Key Points:

Inducements made before entering a lease can give rise to equitable claims – so landlords and leasing agents should be careful.

Landlord and tenant negotiations can often result in encouragement or assurances being provided to the tenant, even on a casual basis. This recent decision of the Victorian Supreme Court of Appeal sends a warning to landlords and their agents that these representations made to tenants (whether written or oral) can have important implications.

In Cosmopolitan Hotel (Vic) Pty Ltd v Crown Melbourne Limited [2014] VSCA 353, the landlord sought to lease two premises for five year terms, and required any prospective tenants to undertake significant refurbishments of the sites.

The tenant had expressed that it was unwilling to enter the leases and outlay the funds required for the refurbishment without the security of ten year tenancies. To allay these concerns, the landlord and its agents advised the tenant over a series of negotiations that it would be "looked after at renewal time".

The leases gave the landlord an option to renew the leases (on terms that it specified) or to terminate the leases after the five year term. When the initial term expired, although the tenant had completed the required refurbishments, the landlord required it to vacate the premises.

The tenant brings proceedings

The tenant sought a declaration from the Victorian Civil and Administrative Tribunal (VCAT) that, given the landlord's representations regarding renewal, it was required (either under promissory estoppel or creation of a collateral contract) to offer a renewal of the leases, and its failure to do so entitled the tenant to compensation.

The Tribunal accepted this argument, finding that the statement the tenant would be "looked after at renewal" created a collateral contract under which the landlord agreed to exercise its option to renew the leases.

The landlord appealed, and the Victorian Supreme Court rejected all of these findings, determining that there was no collateral contract and that the representations did not have effect in promissory estoppel.

"Looked after" = a promise in equity

The tenant appealed to the Court of Appeal on the basis of its original arguments before VCAT.

On appeal, the Court did not accept that the landlord's promises had created a collateral contract to renew the lease. Chief Justice Whelan reasoned that landlord's representation was not intended to be a binding contractual obligation, and the meaning of the promise that the tenant would be "looked after" was also not sufficiently certain to found a contract. In any case, a collateral contract is not capable of limiting the rights of the landlord under the main contract (being the leases).

However, the Court found that although the landlord's representation could not amount to a contract, it was sufficient to found a claim in estoppel. As for any estoppel claim, the tenant needed to establish that:

  • it held an assumption of fact that it would be "looked after" when its leases expired;
  • the assumption was reasonable in the circumstances; and
  • it was induced to hold that assumption by the landlord's conduct.

In this case, in circumstances where the tenant had sought repeated assurances from the landlord about the renewal of the leases, its belief that the landlord would renew the leases was a reasonable assumption, which the landlord had deliberately induced by its statement.

The Court remitted the matter to VCAT to determine what equitable relief, if any, should be granted.

Implications for landlords

Although decided in Victoria, this case turned on equitable principles that are shared across States and is likely to be important in all jurisdictions.

It is yet to be seen whether any consequences will arise out of this for the landlord, nonetheless, it has now been confirmed in a superior court that inducements made before entering a lease can give rise to equitable claims.

In commercial leasing it has long been common for landlords or their property agents to offer oral encouragement to prospective tenants that may never be drafted into the agreement for lease or the lease itself. In particular, a landlord or agent indicating the likelihood of granting the tenant further lease terms is unexceptional in lease negotiations.

This case demonstrates that whether inducements you offer can found a claim for equitable relief will depend on the circumstances, such as:

  • whether the inducement was an offhand remark or repeated assurances;
  • who was making the promises; and
  • whether the landlord knows the promise is key to the tenant's decision to enter into the lease.

It is certainly an issue that landlords and their leasing agents need to consider carefully.