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2. Leases - Covenants

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L EASES —Covenants A covenant is a term of a lease imposing an obligation upon one of the parties • Express covenants • Covenants implied through— o Common Law, based on—  The lessor/lessee relationship  The need to give business efficacy  Implication of usual covenant o Statute o General contractual principles Quiet Enjoyment & Non-derogation from Grant (Lessor) Aussie Traveller P/L v Marklea QCA per MacPherson J (carpenter, joiner, wood-turner tenants in same bldg—partitions did not reach roof | roller doors between areas kept open for ventilation → staff sick from dust | difficulty talking to customers due to noise  breach of implied covenant to allow quiet enjoyment) • Covenant by the lessor to allow lessee quiet enjoyment (QE) and = not to allow interference with the enjoyment of possession • non-derogation from the grant (NDG). = not to render premises materially unfit for the purposes for which the lease was granted ← There is little distinction between the two covenants • Reservations to this implied covenant must be express in the lease o Landlord’s right to enter & repair, enter & inspect, etc • Cannot be excluded by contract: Martin v Hotel Mayfair Breach • Breach by lessor— o Test—whether there has there been a substantial interference with enjoyment/business: Aussie Traveller (dust & noise adversely affecting plaintiff’s business  breach of QE term) o No obligation in respect of conditions of premises known or ascertainable at start of tenancy: Aussie Traveller (leaking of roof, lack of ventilation, intolerable heat of premises) • Lessor may be liable for breach caused by a third party lessee (on adjacent property) where — (Aussie Traveller) o the lessor could have controlled the problem by enforcing the covenant against the rd 3 party (even if they didn’t know of or authorise the conduct): Aussie Traveller (both leases contain an undertaking not to cause a nuisance to the other tenant— lessor need not be active to be in breach—if remiss or condoning situation) o a complaint has been made and the lessor has refused to act: Aussie Traveller (continued complaints by first tenant—no action by landlord  breach of NDG implied covenant by landlord) rd o the nuisance was foreseeable when the premises were let to the 3 party  From previous dealings with third party (knows what 3 party will require to be done on land) Aussie Traveller (had dealt with party previously and knew that dust extractor would be required, causing sawdust outside premises)  Nuisance was reasonably foreseeable • eg knowledge of construction, demolition, etc & impact on business 1 (1) Leases—Covenants Andrew Trotter LWB244 Property B • Examples of breach Aussie Traveller o Damaged stock (dust settling on goods causing damage);  Martins Camera Corner v Hotel Mayfair (Clause excluding liability of L for damage arising out of water overflow  L remained liable for breach of QE) o Conditions made difficult by incompatible tenants (noise prevented employees from talking to customers on the phone)  Norton v Blue Port Enterprises (Brothel on floor above plaintiffs, same landlord—clients abusing employees | urinating on plants | preventing access | noise | odours | brothel illegal → beyond mere inconvenience—impossible to operate  breach of QE by landlord) o High turnover in workforce o Reduced efficiency and profitability (employees regularly off sick due to dust) o Generally unpleasant (dust & noise) Other examples o Removal of windows by lessor: Lavender v Betts o Cutting essential services  Gas & electricity: Perera v Vandiyar  Fire sprinkler system: Kohua Pty Ltd v Tai Ping o Throwing property into street (wrongful eviction): Musumeci v Winadell o Intimidating, threatening or abusing lessee: Kenny v Preen o Noise: Southwark London Borough Council v Mills (lack of noise insulation in old building) o Impeding access of customers etc:  Lift & escalator: Karaggianis v Malltown (lift & escalator to restaurant— landlord decided to stop operating lift beyond 2 floor—restaurant on 6th floor loses business  breach of QE);  Path: JC Berndt v Walsh (Alterations to adjacent property obstructing customers); Vasile v Perpetual Trustees (access to coffee shop); o Damage caused by demolition works on adjacent block: Lend Lease Developments v Zemlicka o Reduction in essential air flow: Aldin v Latimer Clark (to a timber business caused by works on adjacent block) • Not a breach: o Invasion of privacy: Browne v Flower (staircase outside tenant’s window) Extent of Damage Required • Physical effects not required: Aussie Traveller (MacPherson J overruled older authorities) • Not relevant that business was still operating / had not become uneconomically viable: Aussie Traveller (MacPherson J overruled older authorities) o Although practical frustration of lease may be necessary where an injunction is sought Remedies • Damages to extent of value of repair of equipment / compensation for inability to operate business, etc • Refer below (1) Leases—Covenants 2 Andrew Trotter LWB244 Property B Not to Assign without Consent (Lessee): s121 PLA • leases are a form of property → assignable. o Assignment—lessee assigns whole of remainder of lease to a third party o Sublease—lessee transfers part of the remainder of lease to a third party Term in the Lease • Lease silent as to assignment → may be assigned without consent of lessor • Covenant not to part with possession → may grant a license but not a sub-lease over the property—legal parting with possession will suffice (physical parting not necessary): Lam Kee Ying v Lam Shes Tong (T & Partners formed company—company took possession of land | transferred telephone, electricity to company name | company gave cheque for rent  lease granted → covenant broken) o Cheque given for rent → lease o Telephone, electricity etc transferred → lease ← even though company and people in essence the same • Lease contains clause prohibiting assignment → no right to assign or sublet | lessor cannot be forced to consent o Lessor may waive benefit of absolute covenant and permit an assignment: s119 PLA (but question of unreasonable refusal not relevant) • Lease contains clause requiring consent → must obtain consent o Consent not obtained—Failure to ask for consent is a breach of covenant even if there are no reasonable grounds for withholding such consent: Barrow v Isaacs o Consent refused—action by lessor can be contested if refusal was unreasonable  If sublease not yet assigned—can (a) proceed and contest later | (b) seek declaration of court  Sublease assigned—consent is not to be unreasonably withheld: s121(1)(a)(i) PLA Determining whether refusal is unreasonable A contract— • cannot exclude the prohibition against unreasonable refusal of consent: s121(1)(a) (despite any express provision to the contrary) • can frame the covenant not to assign as absolute • include a precondition that the lessee must first offer to surrender the lease: Creer v Lines of Australia o ← if offer to surrender accepted, lease comes to an end o ← if offer to surrender rejected, lessee may only assign with consent—lessor may only refuse on reasonable grounds • Can stipulate what is considered to be reasonable refusal, although this will not prevent the operation of s124: Daventry Holdings v Barcalakis Test • Narrow view—Landlord’s concern is only with the subject matter of the lease → landlord nd may only consider the character of the 2 Tenant or their proposed use of the property: Houlder v Gibbs (potential loss of good tenants on adjoining property = reason for refusal) • Wide view—Landlord may consider any financial effects on their position of the assignment —but not to achieve some collateral purpose wholly inconsistent with the lease: Pimms v Tallow Chandlers applied in Qld by McBeath Nominees 3 (1) Leases—Covenants Andrew Trotter LWB244 Property B Considerations • Open to the court to consider that the reason given is not the real reason: McBeath o If a condition is imposed that creates a collateral advantage to the landlord then this may counter the reasonableness of a reason for refusal: McBeath Nominees (refusal because T2 might not be capable of paying rent—but L would accept if T2 paid a higher amt of rent & longer term  condition indicated collateral advantage); Bromley Parker Estates v Moss (withheld consent in hope that amalgamation of tenancies would give better rent—not based on character of assignment → collateral purpose  unreasonable) o BUT if condition creating the advantage is within the lease → refusal reasonable, McBeath distinguished • Question of reasonableness depends upon information actually available to landlord—lessee cannot rely upon any other information: Daventry Holdings v Bakalakis per Thomas J Examples • Reasonable under both views— o Due to lack of relevant information to make informed decision: cf. Daventry Holdings v Bakalakis  Eg sometimes profit/loss statement | certificate of solvency from accountants  U NLESS information is irrelevant or lack of information used only as an excuse for some other motive | merely for delay → unreasonable under both views: Daventry Holdings v Bakalakis (actually trying to pressure lessee into leaving fixtures behind) • Reasonable under Wide View only— o Tenant’s potential inability to pay rent (relevant to L’s financial position but not directly to nature of T2)  T2 may not be able to operate business, pay interest expenses & rental with adequate profit margin: McBeath Nominees (similar reasoning)  May examine—financial standing | reputation | requisite experience etc o T2’s future use of property interfering with business (eg losing good tenants, reducing income, leaving opening at another lot—relevant to L’s financial position but not directly to T’s proposed use of premises) o Disadvantage suffered by lessor  Although possibly unreasonable if small and out of proportion with disadvantage to lessee on refusal: International Drilling Fluids v Louisville • Unreasonable under both views— o Based on personal dislike, etc (not related to use of property or to financial concerns) o No reasons—no obligation to give reasons for refusal, but failure to do so may lead to an inference of capricious refusal: Secured Income Real Estate v St Martins o For lack of information—where it is irrelevant or used only as an excuse for some other motive → unreasonable under both views: Daventry Holdings v Bakalakis (actually trying to pressure lessee into leaving fixtures behind) o If a condition is imposed that creates a collateral advantage to the landlord then this may counter the reasonableness of a reason for refusal: McBeath Nominees (refusal because T2 might not be capable of paying rent—but L would accept if T2 paid a higher amt of rent & longer term  condition indicated collateral advantage); Bromley Parker Estates v Moss (withheld consent in hope that amalgamation of (1) Leases—Covenants 4 Andrew Trotter LWB244 Property B tenancies would give better rent—not based on character of assignment → collateral purpose  unreasonable) Effect • if unreasonable → assignment valid → no breach • if reasonable refusal → assignment invalid → breach of covenant → damages (eg loss of sale of business) o Landlord has right to forfeiture  Forfeiture clause in contract or  Right to re-enter and take possession implied in PLA: s107(d) [See Chronology flow below] o Must serve notice to Remedy: s124 PLA (specifying breach, allowing reasonable time)  Requirement of reasonable notice cannot be excluded in lease: s124(9) PLA  Lessor may waive right to forfeiture if— (World by Nite v Michael; Matthews v Smallwood) • Single breach—rent accepted in spite of breach • Continuing breach—may be waived if failure to act on notice & continued acceptance of rent Effect on Mortgagee • Registered Long lease (>3yrs: Sch 2 Dictionary LTA) o After mortgage → not binding on mortgagee s66 LTA  unless consent granted prior to registration o Before mortgage → binding on mortgagee: s184(1) LTA • Equitable long lease → not binding on mortgagee: s184(1), o even on actual or constructive notice: s184(2)(a) o UNLESS exceptions to indefeasibility—fraud s185(3)(b) | in personam s185(1)(a) • Short leases (<3yrs: Sch 2 Dictionary LTA) → binding upon incoming mortg
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