Can a landlord recover unpaid components of rent even though the invoices were incorrect?

Commercial landlords should ensure that invoices issued to tenants for rent and outgoing amounts include:

• the correct GST component
• any rent increases that are entitled to be charged
• all outgoings that are entitled to be charged.

The invoices should also be issued in a timely manner and in accordance with any procedures set out in the lease. Likewise, tenants should ensure that they understand whether the rent amount invoiced and paid is inclusive or exclusive of GST, in compliance with the lease terms, and that all rent increases and outgoings are charged, otherwise tenants run the risk that the landlord will seek to recover those amounts down the track. The issue of such invoices was considered by the Supreme Court of New South Wales in the case of Shimden Pty Ltd v Park Pty Ltd [2022] NSWSC 267.

Factual background

In 2008, the tenant entered into a 6-year lease of a service station and convenience store at Granville.  The lease expired on 30 November 2014, with an option to renew for a further term of 7 years.  Whilst the tenant sought to exercise the option in 2014, no new lease was ever executed by the parties.  The landlord subsequently sold the premises in 2019, and the tenancy came to an end. The claim Just prior to the sale, the landlord commenced proceedings against the tenant for amounts of rent and outgoings it claimed were payable pursuant to the terms of the lease.  These amounts consisted of:

• The GST component of the rent, on the basis that the rent specified in the lease was exclusive of GST, not inclusive – the landlord noted that invoices were erroneously issued on a GST inclusive basis, rather than a GST exclusive basis.
• The rent increases over the term of the lease – the lease provided for CPI rent reviews each year, which the landlord failed to claim.
• Outstanding outgoings – again, the landlord failed to claim 80% of its land tax and insurance costs as it was entitled to under the lease.

The tenant argued that the claimed amounts were not payable, or in the alternative, the landlord is estopped from claiming such amounts.  The tenant also raised a defence under section 14 of the Limitation Act 1969 (NSW). It appears that in October 2017, the landlord conducted a review of the lease and only then became aware that the tenant had not been paying the correct rent and outgoings.  The landlord then sent a letter to the tenant about this, although the tenant denied ever receiving the letter.  The Court was not convinced that the letter was in fact sent. Nevertheless, it appeared that another letter was sent to the tenant in February 2018.  The tenant again denied receiving the letter, but the Court in this instance accepted that the letter was received. In November 2017, the tenant received a notice from the Australian Taxation Office (ATO) which stated that because the landlord owed a very substantial amount to the ATO, the tenant was to make payments directly to the ATO, rather than the landlord. Following the February 2018 letter, correspondence between the parties continued into 2019 regarding the claim for unpaid rent and outgoings.

The Court’s decision

The Court noted that the rent amount noted in the lease was silent as to whether it was GST inclusive or exclusive, even though it was commonly accepted that the supply made by the landlord to the tenant was a taxable supply on which GST is payable. Noting the terms of the clause in the lease which provided for GST to be payable in addition to the rent amount, the Court agreed that the GST component was payable by the tenant, in addition to the specified rent amount. In dealing with the tenant’s estoppel argument, the Court noted that the invoices issued to the tenant were based on “an assumed position or state of affairs” that the amount claimed was GST inclusive. With reference to the decision of Moratic Pty Ltd v Gordon (2007) NSW Conv R 56-172; [2007] NSWSC 5, the Court noted that to establish a conventional estoppel, it was necessary for the tenant to establish:

• That the tenant has adopted an assumption as to the terms of its legal relationship with the landlord;
• That the landlord has adopted the same assumption;
• That both parties have conducted their relationship on the basis of that mutual assumption;
• That each party knew or intended that the other act on that basis; and
• That departure from the assumption will occasion detriment to the tenant.

The Court noted that the invoices appeared to confirm that the landlord held the same understanding as the tenant regarding the GST component of the lease, although the landlord argued that the task of invoicing was given to an experienced bookkeeper and it was on this basis that the Court accepted that the landlord did not share the understanding that the rent was inclusive of GST. 

The Court stated:

“The invoices may well have indicated to [the tenant] that [the landlord] shared its understanding that the rent amounts stated in the lease were inclusive of GST, but they do not go so far as to suggest that [the landlord] would not or could not change its position in that regard and seek to recover additional amounts of rent if to do so was in accordance with the lease.”

The Court maintained this position regarding the uncharged CPI rent increases. “… the terms of the lease are clear that there will be a CPI review on each anniversary of the date of commencement of the lease.  It is not a procedure that has to be instigated by either party, although the determination of the new rent requires a calculation to be performed to identify the determined amount of rent. The parties should be taken to have been aware of those provisions.”

Interestingly, the Court noted that whilst the invoices play a role as part of the administration of the payment of rent, they are not documents that have any particular contractual significance in and of themselves. “I think it would be reading too much into the invoices to regard them as definitive statements of what the rent actually is under the lease.” The Court noted the absence of any representation by the landlord that the rent would not be increased by CPI.  The mistake in the invoice “could not reasonably be regarded as an abandonment of the right to claim the rent at the adjusted rate in accordance with the lease.”

The Court therefore held that the landlord was entitled to claim the GST component and the CPI increase in rent, although the Court accepted the tenant’s argument that there was a limitation period of 6 years, preventing the landlord from claiming any unpaid rent for periods earlier than 2013. In relation to the unpaid outgoings, the tenant argued that the landlord did not follow the procedure set out in the lease – such as the provision of an estimate of outgoings before the commencement of the relevant annual period.  The Court considered that allowing the landlord to claim the outgoings in an entirely different fashion “would be to engage in an impermissible re-writing of the terms of the lease. It would involve the imposition of a liability in a manner not contemplated by the terms of the lease.” Even so, the Court noted that the manner in which outgoings were in fact dealt with by the parties from about the first year of the lease (being a mutual assumption to the effect that the only contribution to outgoings would be payment of the other outgoings that were actually paid by the tenant – not the outgoings now being claimed by the landlord) would have given rise to an estoppel by convention that would preclude the landlord from recovering those outgoings.

Therefore, the landlord failed in its claim for outgoings, but was able to recover the unpaid GST and rent increase amounts.  The Court also said that an order for costs in favour of the landlord should be made.