserve the business (which was consistently in default under the lease, due to its consistent failure to pay rent on time), as well as Mr Tenuta's declining ability to manage it, due to his failing health.

After the landlord was informed the agreement had been entered into, it expressed concern that the tenant had, in fact, parted with possession of the premises and therefore was in breach of the lease.

In March 2011, the landlord served on the tenant notice to remedy a number of breaches of the lease. It also contended that the tenant had parted with possession of the premises. The defaults were not rectified within the required time, and the landlord purported to determine the lease by re-entering the premises and taking possession of them. The tenant applied to the court for relief against forfeiture.

The decision

The court held that, while Mr Mohammad had not always acted according to the agreement (and those actions might demonstrate that the tenant had parted with possession), the agreement's purpose was to 'preserve and develop the tenant's business at the premises for the common interest of the tenant on the one hand and Mr Mohammad...on the other.'2 At the same time, the parties would try to obtain the landlord's consent to the proposed assignment. If the landlord did not consent, the business would remain the tenant's.

The agreement was held to be consistent with a management agreement and, therefore, the court held that the tenant had not parted with possession. Significant factors in the court's decision were that the tenant retained keys to the premises and significant control over the business's management, and controlled its financial statements, statutory obligations and insurance obligations.

The tenant was granted relief against forfeiture, subject to complying with a number of conditions to remedy certain other breaches.

Lessons

Landlords should carefully consider all of the facts and circumstances when it believes that a tenant has parted with possession by allowing a third party to take possession of premises. In this case, the court placed significant importance on the tenant's illness. In different circumstances, such a licence or management agreement could be held to be an assignment of the lease or parting with possession of the premises.

Footnotes
  1. [2011] VSC 278.
  2. Lontav Pty Ltd v Pineross Custodial Services Pty Ltd [2011] VSC 278 at [90] per Justice Hargrave. 

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