In a recent 2:1 decision,[1] the Western Australian Court of Appeal has upheld a claim by a landlord that the tenant’s property manager acted with ostensible authority to allow the landlord to enter into the leased premises and undertake major works.

Background

We summarise the relevant facts below.

  • Telstra had leased the ground floor and first to fourth floors of a building in the Perth CBD.  The relevant lease term was due to expire on 21 March 2010. 
  • During the lease term Telstra made a decision to vacate the premises and relocate its staff to another of its leased premises.  By the end of May 2009, all of Telstra’s staff had vacated the premises.  There was approximately 10 months remaining under the lease.
  • Telstra’s property manager and agent were charged with sub-letting the vacant premises for the remainder of the lease.
  • In June 2009, Telstra surrendered the lease in respect of the ground floor area, however it was yet to sub-let the remaining floors. 
  • Also sometime in June 2009, the landlord and the property manager met and agreed that some ‘cosmetic works’, such as cleaning the balconies and renovating the bathrooms, would improve the appearance of the premises and increase appeal from prospective  tenants.  The landlord and the property manager also discussed what were considered to be ‘major works’.  The major works constituted repairs to the roof and recarpeting the floors.  The repair of the roof constituted part of Telstra’s make good obligations.
  • In mid-August 2009, the landlord commenced the major works by recarpeting the floors and repairing the roof.  While the major works were taking place, the premises could not be used by Telstra or any other tenant. 
  • On a number of occasions, the property manager inspected the premises and observed that the major works were in effect.  On one occasion, the property manager indicated that the business case was yet to be approved by Telstra, and that if it was not approved the landlord bore the financial risk in respect of the cost of the major works.  On another occasion the property manager said that recarpeting the floors was a ‘marvellous idea’.
  • In September 2009, Telstra served a notice of termination on the landlord for re-entering the premises and breaching Telstra’s covenant of quiet enjoyment.
  • In November 2009, the landlord accepted Telstra’s termination of the lease as a repudiation and subsequently terminated the lease.

The issue

While there were a number of points raised on appeal, the fundamental question was whether Telstra’s property manager consented to the landlord re-entering the premises to carry out the major works and whether he did so with Telstra’s ostensible authority.

The legal position – ostensible authority

A successful claim of ostensible authority has the effect of finding that a person (or entity) had the authority on behalf of another person (or entity) to make or refrain from making a decision, when in fact that person (or entity) had no such authority.

In this case, the landlord bore the onus of establishing the following three elements.

  1. That Telstra held out the property manager as having authority to consent to the landlord entering the leased premises for the purpose of carrying out the major works.
  2. That the landlord relied on that apparent authority.
  3. That the reliance by the landlord was reasonable.

The acts that led to a finding of consent and ostensible authority

During the term of the lease, the landlord never had any direct contact with Telstra.  Rather the landlord communicated with Telstra’s property manager, or the landlord’s agent communicated with Telstra’s property manager.

The property manager had actual authority to manage Telstra’ interests in respect of the leased premises, and that authority extended to authorising the landlord to complete the cosmetic works, but not the major works.

The property manager inspected the premises on a number of occasions and observed that the major works were being completed.  On each occasion the landlord pointed out the works that were being done, including the ceiling works.  The evidence established that both the landlord and the property manager agreed that the works would be beneficial to the presentation of the premises and could assist to secure a new tenant. 

While the property manager notified the landlord that the business case was yet to be approved and that if it was not approved the landlord may not be able to recover the cost of the major works from Telstra and while the landlord was put on notice that the cost of the major works was yet to be agreed, the property manager did not objet to the carrying out the works.

The property manager did not directly tell the landlord that Telstra had not consented to the major works being carried out at that stage.  Further, he never told the landlord that he did not have the actual authority to approve such works. 

The Court of Appeal held that it was objectively reasonable in the circumstances to infer that the property manager could authorise the landlord to enter the leased premises and carry out the works, including the major works.  As to the second element (reliance) the Court held that there was nothing that could or should have put the landlord on inquiry as to whether or not the property manager in fact had Telstra’s authority to carry out the major works.

Concluding remarks       

While this decision does not change the scope of the law of ostensible authority, it does highlight the factual circumstances in which ostensible authority can be made out.  Arguably, a case of ostensible authority would have never been made out if the property manager had merely notified (ideally in writing) the landlord that:

  1. he did not hold authority to approve the major works on Telstra’s behalf;
  2. Telstra was yet to authorise the works ; and
  3. pending such authorisation the works should cease. 

It is important to ensure that your employees and any third parties who act on your behalf are clearly instructed as to the limits of their authority.  Where these people are involved in major decisions, they must make the extent of their authority clear to the other parties involved. 

On the other hand, where parties are dealing with people who are purporting to act on another’s behalf, a prudent approach would be to ask the person to evidence the extent of their authority.