Retail Tenants’ Right to Stop Paying Rent
- Retail tenants have a right to stop paying rent if the Premises are damaged or cannot be fully utilised.
- Care must be taken by a tenant before they stop paying rent.
- Proper evidence must be available to the tenant to substantiate the reason for not paying rent.
Retail Leases Act Rights
Under the Retail Leases Act 1994 (NSW) (Act) and under similar provisions in other States (e.g. Victoria), a tenant of retail has a right to reasonable compensation for any loss or damage caused by a substantial disturbance to its shop. If the retail shop is damaged and cannot be used or its use is affected by that damage, the tenant also has a right to reduce the payment of the rent in proportion to the reduction in the shop’s useability.
Under section 34 of the Act, a landlord is liable to pay the tenant reasonable compensation for any loss or damage (other than nominal damage) suffered by the tenant as a consequence of significant disturbance to the shop, which has an adverse effect on the tenant’s business. Section 36 of the Act provides that if the shop or the building where the shop is situated is damaged, the tenant is not liable to pay the rent and outgoings or can pay reduced rent and outgoings during the period that the shop is inaccessible because of that damage. It is important to note that parties to a retail lease agreement are not allowed to contract out section 36 with the effect of limiting any liability of the landlord in respect of the damage to the shop.
The leading cases that illustrate the right to ‘set off’ are Braxo Pty Ltd v Pialbla Commercial Gardens Pty Ltd  QSC 259 and the Phoenix Commercial Enterprises v City of Canada Bay Council  NSWSC 17. In the first case, the Court found that there is a general right of abatement that allows a tenant to set-off the damages suffered against the rent and outgoings if the premises cannot be used for its intended use and the tenant is prevented from trading. In the second case, the Court found that the right of set off requires a close connection between the payment of rent and the obligation of the landlord arising from the loss and damage suffered by the tenant.
Whilst retail tenants have a right of set off, retail tenants should be very careful in how those rights are exercised and very careful before payment of rent is stopped. The right of set off has strict rules and requires proper evidence in order to be valid. Accordingly, it is always prudent for retail tenants to seek legal advice before stopping payment of rent.
The recent case of Motevail v Moniton Proprietary Limited (Building and Property) in the Victorian Civil and Administrative Tribunal (Tribunal) emphasised the importance of providing sufficient proof when claiming a right to set off against the rent. In this case, the tenant claimed that the landlord has failed to maintain the structures of the premises in accordance with their retail lease agreement. The tenant complained about water and termite damage that made the premises unsuitable for use as a hair salon. The tenant stopped paying rent and outgoings to the landlord. The tenant claimed that he had a right to be compensated by the landlord for these defects and that he could set off this compensation against rent and outgoings. However, the Tribunal concluded that whilst the law provided a right of set off, the tenant had insufficient evidence to support his allegations. Firstly, the Tribunal found that there was no proper evidence of termite damage to the retail shop. Secondly, the Tribunal also found major problems in the evidence in the builder’s report relied upon by the tenant. The problems included the fact that the builder’s report referred to a residential property rather than a retail shop. Finally, the Tribunal accepted the evidence from the landlord that when the complaints were raised about the water leakage, a plumber was sent immediately to repair the defects and no further complaints were made after the repairs were undertaken.
Accordingly, the tenant’s claim failed due to lack of proper evidence and because he had stopped paying rent the landlord had terminated the lease and the tenant was left without any recourse.
How we can help?
The issue of disturbance and damage to a retail shop are very common issues that we see regularly in our practice in acting for tenants. We are experts in assessing Retail Lease cases and providing the right strategy to properly exercise your legal rights.
If you need further information or assistance with your retail lease, please contact Craig Higginbotham or Catherine Fox on 1300 88 33 92.
Craig Higginbotham and Richen Mojica
18 July 2019