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Contract Law Assignment: A Legal Analysis Of Case Scenario

Question

Task:
Ethan owns a building on the NSW north coast, situated in a small thriving village called Green Bay overlooking the popular Green beach. The building faces the beach and includes premises suitable for a café or restaurant. Ethan advertises the premises for rental.

Ethan is contacted by Abbie who is keen to open a café/bakery in Green Bay. She and Ethan commence negotiations for a retail lease. During negotiations, Abbie explains to Ethan her business plans. ‘I want a 6 year lease for a café bakery that I will call ‘Green Beach bakery’. If the business goes well and I can make a profit, at the end of the first year I plan to expand beyond a café bakery and open up in the evenings with a themed restaurant, focussing on locally sourced and environmentally sustainable produce. I will change the name to ‘Green Bay Inn.’ Ethan responds enthusiastically. “That sounds fantastic. It is just what we need in our little town. The closest restaurant is 5 km down the road at Naxos Beach. Just let me know when you are ready to change direction and I will help in any way I can.’

Ethan does not tell Abbie that he is a part-owner of the café restaurant at Naxos Beach.

A week later, Abbie and Ethan sign a 6 year lease. The 18-page lease is very detailed and includes, relevantly, the following terms:

  1. Abbie (the Tenant) shall operate the café/bakery in Green Bay (the Premises) under the trade name “Green Beach Bakery” and shall use the Premises solely for the purpose of conducting the business of a breakfast and lunch café-bakery and for no other purpose.
  2. Throughout the Term of this Lease, the Tenant, at its sole cost and expense, shall take good care of the Premises, including all Improvements now existing or hereafter erected thereon (including sidewalks and paved areas, exterior lighting, street fixtures, utility lines and facilities, drainage lines and facilities, and all other equipment and appurtenances used in the functioning of the Premises or any portion thereof), and shall keep the same in good order, condition and repair, except for reasonable wear and tear
  3. Ethan (the Landlord) shall maintain the structural aspects and systems of the building, including the building shell, foundation, roof, electrical, heating, and ventilation systems and keep same in good order, condition and repair at its sole cost and expense
  4. In the event of a breach of clauses 2 or 3 above, the non-defaulting party may terminate the lease by serving notice in writing addressed to the defaulting party at least 28 days prior to the date of termination.

Just before she signs the contract, Abbie questions Ethan about clause 1. He replies ‘that’s fine. My lawyer said that this is just a formality and that you can change the usage at any time without even getting my approval. But if you send me a request, I will be happy to approve it and sign off on a change of use.’

The café-bakery is highly successful and proves very profitable in the first year. Abbie has established via online banking an automatic payment system for her monthly rental and all seems to be running smoothly in terms of the lease. When Abbie approaches Ethan to change the usage at the end of the first year, however, he refuses, saying the written lease is very clear.

Later that year, during a violent storm, the roof of the cafe’s building is damaged. Abbie contacts Ethan, who promises to send out a repairman to fix the roof, but this doesn’t happen. Gradually, the water begins to leak into the bakery, causing the food products to deteriorate quickly and mould to develop on the walls and ceiling. Abbie contacts Ethan every couple of days, to no avail. After three weeks, she rings Ethan on his mobile and says ‘If the roof is not fixed within three days, I will terminate the lease and vacate the premises.’

When the leaking roof is not fixed within the three day time limit, Abbie leaves the premises and removes all her stock and fixtures. However, three days after Abbie vacates the premises her bank pays her monthly rental on the premises, as she has forgotten to cancel her automatic payments. Ethan writes to Abbie saying she has repudiated her lease and he will be claiming damages.

Write a contract law assignment providing a legal analysis of the following matters:

  1. Was Abbie entitled to change the name and use of the premises at the end of the first year of the lease? (In answering this question, please do not consider the impact of Conveyancing Act 1919 (NSW) s54A).
  2. Assuming that Ethan’s failure to fix the roof is a breach of clause 3, is Abbie entitled to terminate the lease for Ethan’s breach of this clause?
  3. If yes to 2 above, has Abbie lost her right to terminate the lease for breach of clause 3?

Answer

ANSWER 1
The key issue in the first situation of contract law assignment arose when Abbie approached Ethan because she wants to change and name and the usage of the premise. The issue here is whether Abbie is entitled to change the name and purpose of the premise or not.

The Retail Leases Act (The Act) explains the deceptive and misleading conduct related to a retail lease and it indicates any party in the lease must not involve in any conduct that is deceptive or misleading the other party. Such an action is likely to deceive or mislead the other party involved in the lease contract, so such action should not be undertaken.1 The Act explains the right to compensation to the party who faced damage or loss due to the deceptive action.2 A party involved in the retail lease contract who suffered loss or damage due to the deceptive or misleading conduct of the other party can recover the damage or loss by claiming against the other party. The party who suffered loss due to the deceptive conduct of the other party can lodge a claim.3 A lease is known as a legally binding contract and after signing it, the parties need to comply with all terms. If the landlord or tenant wants to change the lease or any of its terms, it needs to be done in writing. The Act provides specific details about retail shop lease, which explains that whether the agreement is partially oral or partially written is considered as retail shop lease. 4Randi Wixs Pty Ltd v Pokana Pty Ltd (2003) supports the fact that the written contract terms of a lease need to be followed by both parties until there was any deceptive conduct by any of the parties.5

The general terms of a lease indicates that Abbie should follow the terms of lease agreed at the time of signing the contract. The first term of the lease clearly mentions that Abbie can use the premises solely for the business of lunch and breakfast café bakery; there will not be another purpose. The term was written on the lease contract, so it is binding and valid for both the parties until there was any misleading or deceptive conduct. As per the Act, Ethan, the landlord misguided Abbie, the tenant at the time of signing the contract as Ethan said that the first term was only for formality, so there will be no legal binding about it. The misleading words of Ethan lead Abbie to believe that she can change the usage of the premise when she needed.6 Based on the misleading fact, she agreed to all the terms of the lease. Ethan conducted misleading or deceptive actions to make Abbie believe in the contract terms. The Act and the case example supports that Abbie was entitled to change the usage of the premise after the first year.

Another key fact that supports the entitlement of Abbie is the priority of lease terms, as it was clearly mentioned that the breach of the second and third terms may lead to contract termination by the non-defaulting party.7 . It was not mentioned in the lease term that what would be the results of not abiding by the first term. Based on the analysis of all the factors, it supports the side of Abbie as she faced loss and damage due to the denial of Ethan to change the usage of the premise8. The Act explains that partial oral conditions are also part of a retail shop lease, so based on the fact; Abbie is entitled to change the name of her premise as the condition was added in the lease at the time of signing it9. The business of Abbie was successful and profitable in the first year, which is expected to grow in the next year if the change of premise usage was done.

The entitlement of Abbie to change the usage of the premise is valid because the misleading conduct was done by Ethan and the oral condition is also a part of retail shop lease. The misleading conduct of Ethan also leads Abbie to face losses as she was not able to extend her business as per plan.

ANSWER 2
In the second situation, Ethan failed to oblige to the third term of the contract, which says the landlord needs to maintain the systems of the building and structural aspects that include roof. Even after promising Abbie to send repairmen to fix the roof, Ethan did not do the same as he mentioned. With the failure of Ethan's actions to fix the roof, Abbie faced problems and damages. The situation raises the question of whether Abbie is entitled to terminate the lease because of the failure of Ethan to fix the roof that breaches the third clause of the lease.

The Act explains the non-provision of statement or outgoings estimate. 10The section explains that if the lessor failed to act as per the statement promised to the lessee after 10 days from the day when the request was submitted, then it is considered as a breach of the lease by the lessor. The lessee in the lease is not in breach of the lease to act according to the section. 11The section has no effect on the other rights that are based on the connection of the lessee with the failure of the lessor to provide or act according to the statement.

The Act explains the damaged premises and the actions lessor and lessee need to undertake on the same. 12The Act reflects that prior notification of the lessor in writing can allow the leasetermination either by the lessor or by the lessee. 13The writing should be based on the consideration that the damage is such that the repair is undesirable or impracticable; in that case, the termination can be made within the short notice of 7 days, there will be no compensation based on such termination. 14The Act explains the consequences of the lessor's failure to repair the damage on time. It reflects that if the lessor is not able to repair damage within specific time even after requested by the lessee, then it allows the lessee to terminate the lease within 7 days’ notice to the lessor with written termination. 15Cakirgoz v Crouch (2008)reflects if the lessee is not able to use the premise due to the damages in the premise and the repair of those damages were the responsibility of the lessor to be fixed, then the lessee should not have to pay the rent for the specific period. In this case, even after repairing the damage by the landlord, the lessee neither wants to pay for rent nor to terminate the contract. 16The Act indicates that the failure of the lessor to repair the damages on time can lead the lessee to terminate the contract. In the present case, Abbie (lessee) was notified about the damage in the structural part of the building (roof) to Ethan (lessor). The lessor promised to send to repairman to fix the problem, but he did not act the same. The ignorance of the lessor to the repair of the building caused damage to Abbie's business as the food products have deteriorated quickly and the walls and ceiling were also damaged17 .The Act specifically supports that the failure of the lessor (Ethan) to repair the damage at a reasonable time allows the lessee (Abbie) to terminate the lease with less than 7 days' notice to the lessor.18In this case, Ethan failed to provide adequate support for repair on time. Abbie gave him time even after 3 weeks of the damage and notified him to repair the roof within three days; otherwise, she will terminate the lease. The time given by the lessee (Abbie) was reasonable enough to fix the roof, but Ethan failed to do so. Hence, Abbie is entitled to terminate the lease based on the breach of the Act.19

Apart from the relevant legislation support, the lease clause also supports the entitlement of Abbie to terminate the lease. The third clause of the lease clearly mentions that the landlord, Ethan needs to maintain the system of the building as well as the structural aspects of the building. The structure and system of the building are including building shell, roof, ventilation system, foundation, and electrical system. As the landlord, he is responsible to keep the same things in a good position and repair them at their sole expense and cost. Lease clause 4 mentions that the breach of clauses 2 and 3 allows the non-defaulting party to terminate the contract. Ethan (the landlord) failed to act as per clause 3, so the non-defaulting party (Abbie) can terminate the contract based on the fact.

Based on the analysis of the relevant legislation and the clause of the lease, it can be said that Abbie is entitled to terminate the lease due to the failure of Ethan to act as clause 3 and breaching the provisions of the Retail Leases Act 1994. If Ethan acted as per the clause and took immediate action to repair the damage to the building the termination of the lease may not be entitled by Abbie.

ANSWER 3
Abbie is entitled to terminate the lease as Ethan failed to act as per the lease terms and breached clause 3. In this case, Abbie did not make the notice for the termination in writing, but the verbal notification was made by Abbie. The lease clause also mentions that if the non-defaulting party is making the notice for termination, then it should be in writing and needs to be provided before 28 days of termination. The notification of Abbie to Ethan was made over the phone and three days' time was given to Ethan for the termination of the lease if repair is not made. The written document is a crucial thing in the lease because it proves the side of each party. In this case, even if Ethan breached clause 3, but Abbie lost her right to terminate the lease based on the fact of breach of clause 3. 20She did not make a written notice to Ethan about the termination of the lease, which is crucial based on the lease clause as well as the Retail Leases Act 1994. If Abbie made a written notice to Ethan about the termination, then it would safeguard the rights of Abbie regarding the termination of leases based on the breach of clause 3.

The discussion of the three situations and the legal analysis of those situations are provided based on the clauses made under the lease in this case and the support of the Retail Leases Act 1994. The first two situations reflect Abbie's entitlement to change in the usage of the premise as well as to terminate the contract. The verbal notification made to Ethan (landlord) is not valid in the support of Abbie, so she may lose her right to terminate the lease as it is necessary to provide a written notice to the landlord before terminating the contract. The verbal notification regarding termination of lease contract is not valid, so Abbie will not be able to breach the contract even she has the valid reason to do so. A written declaration of the termination needs to be made to Ethan.

BIBLIOGRAPHY
A Cases
Cakirgoz v Crouch [2008] NSWSC 1124

Randi Wixs Pty Ltd v Pokana Pty Ltd (No 2) [2003] NSWADT 4

B Legislations
Retail Leases Act 1994 (NSW).

Retail Leases Act 1994 (NSW) s 62 E.

Retail Leases Act 1994 (NSW) s 62 D.

Retail Leases Act 1994 (NSW) s 71.

Retail Leases Act 1994 (NSW)sch 3 cl 17.

Retail Leases Act 1994 (NSW) s 28 A.

Retail Leases Act 1994 (NSW) s 36.

Retail Leases Act 1994 (NSW) s 36 (c)-(d).

Retail Leases Act 1994 (NSW) s 44.

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