HG Alert: Landlords - Check Before You Terminate - Jun 2009

The implications of the New South Wales Supreme Court’s decision in Symbion Medical Centre Operations Pty Ltd v Lawton Pty Ltd are likely to be significant in commercial leasing disputes as the impact of the global financial crisis increases.

The decision confirms that unless a lease contains a positive obligation for the tenant to carry on business from the premises, tenants of shopping centres will not be in breach if they cease trading and move out during the term of the lease.

This decision is a reminder for all landlords and their lawyers to not only include a positive obligation in the lease on the tenant to carry on business in the premises, but also to seek legal advice before taking steps to terminate a lease on that basis.

The facts

Lawton Pty Ltd leased to Symbion Medical Centre Operations Pty Ltd a suite that was used as a medical centre on the ground floor of a building known as the Barwell Centre. The lease was for a term of five years.

Around March 2008, the shares in Symbion were acquired by Primary Health Centre Care Limited through a hostile takeover. As Primary owned a medical centre in Castle Hill, it closed the Barwell Centre medical practice prior to 25 April 2008. At that time, with the exception of a dentist, no medical practice was conducted at the Barwell Centre, even the furniture and medical files were removed.

On 5 August 2008, Lawton served a notice of breach of covenant under section 129 of the Conveyancing Act (NSW) on Symbion. The notice contained particular reference to a covenant in the lease which required Symbion as lessee not to:

Use or permit or suffer to be used, the Leased Premises in any noisy, noxious, immoral or offensive manner or do on the Lease Premises or the Centre anything which in the Lessor’s reasonable opinion may be or become a nuisance hazard disturbance or cause damage to the Lessor, its tenants or other persons in or using the Centre or neighbouring properties.

The notice then alleged that on 25 April 2008, without notice or explanation to Lawton, Symbion breached that covenant by abandoning the leased premises or otherwise vacating, ceasing to occupy or use them as a general practitioner centre, and had since ceased to operate any business on the leased premises but had left them vacant. The notice required Symbion to remedy the breach within 14 days.

Symbion denied that it was in breach of the Lease. Lawton subsequently served a notice of termination of the lease and retook possession of the premises.

The decision

Justice Brereton stated that clear words are required where it is sought to impose on a tenant a positive obligation to maintain a business or actively use premises.

His Honour determined that while clause referred to in the lease was a prohibition on certain uses of premises, or on doing positive acts on the premises, it did not impose a positive obligation to maintain the business.

Furthermore, His Honour found that a prohibition on “doing anything which in the lessor’s reasonable opinion may cause damage to the lessor” does not cover ceasing to conduct any business at all.

Accordingly, as ceasing to carry on business was not a breach of the lease, there was no basis for Lawton to terminate the lease. Symbion was granted an injunction by the Court, restraining Lawton from interfering with Symbion’s use and occupation of the premises. Lawton was also ordered to pay Symbion’s legal costs.

Practical effect for landlords

The decision of Symbion Medical Centre Operations Pty Ltd v Lawton Pty Ltd highlights the importance of putting in place sophisticated lease documents that cover this issue in the appropriate circumstance, and also to seek expert legal advice before terminating a lease. Failure to validly terminate a lease can have serious consequences for a landlord, including exposure to significant damages claims and legal costs orders.

As tenants are increasingly leaving premises due to financial difficulties, often without having paid rent, this issue is likely to arise on a regular basis.

For further information regarding your entitlements to terminate a lease, or require any assistance in updating your lease documents, please contact HopgoodGanim specialists in Commercial leasing, and Litigation and Dispute Resolution.