20 May 2019

Landlords and tenants getting hot under the collar over air conditioning

Tenants of commercial premises in Australia rely heavily upon the use of air conditioners to ensure their comfort, health and safety whilst at  work. In a previous decision, the Victorian Civil and Administrative Tribunal found that a landlord’s failure to repair an air conditioning unit amounted to a repudiation of a lease by the landlord thus allowing the tenant to terminate the lease.  This decision has now been reversed by the Supreme Court of Victoria.  

Judd Last, Partner considers the decision of Pepper Property Group Pty Ltd v S 3 Sth Melb Pty Ltd [2019] VSC 41.

S 3 Sth Melb Pty Ltd (the tenant) and Red Pepper Property Group Pty Ltd (the landlord) entered into a lease of retail premises as a pilates and barre studio in South Melbourne.   The lease contained, amongst others, the following relevant special conditions relating to the air conditioning unit:

  • the landlord would install air conditioning to service the premises;
  • the tenant was responsible for taking out a maintenance contract on the air conditioning and having it serviced every 6 months; and
  • provided the tenant had complied with its obligation to take out a maintenance contract and have the air conditioning unit serviced every 6 months, the landlord was responsible for any capital repairs.

The parties also agreed to recommission the existing air conditioning unit.

During the first year of the lease the air conditioning failed several times. By May 2017, the air conditioning had only worked for 20 minutes at a time.  Between May and June 2017, the tenant notified the landlord of several air conditioning failures, including by providing a technician’s report showing that the air conditioning unit was beyond repair and required works to be undertaken to the value of $80,000. 

In response, and relying upon the special conditions in the lease, the landlord stated that it was the tenant’s responsibility to maintain the unit and inquired as to whether the tenant had taken out a maintenance contract on the air conditioning unit.

The parties were unable to resolve the dispute and the tenant subsequently terminated the lease alleging that the landlord had repudiated the lease.  Subsequent to the lease being terminated, the landlord engaged technicians which revealed that the only issue with the air conditioning unit was a faulty fan which was replaced at minimal cost.

VCAT Decision

At first instance, VCAT determined that the landlord had a continuing obligation to maintain the air conditioning unit and that its failure to provide the air conditioning was a fundamental breach of the lease.  As such, the landlord was found to have repudiated the lease.

Appeal to the Supreme Court of Victoria

The landlord successfully appealed the VCAT decision stating that it incorrectly determined that:

  1. the landlord’s obligation to install air conditioning was an ongoing obligation to provide air conditioning;
  2. that obligation was a fundamental breach of the lease; and
  3. the breach amounted to a repudiation of the lease.

In relation to these issues, the Court found in favour of the landlord as follows:

  1. the landlord’s obligation to install air conditioning was not an ongoing obligation under the lease.  Instead, the landlord’s obligation pursuant to the special conditions was to install the air conditioning unit at or within a reasonable time after the commencement of the lease and did not require a new air conditioner unit to be installed.  Had the parties intended for a new unit to be installed, that ought to have been specified in the lease.
  2. there was no specific time within which the landlord was required to comply with the obligation to install the air conditioning.  The failure of a landlord to correct a minor repair is not a serious matter which justifies repudiation of a lease, particularly in circumstances where the tenant could have easily repaired the air conditioning unit and claimed the cost from the landlord.
  3. a landlord’s obligation to repair does not arise until the tenant notifies the landlord and that such notice must specify the nature of the defect and why it is the landlord’s obligation to repair it.  In these circumstances, the tenant’s emails to the landlord did not amount to notice as they failed to address the landlord’s obligation to repair the air conditioning unit. The Court also held that the tenant’s failure to take out a maintenance contract in relation to the air conditioning amounted to the tenant not being willing or able to perform the lease and disentitled the tenant from relying upon any breach by the landlord.

The obligations of tenants and landlords in relation to air conditioning can often result in costly and lengthy disputes. Given the importance of air conditioning in Australia’s climate, the cost to install and maintain those units, and to ensure the health and safety of employees and parties using the buildings and premises, it is very important that any lease clearly identifies each parties’ obligations and responsibilities in relation to the installation, maintenance, repair and replacement of air conditioning units and systems. It is also important for parties to understand that any failure to satisfy a precondition in a lease may prevent them from obtaining relief under the lease.

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