Who owns the Tenant’s installations?

In a recent case involving our Landlord customer, the above question was key while determining the rent during the Lease term subject to market review.

Background facts

Following the Tenant exercising its option to renew the Lease for a further term, the Landlord consented to the Tenant undertaking major building works (“the Installations”) on the premises at the Tenant’s sole cost.  A Deed of Variation was executed between the parties to include the relevant permits for the building works.

The Lease required the rent for the following term to be calculated based on market review.  During negotiations, the Tenant argued that as the Installations were owned by the Tenant, they were excluded for the purposes of determining the current market rent pursuant to Section 37 of the Retail Leases Act (RLA).  

The Landlord, however, argued that the Installations were substantial and structural in nature and that the Landlord consented to the Installations in consideration for the option term granted to the Tenant. Additionally, the Installations had irreversibly altered the premises to such an extent that the Tenant could not ‘make good’ the premises at the end of the Lease term. On that basis, the Landlord argued that the Installations were effectively a part of the Landlord’s building and could not be excluded when determining rent based on market review.

The key issue

The parties considered whether Section 154A (1) of the Property Law Act (PLA) was applicable given the executed Deed of Variation to the Lease (prepared by our customer’s previous solicitors) was silent on who owns the Installations and/or if the Installations were carried out by the Tenant on behalf of the Landlord. The exclusion on the Installations from the market review would lead to a significant drop in the current rent paid by the Tenant to the Landlord. The parties engaged an independent valuer to assess the market rent who, for the purposes of determining the rent, sought legal advice on the issue of who owned the Installations.

Outcome

The Tenant owned the Installations and Section 154A (1) of the PLA was applicable.

Section154A (1) of the PLA which came into operation on 1 August 2010 states:

“A tenant who at his or her own cost or expense has installed fixtures on, or renovated, altered or added to, a rented premises owns those fixtures, renovations, alterations or additions and may remove them before the relevant agreement terminates or during the extended period of possession of the premises, but not afterwards”.

Section154A of the PLA overrides any common law position as to if the Installations were fixtures. In the recent case of AWF Prop Co 2 Pty Ltd v Ararat Wind Farm Pty Ltd [2020] VSC 853 it was stated that Parliament intended Section 154A of the PLA to displace the common law of fixtures. Furthermore, the decision also affirmed that any fixtures installedby a Tenant on the leased premises remained the personal property of the Tenant.

As a result, the Installations were excluded from the market rent review.

Conclusion

The above case study highlights the significance of a clearly worded Lease and/or variation to the Lease between the parties to accurately reflect any provisions relating to Tenant’s installations and ownership of those installations. Both the Landlord and Tenant should give good consideration as to what effect the installations would have on their rent should the Lease be subject to market review, and whether the Tenant is able to make good the provisions at the end of the term. Failure to do so would result in a costly exercise for both parties and may also mar the relationship between the parties long term.

How Sharrock Pitman Legal can help

As Accredited Specialists in Property Law, we provide cost-effective legal advice on all lease-related issues for both landlords and tenants alike. If specific advice is sought in relation to the matters contained in this article, or any other property related matters, feel free to contact us on 1300 205 506or by email at sp@sharrockpitman.com.au. Alternatively, contact the author directly at crystal@sharrockpitman.com.au.

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The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

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