It never ceases to amaze me how often a client will reach out for my assistance on a leasing matter, well after they have signed the document. They will go down the well-trodden path of asserting that they did not understand what they signed however, it is generally too late once you have signed the document.
It is often the case that there are misunderstandings around outgoings. A well-drafted retail lease will clearly specify who is to pay for which outgoings in relation to a leased property.
However, the case of Scudooda Pty Ltd v K and E Property Pty Ltd  NSWSC 1397 (Scudooda) shows how the tenant’s misunderstanding of its lease provisions led it to act in a manner that brought them in breach of their lease. The chain of events eventually gave the landlord, K and E Property Pty Ltd (K and E), the right to terminate the lease. K and E was found to not be liable for Scudooda’s electricity costs and this ultimately proved quite costly for the tenant.
The Background and Facts
- In September 2009, Scudooda operated a restaurant and bar from leased premises in York Street, Sydney;
- Relevant clauses in the lease set out the outgoings that each party was required to pay;
- After taking possession of the premises, Scudooda organised for the supply of electricity to the premises and paid for all electricity bills;
- In November 2016, Scudooda wrote to K and E, asserting that K and E was required to reimburse them the sum of $24,043.10 for electricity bills paid up until that date;
- By 2018, Scudooda claimed that over $266,000 was owing to them for all electricity bills paid since early 2010;
- After December 2016, Scudooda stopped paying rent, and claimed it had the right to offset the electricity bills against the rent;
- In January 2018, K and E served Scudooda a notice of intended termination by default, stating that it would terminate the lease if the rent owing in the sum of $145,622.78 was not paid within seven days; and,
- Scudooda failed to do so and as a result in February 2018, K and E formally terminated the lease.
Who was Liable for the Electricity Costs?
It was found that the lease specifically excluded electricity charges from the services Scudooda was required to pay for. However, the electricity charges payable by Scudooda under the contract for the supply of electricity with its energy provider did not fall within the scope of the relevant clauses in the lease, and so K and E was not required to reimburse it.
The payment of electricity charges was not governed by the lease. It was also found that since the electricity charges for the use of the premises were not governed by the lease, a reasonable businessperson would consider the matter of arranging and paying for electricity was to be left for Scudooda to deal with.
So, was the Lessor’s Termination for Non-Payment of Rent Justified?
Since K and E was not liable for Scudooda’s electricity bills, the tenant was not entitled to set off the electricity bills against the rent and stop paying rent. In doing so, Scudooda breached an essential term of the lease and repudiated the lease. K and E’s termination of the lease on the grounds of non-payment of rent was therefore justified.
- It is essential that every lease has a well-drafted clause that covers the tenant’s liability for the provision of services such as electricity to the premises;
- Before signing the dotted line, you should ensure that you understand your rights and obligations under your lease and are happy with them; and
- One dispute or issue is not cured by creating another one, or by breaching the lease.
More particularly, I often tell my tenant clients to not withhold payment of rent as a response to an alleged breach by their landlord – if they do, they run the risk of the landlord being able to terminate.
If you need assistance reviewing the provisions in your lease that deal with liability for the provision of services to the premises and payment of outgoings, or help in understanding your rights and obligations more generally, please don’t hesitate to get in contact with Coleman Greig’s Commercial Property team: