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Case Law: Is a new landlord liable for breaches of lease by a previous landlord?

5 min read
15 December 2022

Key Takeaways

  • A new landlord does not become liable for an unremedied breach of a lease covenant by a previous landlord pursuant to s 62 of the Land Title Act 1994 (Qld).
  • Likewise, a new landlord will not become liable by reason of a covenant given to the tenant in a deed of covenant, where the proper construction of the covenant is to impose an obligation to perform the terms of the lease which are to be performed after settlement.
  • It is at least reasonably arguable that a covenant giving a tenant the right to set-off costs of remedying a landlord’s breach of covenant against the rent payable runs with the land, and therefore any such costs attributable to a breach by a previous landlord could be set-off against rent payable to a new landlord.

Case Summary: Bank of Queensland Limited v Y & L Promising Pty Ltd [2022] QCA 217

The appellant, Bank of Queensland Limited (“BOQ”), was the tenant of a commercial premises currently owned by the respondent, Y & L Promising Pty Ltd (“Y & L”). The lease to BOQ was granted in 2016 at which time the land was owned by a different, unrelated entity. In March 2020, the then-owner sold the land to another unrelated entity, who then sold the land in July 2021 to Y & L.

The Lease provided that:

  1. The tenant was not responsible for any residual asbestos present in the premises.
  2. In the event asbestos was found in the premises during the term or any further term, the landlord must remove it (at its cost) and would be liable for any costs incurred by the tenant in its removal.
  3. If the landlord defaults under the lease and fails to remedy the default to the tenant’s reasonable satisfaction after the tenant providing notice to do so, the tenant may (without limiting its other rights) either:
    1. remedy the breach and the landlord must pay the tenant’s reasonable costs of doing so as a liquidated debt within seven days after demand, or the tenant may set off the costs against the rent and other monies payable by it under the lease; or
    2. terminate the lease by notice to the landlord.

In August 2017, asbestos was found at the premises. BOQ asked the then landlord to remove the asbestos. After the then landlord failed to remove the asbestos, BOQ at its cost of $193,000.00 caused the asbestos to be removed. The then landlord did not reimburse BOQ. When the land was sold in March 2020, similarly, the new landlord did not pay the cost of remediation on demand by the tenant. In July 2021, on transfer of the property, a Deed Poll in favour of the tenant was entered which operated to bind the new owner, on or after settlement date, to:

  1. abide by the terms of the lease on the part of the landlord; and
  2. observe the provisions of the lease which otherwise do not touch and concern the land (i.e those covenants or obligations – positive or negative – which do not inherently relate to the land or the manner it is used, or where it affects the landlord or the tenant under the lease).

Following settlement, BOQ demanded payment from Y&L (which was refused by Y&L) and consequently BOQ commenced legal proceedings. BOQ claimed that as a consequence of the change in ownership of the land between several parties in reliance on s 62(1) of the Land Title Act 1994 (Qld)[1] and the terms of the Deed Poll, all liabilities in relation to BOQ’s damage from breach of lease regarding the costs of remediation works vested in Y&L. This claim was summarily dismissed by the trial judge and BOQ appealed the decision.

On appeal, there were three main issues/grounds of appeal put forward:

  1. Whether the breach of the lease (as summarised above) occurring prior to the transfer of ownership was a liability “in relation to the lot” for the purpose of section 62 of the Land Title Act 1994 (Qld).
    1. It was held that on the proper construction of Section 62, the completed breach was not a liability “in relation to the lot” and BOQ’s appeal on this ground failed.
  2. Whether it was intended for Y&L to assume liability for the debt which had accrued before the transfer.
    1. On the basis of the Deed Poll, BOQ argued that Y&L had contractually agreed that it would be liable for damages arising from the prior breach of covenant despite the liability to pay damages not necessarily “running with the land”
    2. Despite the court acknowledging that BOQ has a continuing cause of action in debt against the owner of the premises prior to Y&L (derived from the default clauses under the Lease), it was held that the objective language in the Deed Poll:
      1. did not suggest that Y&L intended to assume the prior owner’s debt liability which had accrued before the transfer of land to Y&L; and
      2. instead, was to ensure that Y&L would comply with the provisions of the Lease from the Settlement Date, and therefore the Deed Poll did not operative retrospectively.
    3. This ground of appeal also failed.
  3. Whether BOQ’s right to set-off the costs against the rent and other monies payable by it under the lease was transferred to Y&L by the Deed Poll or by virtue of s 62 of the Land Title Act 1994 (Qld).
    1. BOQ was allowed the appeal on this ground and were given the opportunity to amend its pleadings. The court considered it was at least reasonably arguable that:
      1. BOQ’s right of set-off conferred by the Default clause under the lease gave rise to a personal liability on the part of the prior owner which was incidental to the present and future ownership of the land. The personal liability affected the amount of future rent which the prior owner would be entitled to recover from BOQ and, on that basis, was intimately connected with, or normally incident to, the right of ownership being transferred; and
      2. Unlike the prior owner’s accrued liability to pay damages for its completed breach, the liability to have future rent payments reduced by reason of the contractual set-off did not exist independently of the lease obligations; and
      3. The liability created by the right of set-off had a sufficient connection to the ownership interest that it could properly be described as a liability “in relation to the lot” for the purposes of Section 62.

We can provide advice on a wide range of property and leasing matters. If you require our assistance, please do not hesitate to contact us via email or call 07 3220 1144.

[1] which states, in short, that on transfer of a lot, all the rights, powers, privileges and liabilities of the transferor in relation to the lot vest in the transferee.

The information in this blog is intended only to provide a general overview and has not been prepared with a view to any particular situation or set of circumstances. It is not intended to be comprehensive nor does it constitute legal advice. While we attempt to ensure the information is current and accurate we do not guarantee its currency and accuracy. You should seek legal or other professional advice before acting or relying on any of the information in this blog as it may not be appropriate for your individual circumstances.

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