Commercial buyer beware – landlord liability for lease defaults inherited from seller and possible set-off risks

The Queensland Court of Appeal has recently considered a commercial dispute between a Tenant and its new Landlord as to whether the new Landlord was liable for breaches of the pre-existing landlord prior to its purchase of the property.

In Bank of Queensland Limited v Y & L Promising Pty Ltd [2022] QCA 217, the Court considered a scenario where the Bank of Queensland (Tenant) entered into a lease of a Gold Coast property which included a clause providing that the Tenant was not liable for any residual asbestos at the property and, if any asbestos was discovered, the Landlord must remove at its own cost or pay the Tenant’s reasonable costs of doing so itself.

During the term of the lease asbestos was discovered and remedied by the Tenant at a cost of approximately $193,000. The property was subsequently sold to another party and then again onsold to Y&L Promising Pty Ltd (Landlord). The Tenant demanded payment from, but did not commence proceedings against, the initial owner (who did not pay), and then the subsequent owner (who also did not pay). The Tenant then commenced proceedings against the Landlord after it acquired the property, demanding payment of its costs.

The Tenant claimed that, although the breach of the lease occurred prior to the Landlord’s time as owner of the property, the Landlord remains liable for the breach of its predecessor because:

• section 62 of the Land Title Act provides that the liability vested in the Landlord when it was transferred the property (that section, which also exists in other jurisdictions, provides that all liabilities of a transferor in relation to a lot vest in a transferee upon the registration of a transfer instrument); and/or
• the Deed Poll the Landlord provided to the Tenant as a requirement of its purchase of the property meant the Landlord agreed to take on the liability (that document relevantly stated that the Landlord would abide by the terms of the lease to be performed, fulfilled or observed on or after the Settlement Date).

The Court dismissed these arguments and determined that:

• the words “liabilities… in relation to the lot” make it clear that only liabilities that are sufficiently intimate or incidental to the present and future ownership of the land are vested in a transferee under section 62 of the Land Title Act. The Tenant’s contractual right to enforce a completed debt in this instance was a personal right that was not sufficiently “in relation to the lot” to be vested in the Landlord under section 62; and
• the Deed Poll given by the Landlord clearly limited the Landlord’s obligations to future liabilities arising under the lease, not past liabilities. In order for a Landlord to assume past liabilities also, it must be clear from the intention of the parties and the wording of the relevant document.

Interestingly, the Court also went on to investigate an alternative outcome in which the Tenant had instead elected to set-off its past debt against future payments of rent to the Landlord (which it was entitled to do under the lease), rather than pursuing the debt itself against the Landlord. This matter wasn’t pleaded by the parties and has been remitted back to the District Court for re-pleading. While there are other issues for consideration, the Court noted that, unlike the personal right to sue which did not vest in the Landlord under section 62, a right of set-off under the lease may sufficiently “relate to the lot” so as to vest in the Landlord under section 62 because it affected future rent payable under the lease.

Although the Court ultimately found that the Landlord was not liable for prior breaches of the lease in this instance, the decision serves as a reminder for purchasers of tenanted commercial property to:

• clearly understand the terms of the leases it is agreeing to take on (including, subject to the outcome of the Court’s view on set-off, in relation to any future rights of set-off); and
• ensure their purchase arrangements with both the seller and the existing tenant make it abundantly clear that the landlord does not intend to take on any retrospective liabilities.