Passing the buck on lease assignment

For as long as leases have been around, discussion has endured over which rights and obligations pass from one tenant or landlord to the next during the lease life.

The Victorian Property Law Act holds that assignees are bound by covenants which ‘touch and concern’ the land^[1], however it remains unsettled as to what exactly constitutes these covenants.

Security deposits

A covenant, recently under scrutiny, is the passing of security deposits between old and new landlords. A security deposit is an amount paid by a tenant as surety to a landlord. It is returned at lease end.

The landlord’s covenant to repay the deposit at lease end has been found not to touch and concern land. This is a concern for tenants who may need to chase their old landlord for a significant sum outlaid when they entered the lease. Ouch!

Australian position

In the 2010 Supreme Court case of Specialist Diagnostic Services v Healthscope, Croft J held that the benefit of the covenant to repay the deposit could not touch and concern the land because the liability to repay the deposit to the original tenant at the end of the term remained throughout on the original landlord.^[2]

This reasoning was consistent with the longstanding test from Vyvyan v Arthur which states ‘if the performance of the covenant be beneficial to the reversioner, in respect of the lessor’s demand, and to no other person, his assignee may sue upon it’^[3].

Tenants, take note!

It is crucial for tenants to protect themselves by requiring that, where a landlord changes, the outgoing landlord must transfer any security deposit held under the lease to the incoming landlord. Tenants should ensure written evidence of the security deposit transfer is provided in order to prevent potential disputes at lease end.

For all other covenants, the test repeatedly cited by judges for categorising a covenant is whether it affects either the landlord as landlord or the tenant as tenant^[4]. A covenant may have reference to land, but, unless it is reasonably incidental to the relation of landlord and tenant, it cannot be said to touch and concern the land.

Whilst we like to think of ourselves as experts in this area, we are proud to say that the judges agree, taking into account our victory in a recent New South Wales case acting for a tenant on this very topic.

^[1] Property Law Act 1958 (Vic) s 142
^[2] Specialist Diagnostic Services Pty Ltd v Healthscope Ltd [2010] VSC 443 at 61
^[3] Vyvyan v Arthur (1823) 1 B & C 410 at 417
^[4] Breams Property Investment Co Ltd v Strougler [1948] 2 KB 1 at 7

^{Retail leasing: do your homework}
^{Splitting the bill: retail lease outgoings}
^{Clawing back lease incentives}