Australia: Resolving statutory illegality in landlord and tenant disputes

How do you resolve an apparent competition between two separate pieces of legislation, where one creates rights that are seemingly taken away by the other?

This was the question recently considered by the High Court in a dispute between a landlord and tenant where the issue of statutory illegality came to the fore. In Gnych v Polish Club Ltd ¹, the High Court ruled that the landlord could not rely on its own breach of one statute to argue against the existence of a lease under another statute.

The facts

The Polish Club Ltd (Club) was the owner of a property that was licensed under the Liquor Act 2007 (NSW) (Liquor Act) for the sale and supply of alcohol for consumption on the property. The Club wished to lease certain areas to a couple, Mr and Mrs Gnych (Gnychs), who wanted to run a restaurant from the premises. Terms were agreed in principle for a lease of two years, with two subsequent two-year option terms. The Gnychs took occupation of the premises and began running the restaurant on 31 March 2012. While a draft lease was prepared and issued by the Club's solicitors, no written agreement was ever finalised.

Relations between the parties deteriorated and the following events unfolded:

• in July 2013, the Gnychs' lawyers were notified of the Club's decision to terminate the relationship
• the Gnychs' lawyers responded in August 2013 by issuing a notice under the Retail Leases Act 1994 (NSW) (RLA) fixing the term of the Gnychs' occupancy for a term of five years from 31 March 2012
• in response, the Club's solicitors argued that any rights the Gnychs may have had under the RLA were overridden by the Liquor Act's prohibitions on leasing, particularly in section 92(1)(d) which obliged the Club to obtain the approval of the Independent Liquor and Gaming Authority (Authority) to the proposed lease (which the Club had failed to do).

In other words, the Club sought to rely on its own breach of the Liquor Act to assert that the Gnychs were not entitled to a five-year lease under the RLA.

The High Court's decision

The Club's argument that the Gnychs' statutory five-year lease was void failed in the High Court.

The Court (French CJ, Kiefel, Keane and Nettle JJ) reviewed the relevant authorities on statutory illegality and held that the scope of the prohibition in section 92(1)(d), and the consequences of a breach of that prohibition, are to be determined by the language of the section itself construed in the context of the Liquor Act as a whole. This led the Court to conclude that the prohibition in section 92(1)(d) was directed to the grant of the interest in land (in this case, the creation of the statutory lease under the RLA) and not the performance by the parties of the collection of rights and duties that regulated the statutory lease. The Court observed that to take a broader view of the prohibition and destroy the statutory lease at its inception would:

1. allow the Club to take advantage of its own breach of the Liquor Act
2. be inconsistent with the supervisory role of the Authority under the Liquor Act, and pre-empt any decision the Authority might make about the continuation of the statutory lease once approval was sought.

Illegality in a leasing context

The Gnych case turned on the role that statutory illegality plays in competing statutes. However, statutory illegality plays a broader role in the enforceability of contracts in general. The decision of the Victorian Court of Appeal in Equuscorp Pty Limited v Antonopolous ²(Equuscorp) is an example of this in the context of leasing arrangements.

Equuscorp involved a landlord's claim for damages for the termination of a forestry leasing scheme under which the landlord had granted the tenant consecutive leases of part of a parcel of land. Specifically, the grant comprised six terms of four years each, plus a final term of one year. At the time, there were two key provisions of the Local Government Act 1993 (NSW) (LGA) that came into play. First, section 323(1) prohibited any lease of part of a parcel of land without Council approval, unless the lease period (including the period of any option to renew) did not exceed five years. Secondly, section 327(3) of the LGA provided that if any agreement was entered into in breach of section 323(1), it would not be rendered illegal or void merely because an application for Council approval had not yet been obtained. Rather, such an agreement was subject to the Council's approval being obtained.

The landlord argued that each of the leases took effect as separate shorter-term transactions and therefore fell within the statutory exception in section 323(1), meaning that Council approval of each lease was not required. The Court of Appeal rejected this argument, holding that the consecutive leases were plainly intended to give the tenant an enforceable right to occupy the land for a period of 25 years. Accordingly, the exception did not apply and Council approval was required. Ultimately, despite the fact that section 327(3) operated to preserve the leases in the meantime subject to Council approval, that approval was never obtained. The landlord was therefore unable to enforce its claim for damages against the tenant.

It is important to note that the prohibition of the kind considered in Equuscorp does not prohibit a licence (as opposed to a lease) to use land for a term that exceeds five years, as licences are not caught by the current provisions in the Conveyancing Act 1919 (NSW) requiring Council approval to a subdivision.

Interestingly, it seems that nobody is currently challenging the hundreds of existing consecutive leases which have been used for decades for telecommunication facilities. On one hand, this may be because Schedule 3 of the Telecommunications Act 1997 (Cth) overrides State laws requiring council approval. In Bayside City Council v Telstra Corporation Limited ³, the High Court held that State legislation authorising local authorities to levy rates and charges in respect of land occupied by telecommunication cables in a way which discriminated against a carrier was inconsistent with the Telecommunications Act and was invalid pursuant to section 109 of the Constitution. On the other hand, it may just be that there is no practical point in challenging these leases, because even if they were challenged effectively, the telecommunications operators would then seek to rely on their access rights under the Telecommunications Act, or indeed simply lobby for a change in law.

As yet, Equuscorp has not been properly tested in NSW (it may just be a frolic of the Victorian Court of Appeal), so the current state of the law on consecutive lease terms and deemed subdivision in NSW is yet to be formally determined.

Key takeaways

The following lessons emerge from this discussion:

• Any lease entered into in breach of a legislative prohibition is not necessarily unenforceable as a result of the illegality. A conclusion of that kind will require clear words in the legislation.
• The purpose of the relevant legislative prohibition, and the terms of the legislation, may mean that the lease is conditional upon certain steps in the legislation being satisfied.
• Long-term licences (and possibly consecutive telecommunication facility leases) are exceptions to the need to obtain subdivision approval to a lease of part of a parcel of land.

Footnotes

¹Gnych v Polish Club Ltd (2015) 320 ALR 489.
²Equuscorp Pty Limited v Antonopolous [2008] VSCA 179.
³Bayside City Council v Telstra Corporation Limited (2004) 216 CLR 595.

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