What happens when the lessor defaults?

Posted on Apr 10, 2017 by Terry Morgan   |   Categories: Commercial & Retailing Leasing

We are all familiar with the difficulty that is sometimes faced when a tenant does not observe the terms of a lease particularly in the area of maintenance and repair of the leased premises.

It is less frequent to encounter a situation where a tenant complains that a landlord has not maintained the premises in accordance with the terms of a lease.

In a recent decision of the Supreme Court of New South Wales Court of Appeal a tenant complained that the lessor was in breach of the lease in that the lessor had not complied with a positive covenant to maintain the premises in good condition and serviceable repair and to paint and varnish parts of the leased premises.

The terms of the lease required the lessor to maintain the leased premises and in particular, required the lessor to paint and varnish part of the premises within certain time frames. The lessor did not comply with those obligations.

The tenant applied to the Supreme Court of New South Wales and was successful in obtaining a judgement against the lessor for damages to carry out the work which the lessor was obliged to carry out pursuant to the terms of the lease.

The tenant was successful before a single judge and the landlord appealed to the New South Wales Supreme Court of Appeal.

The Court of Appeal confirmed the decision of the judge at first instance in confirming the order for damages payable by the landlord in circumstances where the tenant had not yet incurred the costs of carrying out the works which were to be carried out by the lessor in accordance with the terms of the lease.

In essence the court ruled that the tenant was entitled to damages against the lessor on the basis that the tenant was entitled to damages for an amount of money required to put the tenant in the position it would have been, had the lessor performed the painting and repair covenants pursuant to the lease.

The award of damages was made notwithstanding that the tenant had not, at the time of the decision, actually incurred the cost of carrying out the work which was the responsibility of the lessor.

Whilst the same argument is able to be applied to a tenant not carrying out its obligations to maintain the premises in this particular case there was a positive covenant on the lessor to effect certain repairs to the premises from time to time and as the lessor had defaulted in that positive covenant tenant was entitled to an award of damages.