March 2018

Landlords beware: encouraging an expectation in tenants of a grant of a lease

What happens when a tenant spends big money on upgrading premises, believing a lease is about to be granted or renewed?

If that belief is reasonable, and the landlord denies the lease, the landlord may be liable to pay compensation to the tenant.

The Pin Oak decision

The Supreme Court of Victoria – Court of Appeal recently considered the case of a tenant who had spent nearly $115,000 upgrading its restaurant, based on the landlord’s promise to grant a new lease.

In Risi Pty Ltd v Pin Oak Holdings Pty Ltd [2017] VSCA 317, Pin Oak leased the ground floor of a building in Moonee Ponds, Melbourne to Risi for the purpose of a restaurant.

In the final year of the lease, Risi sought a new lease from Pin Oak. The parties and their solicitors exchanged correspondence regarding a new lease of 3 years with 2 further options of 5 years each. This culminated in the landlord finalising the lease and delivering execution copies to the tenant. The tenant executed the lease and returned the lease to the landlord, but the start date of the lease was not agreed.

The tenant and landlord discussed the renovations which the tenant proposed to carry out in the restaurant, after which the tenant spent nearly $115,000 on those works.

The landlord never signed the lease. A dispute then arose between the parties and the landlord gave the tenant notice to vacate the premises.

The question which the Court of Appeal considered was whether the landlord was prevented (or estopped, to use the legal term) from denying a new lease because:

  • it had induced the tenant to assume it had the benefit of the lease; and
  • the tenant had acted on that assumption to its detriment.

Established principles typically require the estopped party (the landlord in this case) to make good on the expectation it has encouraged. But there are exceptions!

Where a party’s expectation or assumption is uncertain, extravagant or out of all proportion to the detriment it has suffered, the court should recognise that the party’s equity may be better satisfied in another, possibly more limited, way. In this case, the Court concluded that granting a new lease for 3 years with 2 further options of 5 years each would have been out of all proportion to the detriment the tenant had suffered in spending what it did on renovations.

For this reason, the Court affirmed the decision of the primary judge that the tenant’s detrimental reliance could be entirely ameliorated by awarding compensation and interest.

Concluding remarks

The Court will not necessarily order a landlord to make good its promise and grant the lease, but may instead award compensation if that will compensate the tenant sufficiently. Although the landlord was successful in this case, it was still ordered to compensate the tenant the renovation costs, which it could have avoided if it had not led the tenant to believe it would grant a new lease. It is important for landlords to realise that they may be liable for pre-contractual representations which they make. 

If great care had been given to the lease negotiations and if the parties had entered into an agreement for lease regarding the renovations, the result in this case would have been avoided. 

To ensure that there is no dispute as to whether a tenant has a lease of premises, the lease should be finalised and executed by both parties before the tenant is given possession of the premises. This is especially important when a tenant proposes to undertake works on the premises.

Author: Peter Barakate