In the decision of Allied Pinnacle Pty Ltd v G R Mailman & Associates Pty Ltd, Justice Muston confirmed the proper construction of make good obligations under a commercial lease.
The parties were in dispute over whether the lease required Allied Pinnacle Pty Ltd (Allied) to remove previously approved fit-out works, paint the external premises and completion of make good obligations specified under the lease.
His Honour found that, on proper construction of the lease, while the lease did not require removal of the fit out, it did require painting of the external premises and fulfilment of the make good obligations specified. Therefore, Allied was found to have breached the lease by not fulfilling its obligations.
Factual Background
Allied was the lessee over commercial premises located in the Western Sydney suburb of Huntingwood. The lessor named in the registered lease was originally Liberty Drive Pty Ltd (Liberty Drive). The lease commenced on 15 August 2015 and contemplated an initial term of 10 years, terminating on 14 August 2025, with an option to extend for 2 further terms of 5 years each.
GR Mailman & Associates Pty Ltd (GR Mailman) purchased the premises from Liberty Drive in late 2017. Following the transfer of title in December 2017, GR Mailman assumed the lessor’s obligations and benefits under the lease by operation of s 51 of the Real Property Act 1990 (NSW).
Allied did not exercise the option to extend and had vacated the premises by 14 August 2025.
The lease also required Allied to complete certain works prior to vacating the premises as part of its make good obligations (redecoration works).
When Allied had vacated, it left the premises in the following state:
in situ substantial internal fit out works that it had undertaken upon the commencement of its tenancy in 2015 (the 2015 fit out);
the exterior of the premises was not repainted; and
the redecoration works had not been completed in their entirety (outstanding redecoration works).
The factual basis was uncontentious. Allied accepted that the 2015 fit out had not been removed and that it did not repaint the exterior of the premises at or prior to the conclusion of the term of the lease. It also conceded that aspects of the redecoration works had not been carried out.
The central dispute of the parties turned on the proper construction of the lease.
Allied contended that, properly construed, the terms of the lease did not require:
removal of the 2015 fit out prior to vacating the premises at the conclusion of its tenancy; or
repainting the exterior of the premises as part of its make good obligations.
Allied also argued that it was not liable to GR Mailman for its failure to have undertaken the outstanding redecoration works for any, or a combination of:
a failure by GR Mailman to have mitigated its loss;
a breach by GR Mailman of duties of cooperation and good faith implied in the lease;
a repudiation of the lease by GR Mailman;
an estoppel; and/or
a wavier by GR Mailman of its right to require that Allied complete the redecoration works.
GR Mailman contended that before vacating the premises, Allied was contractually obligated to:
remove the 2015 fit out as to restore the premises to the state it was in before those works were undertaken;
repaint the exterior of the premises as part of its obligation to carry out redecoration works; and
complete the redecoration works.
Issues
Whether Allied was required by the terms of the lease to remove the 2015 fit out; and
Whether Allied was required by the terms of the lease to repaint the exterior of the premises.
Court findings
The proper construction of the lease
His Honour held that upon the proper construction of the lease, Allied was not required by cl A2.1 to remove the 2015 fit out prior to vacating the premises at the conclusion of the lease but was required to paint the exterior of the premises.
Clause A2.1 relevantly provides that upon expiry or termination of the lease, Allied is required to “…yield up the demised premises to [GR Mailman] in the state of repair and condition as is specified in this clause and consistent with the condition of the demised premises at the commencement of this Lease”.
The 2015 fit out:
His Honour accepted Allied’s construction to the meaning of cl A2.1, which construed the word ‘condition’ in reference to the standard of the premises and not its configuration. Where the word ‘condition’ had appeared elsewhere in the lease, the textual context had clearly indicated that it was intended by the parties to refer to the standard of the premises and not its configuration. In cl A2.1, there was no textual context to point to the parties having chosen to refer to the standard.
Further, cl B1(22) and cl A24 supported this construction. Clause A24 set out the specific make good obligations that were imposed on Allied. There was nothing in cl A24 that required Allied to undo any works which might have been previously approved or otherwise return the premises to the same state or configuration it was prior to such works taking place. Clause B1(22) gave Allied a right to remove ‘tenant’s fixtures’. His Honour considered that this right would have been redundant if cl A2.1 already required Allied to remove all tenant’s fixtures prior to vacating the premises as part of its make good obligations.
Therefore, Allied was not required to remove the 2015 fit out under the lease.
The painting of exterior premises:
Clause A24.3(b) expressly required that Allied paint ‘all painted surfaces’. His Honour found that there was nothing in the text of cl A24.3(b) to suggest that the parties’ reference to ‘all painted surfaces’ should exclude exterior surfaces. There were also references in the lease to ‘all internal surfaces’, which drew an express distinction from the reference to ‘all painted surfaces’ in cl A24.3(b). Further, the general fair wear and tear exclusion did not negate an express provision that required painting, otherwise it would contradict cl A24.
Therefore, Allied’s failure to have repainted the exterior painted surfaces amounted to a breach of the lease.
Outstanding redecoration works
Justice Muston rejected all Allied’s arguments for why it should be relived from liability for its failure to complete the redecoration works.
GR Mailman had not failed to mitigate its losses by not issuing a notice requiring Allied to commence the redecorating works. GR Mailman had made clear to Allied what it believed to be the full extent of the make good obligations and the dispute between the parties as to what the extent of the obligations was genuine. Therefore, it was entirely reasonable for GR Mailman to have maintained its position.
GR Mailman had also not conducted itself in such a way as to be liable for repudiation, waiver, estoppel or a breach of the implied duty to act in good faith and cooperate. Allied had made a unilateral decision not to perform the uncontentious outstanding redecoration works. Therefore, it cannot be said that any breach of the lease by GR Mailman materially contributed to Allied’s own breach of its obligations to complete those works.
Key Takeaways
Make good clauses must be read in the context of the entire contract.
Tenants are not automatically required to remove approved fit outs and may be entitled to leave alternations unless expressly required to be removed.
A failure to issue a notice under a clause was not a contractual barrier to recovery.
If you have any questions about this article or the issues it raises, please contact us:
Alicia Hill
Principal
T: +61 3 9611 0180 | M: +61 484 313 865
E: ahill@sladen.com.au
Jake Cole
Special Counsel
T: +61 3 9611 0112 | M:+ 61 413 557 157
E: jcole@sladen.com.au
Krissy Lamont
Associate
T: +61 3 9611 0175
E: klamont@sladen.com.au
This article was originally published on the Sladen Legal website: Did the tenant have make good obligations under its commercial lease? Allied Pinnacle v G R Mailman illustrates the issues.
