Real Estate Markets Insights

17 December 2010

Landlord vs guarantor: VCAT the right place, says Supreme Court

By John McGuire and Kym Fraser.

Key Points:
The Victorian Civil and Administrative Tribunal is the correct tribunal to hear a dispute between a landlord and guarantor of a tenant's obligations under a Victorian retail lease.

Victorian retail leasing disputes consisting of claims by a landlord against tenants and guarantors, which have previously been decided in separate forums, are likely to now be heard together in the Victorian Civil and Administrative Tribunal (VCAT), following the Victorian Supreme Court's decision in Michael Tucci v Victorian Civil and Administrative Tribunal and Athedium (Vic) Pty Ltd [2010] VSC 425.

The Court held that VCAT has jurisdiction to hear disputes as between a landlord and guarantor under the Fair Trading Act 1999 on the basis that providing a guarantee is a provision of a service within the meaning of section 107 of the Act.

The lease and the guarantee

Athedium leased premises to Matchpoint Pty Ltd for use as an indoor tennis and volleyball complex. A guarantee and indemnity was attached to the lease, provided by Michael Tucci, who was the sole director of Matchpoint.

Among other things, Athedium claimed that Matchpoint failed to leave the premises in good repair when the lease expired in 2008. It brought a civil claim in the Retail Tenancies List of VCAT claiming breach of the lease and damages from Matchpoint. Athedium also claimed damages against Tucci personally, as a debt owing by him or, in the alternative, an order that Tucci indemnify Athedium for the loss suffered as a result of Matchpoint's alleged breach under the guarantee and indemnity given by him.

Tucci applied for summary dismissal of the claims made against him on the grounds that VCAT did not have jurisdiction to hear them. It is likely that Tucci made that argument for strategic reasons, because if it succeeded it would have required Athedium to commence separate proceedings in the Supreme Court against him, whilst maintaining separate proceedings against Matchpoint in VCAT. Multiple claims in different forums mean maximum cost and inconvenience for a plaintiff!

VCAT's jurisdiction to hear consumer and trader disputes

The Victorian Court of Appeal had previously established that VCAT is the appropriate Tribunal to hear disputes between a landlord and tenant under a retail lease (Zeus & RA Pty Ltd v Nicolaou (2003) 6 VR 606).

The central issue in Tucci was whether the statutory provisions of the Act gave VCAT jurisdiction to hear and make orders with respect to a dispute between a landlord and a guarantor of the tenant's obligations.

Section 108 of the Fair Trading Act provides that VCAT may hear and determine a "consumer and trader dispute", which is defined in section 107 as:

"a dispute or claim arising between a purchaser or possible purchaser of goods or services and a supplier or possible supplier of goods or services in relation to a supply or possible supply of goods or services".

Services are defined to include "any rights (including rights in relation to, and interests in real or personal property), benefits, privileges or facilities that are, or are to be, provided, granted or conferred in trade or commerce".

The question was whether by providing the guarantee, Tucci was supplying a "service" to Athedium as defined in the Act. VCAT held he had; Tucci then appealed to the Supreme Court.

Supreme Court Appeal

Tucci made two arguments.

First, he argued, the Fair Trading Act does not define a "consumer and trader dispute" with reference to a guarantor. He contended that a "consumer and trader" dispute is expressly limited to a dispute arising between a purchaser of services and a supplier of services, which can include a tenant and landlord. Tucci submitted that a guarantor is a "third party" to the lease arrangement and therefore VCAT's jurisdiction cannot extend to a dispute between Athedium and himself as guarantor of Matchpoint's obligations.

Secondly, Tucci argued that a guarantor does not provide a "service" as defined in the Act. A guarantee, he said, is an agreement to answer for a third party's debt under a contract, or an "obligation to pay money on a contingency", which does not require a supplier to perform its contractual obligation by providing a service. If "supplier" was defined to include a guarantor, it would follow that VCAT would have jurisdiction to hear and determine very large claims or disputes arising from any and all guarantees given in trade in Victoria (even multi-million dollar developments). He contended that Parliament could not possibly have intended this result.

The Supreme Court's interpretation of a "service" under the Fair Trading Act

The Supreme Court held that VCAT did have jurisdiction to hear the dispute between Athedium as landlord and Tucci as guarantor. The provision of the guarantee by Tucci was a "service" within the meaning of the Act. Tucci, by guaranteeing Matchpoint's obligations under the lease agreement was providing "financial security" to Athedium.

The Supreme Court clearly rejected the argument that the definition of "services" is limited to contracts for service which require the supplier to perform its contractual obligation by providing a service such as the provision of legal or medical services. "Services" as defined in the Act includes "any rights (including rights in relation to real or personal property)". The courts have interpreted this definition to include disputes about the sale of land or interests, with the vendor providing a "service" to the purchaser.

The Supreme Court also found that VCAT has a very wide jurisdiction under the Act and is authorised to hear and determine very large claims or disputes. It was not the intention of Parliament that VCAT be restricted to hearing only minor disputes or claims. Under the Act, VCAT has jurisdiction to hear consumer and trader disputes without limitation as to the quantum of the claim. The Plaintiff's "professed incredulity that VCAT could be given such broad jurisdiction as the Act appears to give it", was not to the point.

So we are off to VCAT?

VCAT has traditionally had jurisdiction to hear retail tenancy disputes between landlords and tenants pursuant to its jurisdiction under both the Retail Leases Act and the Fair Trading Act (the landlord being a "supplier" and the purchaser a "consumer").

The Tucci case confirms that VCAT's jurisdiction is wide enough to also include disputes between a landlord and a guarantor of the tenant's obligations. This will make it procedurally simpler for the landlord to pursue its claims for breaches of the lease against all relevant parties in the one forum.

Previously, there was a real risk that claims by a landlord against a tenant were heard in VCAT, and the landlord's claim against the guarantor of the tenant's obligations would be heard in the Supreme Court.

There are procedural issues that need to be considered when a matter is heard in VCAT. VCAT is not bound by the rules of evidence except to the extent that it adopts those rules. Parties are generally required to bear their own costs in a proceeding and VCAT will make a costs order only if it is satisfied that it is fair to do so having regard to certain conduct of the parties during the proceeding.

Finally, a curiosity remains from the decision. Disputes based on subrogation between multiple guarantors of a tenant's obligations might not be a dispute between a "purchaser" and "supplier" under the Act, and it remains likely that such a dispute between guarantors about their proportionate liability to the landlord, is likely to have to be determined by another court (most likely the Supreme Court).

Thanks to Melissa Lirosi for her help in writing this article.


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For further information, please contact John McGuire and Kym Fraser.

Disclaimer
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states or territories.