When retail premises are damaged, is the landlord required to abate the rent or can the landlord terminate the lease if repairing the damage is impractical or undesirable?
When premises are damaged
Retail, commercial and industrial leases in Australia commonly contain clauses that entitle a tenant to an abatement of rent and outgoings if the premises become wholly or partly unfit for occupation because of damage (not caused by the tenant), until they are repaired and again fit for occupation. The rationale for this arrangement is to preserve the leasing relationship while fairly allocating the economic burden of the damage. Without an abatement, the tenant’s obligation to pay rent would continue, even though the premises could not be used.
Termination provisions in the event of damage to or destruction of leased premises deal with a different proposition – that is, at what point is the damage so serious such that neither party should be forced to continue with the lease? Typically, if premises are destroyed or damaged to such an extent that rebuilding or repair is impracticable, impossible or undesirable, either party may terminate the lease. Instead of requiring years of repair while the lease technically continues, the clause allows one or both parties the right to terminate the lease and walk away.
When retail premises are damaged, retail lease legislation in certain states[i] incorporates provisions into retail leases providing tenants with an entitlement to a rent abatement and a right for either the landlord or tenant to terminate the lease in certain circumstances where damage or destruction has occurred. Conceptually, there is an overlap between the operation of the abatement and termination provisions, but the two rights address different legal consequences of the same event. The overlap arises because both are triggered by damage to the premises, yet one is intended to preserve the lease while the other brings it to an end. This overlap was the subject of the recent case of Get Plucked Holdings Pty Ltd v Queens Court Pty Ltd[ii]
The facts
On 1 June 2019, Get Plucked Holding Pty Ltd (the tenant) and the landlord (landlord) entered into a lease (Lease) over premises at Queens Court in Woollahra, NSW (Premises). The Premises were located on the upper floor of a two- storey heritage building. Queens Court has a rich history dating back to the 1860s. It is an iconic landmark building in an exclusive and affluent area said to be worth in excess of $30 million[iii]. Queens Court is located within the Woollahra Heritage Conservation Area and is subject to strict controls and approval processes which apply to the carrying of works such as (relevantly) the repair or replacement of a roof. The director of the tenant company, Ms Sharon Lee (Hamilton), is widely regarded as Australia's leading eyebrow artist, whose services are highly sought after by an elite clientele including Hollywood A-list celebrities and other highly influential people.
Between September 2019 and June 2022, the Premises experienced water leaks from the air conditioning equipment on four separate occasions. On 5 October 2023, following the tenant’s exercise of the option to renew contained in its lease, the Premises again experienced leaks. This caused damage to the ceiling and roof, and the landlord was advised by its builder that the roof required a full replacement. Then, between February and April 2024, the sixth instance of water ingress occurred at the Premises[iv].
Following the numerous water leaks at the Premises, on 10 April 2024 the tenant issued a Notice of Breach to the landlord. The breach notice sought a rent abatement pursuant to clause 21.4 of the Lease on the basis that the water leaking into the Premises caused an interruption to the tenant’s quiet enjoyment of the tenancy, and that the damage to the tenancy caused by the water leaks made the Premises virtually uninhabitable. Clause 21.4 of the Lease reflects section 36(1)(b) of the of the Retail Leases Act NSW 1994 (RLA). This provides that if a shop is still useable but that use is diminished due to the damage to the premises, then the lessee's liability for rent and outgoings for the diminished period of useability is reduced in proportion to the reduction in useability caused by the damage.
In response to the breach notice, on 15 April 2024 the landlord gave notice that it considered the damage to the Premises was such as to make its repair impractical or undesirable and provided 7 days’ notice of termination of the Lease in accordance with section 36(1)(c) of the RLA.
The tenant, wanting to remain in Queens Court, brought proceedings against the landlord seeking a declaration that the termination notice was null and void and of no legal effect.
The arguments
The primary issue for consideration in the legal proceedings was whether the landlord, by way of its 15 April 2024 notice, was entitled to terminate the Lease.
The tenant submitted that in its consideration as to whether the extent of the damage made it impracticable or undesirable to repair, the landlord objectively needed to act reasonably.
As a starting point, this required an analysis of the landlord’s state of mind at the time and what was known by the landlord in respect of the extent and nature of damage to the building and the necessary or likely repairs needed to rectify the damage and the commercial realities of doing so. The tenant alleged the landlord failed to objectively consider important matters such as the extent of the damage to the Premises, how that damage occurred, the cost of the repairs, whether there was any commercial utility in carrying out the repairs, the estimated time to complete repairs and whether there were restrictions on carrying out the repairs.
The tenant argued that if a reasonableness standard was not imposed in the application of section 36 of the RLA, a lessor would be entitled to terminate a lease in circumstances where it was unreasonable to do so (including where the lessor is in default of the lease) and at considerable detriment to a lessee. The tenant alleged that the landlord was at fault by allowing the condition of the Premises during the course of the Lease to deteriorate without adequate repairs to address the cause of the leaks. The tenant submitted that as the RLA is "beneficial" legislation, which is protective of lessees, an objective reasonable standard should apply to the operation of section 36.
The landlord asserted that section 36 operates on the landlord’s subjective view as to whether the extent of the damage was impracticable or undesirable to repair. It submitted that whilst that view must be formed in good faith, there is no requirement that the landlord act reasonably or take the lessee’s interests into account.
The decision
The landlord was successful in defending the tenant’s proceedings, with the Tribunal holding that it was entitled to terminate the Lease. There is no standard of objective reasonableness required to be applied by a landlord in forming the view that the damage was such that it was impracticable or undesirable for it to repair the premises. Rather, the correct test is the landlord’s good faith subjective view. The Tribunal found that the landlord did not act in bad faith or for an improper purpose in issuing the termination notice. Section 36(1)(c) does not prescribe any particular matters that a lessor is required to consider in forming the view that repair is impracticable or undesirable. The Tribunal said there was an assumption by the tenant that the sole beneficiary of the RLA is the lessee, which is not the case at all.
“The (RLA) is for the benefit of both lessors and lessees imposing restrictions and requirements on leases for retail shops and on the practices of lessors and lessees under those leases”[v].
The plain terms of section 36 provide to both the lessor and the lessee the right to terminate the lease, not just the lessor. In other words, once the lessor has formed the view that it considers it impractical or undesirable to repair the premises, then the parties should not be held to the lease and if the lessor does not terminate, then the lessee can do so. That does not make the section completely favourable to a lessor[vi].
While the landlord was ultimately successful in terminating the lease, the Tribunal did find that the tenant was entitled to an abatement of rent and outgoings pursuant to s 36(1)(b) of the RLA, which is in the same terms as Clause 21.4 of the Lease. This meant the tenant obtained a reduction in rent and outgoings proportionate to the reduction in useability of the Premises caused by the water damage. The tenant was abated for the loss of use of the Premises between the date the leak was first identified to the date on which it was rectified for the months of October and November 2023 and for the months of February 2024 and following for the days of operation being Thursday to Saturday inclusive.
2 overlaps of 2 concepts
While retail lease legislation is ameliorating or remedial legislation that should be given a broad, beneficial construction, that principle is not a trump[vii] that allows the plain language of the wording in the legislation and its construction to be disregarded and extraneous considerations to be incorporated when deciding legal meaning. Section 36(1)(c) of the RLA does not say or contain the wording or context which suggests that a lessor must be objectively reasonable in forming the view that repairing damage to premises is impracticable or undesirable.
The proper test is whether the lessor, acting in good faith and not for an improper purpose, subjectively considers the damage to be such that repair is impracticable or undesirable. The lessor’s subjective view is determinative; there is no separate requirement that the landlord act reasonably. In the Get Plucked case, the Tribunal said:
“In many respects there would be an overlap between the two concepts. If a landlord had in good faith made an assessment that repairs to the property were impractical or undesirable because of the damage (and not because of an extraneous or improper purpose), it is difficult to see how such a decision would be objectively unreasonable in most circumstances”[viii].
The relationship between abatement clauses and termination rights in retail leases where leased premises are damaged is often misunderstood. Although both are triggered by damage to the premises, they serve different purposes and operate sequentially rather than as mutually exclusive remedies. Their reconciliation depends on the terms of the lease and the statutory framework under retail lease legislation. An abatement clause addresses a lessee's obligation to pay rent where the premises become unusable because of damage - the clause allocates the economic risk during the period in which the lease continues. A termination clause, by contrast, determines whether the lease itself should come to an end because the damage is sufficiently serious such that repair or reinstatement would be prolonged.
An abatement assumes the lease continues. Termination ends the lease prospectively. Accordingly, there is no inherent inconsistency between the two rights.
[i] NSW, Victoria and the Northern Territory.
[ii] [2026] NSWCATCD 3
[iii] Paragraph 23.
[iv] I acknowledge the assistance of Katherine South in the preparation of this article.
[v] Paragraph 71.
[vi] Paragraph 72.
[vii] Leeming JA in Sydney Seaplanes Pty Ltd v Page [2021] NSWCA 204; (2021) 106 NSWLR 1; 393 ALR 485 at [85]
[viii] Paragraph 53.
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