The landlord's responsibility to recover outgoings in a timely manner

The responsibility for the payment of the costs of the water usage and electricity for a Kirrawee commercial property was the subject of a dispute dealt with by the District Court in 2017 – AAP Engineering Pty Ltd v Fernlog Pty Ltd [2017] NSWDC 141.

The tenant, Fernlog, leased a portion of the property at 106-108 Oak Road, Kirrawee.  The landlord, AAP Engineering, occupied the other portion of the property for its business, Colorfen Constructions.

The parties’ positions

The landlord claimed sought damages (by way of reimbursement of the water usage and electricity costs), arguing a breach of contract as well as promissory estoppel, arguing that the parties conducted themselves on an assumed and agreed state of affairs, that the tenant would pay for the utilities supplied to it and paid for by the landlord.

The tenant denied that it had an obligation to pay the utilities and therefore that it did not owe the landlord anything.  Rather, the tenant argued that any such obligation only arose in relation to utilities that were separately metered, and only if the invoices for those utilities were directed to the tenant.  Further, the tenant it cross-claimed (that is, sought reimbursement) for the money it had already paid to the landlord towards the electricity costs.

What did the lease say?

The parties entered into a commercial lease for the period 1 September 2007 to 31 August 2012.  The tenant held over (that is, remained in occupation of the property and continued with its obligations, without entering into a new lease) until 31 May 2015.

The lease stated that there were NIL outgoings payable, but nevertheless included the following clause:

“The tenant will pay to the property Authorities all charges for utility and other services connected to the Premises (if separately metered) and should the tenant default in payment of such charges the landlord may pay the same and immediately recover the amount paid as if it were rent in arrears payable by the tenant.”

The landlord claimed that the water was separately metered for the duration of the lease, and that the electricity was separately metered from April 2009.  The tenant agreed that the electricity was separately metered, but noted that the meter included some lights on the landlord’s side of the premises.  The tenant also noted that the meter for the water included usage for the neighbouring property’s fire hose and a tap.  It was also noted that during the lease, the tenant arranged for an additional tap to be installed, but the tap was installed on the landlord’s side of a dividing wall in the factory which separated the tenant’s leased property from the rest of the premises.

What actually happened?

For the duration of its occupation and use of the premises, the tenant never paid the water and electricity charges.  Rather, they were paid by the landlord.  The landlord never sought reimbursement from the tenant.

It was not until September 2012 that the landlord’s financial controller sought moneys from the tenant for electricity bills paid in relation to the property by the landlord since 2009.  The tenant subsequently made some payments to the landlord for the electricity not because he thought he was obliged to but because he was fearful that the landlord would cut off the electricity as bills were not sent to the tenant but to the landlord alone.  In the period of March/April 2012 to February 2015, the tenant paid a total of $110,000 for the electricity costs.  No amount was paid in relation to the water bills.

The Court’s view

The Court accepted the tenant’s submission that the word “outgoings” when used in a commercial lease is a wide term which usually would include expenses such as utility charges including, in this context, relating to utilities in the landlord’s name.  Nevertheless, the Court noted that the relevant clause contemplated that the utility charges in question arise from separate metering which has been installed by or on behalf of the relevant authority for the services supplied to the property.

The Court referred to the landlord’s late request for the utility costs as an “inconvenience” to the tenant, and interpreted the clause as requiring the tenant to pay the invoice, at first instance, and only if payment was made would the landlord then pay the invoice “to avoid any potential consequences”.

As the landlord was unable to provide evidence regarding its usage of the fire hose and taps, which were connected to the tenant’s meter, and did not provide evidence rebutting the tenant’s evidence of the landlord’s usage of the taps, the Court referred to the rule under Jones v Dunkel, that if a party does not call a witness who can apparently give evidence about a matter in dispute, the failure to call them allows the Court to infer that the evidence of that person would not assist the party – but only if the other party can prove that the relevant witness has knowledge of the relevant matter, and that the witness is “available” to provide evidence.

Because of the fact that the water meter was connected to a fire hose and taps on the landlord’s property, the Court concluded that the water meter was not “separately metered” and therefore the landlord was not entitled under the lease to demand the payments sought from the tenant.

In relation to the landlord’s claim for restitution – that it is entitled to be paid by the tenant because it would be unjust for the tenant to retain the benefit of the payments made by the landlord, the Court noted that there was no obligation under the lease for the tenant to pay the electricity and water charges because they were not separately metered and therefore the requirements under the clause were not complied with.  The landlord’s claim therefore was rejected.

In relation to the landlord’s claim of promissory estoppel, the Court referred to the principles stated in Moratic Pty Ltd v Gordon [2007] NSWSC 5 for establishing conventional estoppel, being:

• The plaintiff has adopted an assumption as to the terms of its legal relationship with the defendant;
• The defendant has adopted the same assumption;
• Both parties have conducted their relationship on the basis of that mutual assumption;
• Each party knew or intended that the other party act on that basis; and
• Departure from the assumption will occasion detriment to the plaintiff.

The decision noted that the difference between conventional estoppel and promissory estoppel is that the latter is focused on the consensual basis of the parties’ relationship – where both parties have adopted the same assumption as the basis of their relationship, often without appreciating that any departure from the strict legal position is involved, so as to hold both parties to their common understanding.

The Court in this instance noted that it is not necessary that the assumed position or conventional basis of the parties is correct under the original terms of the contract.  All that is required is that the parties have, by their course of dealing, adopted an assumed state of affairs or convention and put their own interpretation on the contract.

“If they have and they have conducted their affairs in accordance with it, the parties cannot be allowed to go back on it.”

The landlord relied on the fact that the tenant willingly paid instalments to the landlord by way of reimbursement without protest or complaint.  The tenant maintained that it only did so because it felt threatened that the electricity would be cut off if not paid.

Accordingly, the Court ordered that the tenant be reimbursed for the $110,000 paid towards the electricity bills with appropriate interest, noting that the money was not paid on the basis of any mutual assumption of either a liability to contribute or a mutual acceptance of a moral or other obligation to contribute.

Lessons to be learned

If the landlord is entitled to recover amounts paid from the tenant for the duration of the lease, then such amounts should be recovered in a timely manner, and not some years down the track.  All conduct should be consistent with the terms of the lease, otherwise it may be difficult to argue against the tenant’s claim that its obligations under the lease had been amended by the course of conduct.