When does a lease agreement become binding and enforceable?

In the frenzy of applications, inspections, and other day-to-day administrative tasks, it can sometimes be easy to overlook the important question of whether a valid tenancy agreement has been properly formed and/or voided through the lens of the Residential Tenancies and Rooming Accommodation Act 2008 (the Act).

In circumstances where a tenancy relationship sours, as they did in the cases of Barnet & Anor v Zenbar (Aust) Pty Ltd [2011] QCAT 314 and Dobeson v Ray White Sherwood [2019] QCAT 155, establishing whether a tenancy agreement has actually been formed, and remains valid, is a critical first step.

Barnet & Anor v Zenbar (Aust) Pty Ltd

The applicant tenants entered into a six month fixed term tenancy agreement on 6 January 2011. After signing the lease and paying a rental bond deposit, the tenants asserted they discovered the property to be in a non-liveable state due to a significant cockroach infestation.

Upon expressing concerns to their property manager, the property manager admitted she knew about the pest problem and she arranged for the property to be fumigated on 7 January 2011 (although she denied the assertion that the property was in a non-liveable condition).

The tenants and property manager discussed possibly amending the commencement date of the agreement from 6 to 10 January 2011.

On 7 January 2011, the tenants advised via email they did not wish to continue with the tenancy due to the poor condition of the property. The tenants sought the return of their $500 holding deposit on the basis that they had exercised their option not to enter into a tenancy agreement within the allowable period permitted by sections 159 and 161 of the Residential Tenancies and Rooming Accommodation Act 2008 (the Act).

The lessor argued that the tenants had already signed a tenancy agreement and were bound by its terms. The lessor sought compensation for rent between 6 January to 19 January 2011 and a break lease fee of one week’s rent. The lessor secured a new tenancy for the property on 19 January 2011 and asserted that it had therefore taken reasonable steps to mitigate unnecessary loss.

The matter went before the Queensland Civil and Administrative Tribunal (QCAT) for determination.

Was the agreement valid?

The tenants contended that the lease agreement formed on 6 January 2011 was void because the property was not in a liveable condition at the start of the tenancy.

Under section 185(2) of the Act, the lessor must ensure that the property is clean, fit for habitation, and in good repair. The standard for determining whether a property is "fit for the tenant to live in" is based on reasonableness, considering factors such as the age, character, and locality of the property, and the effect of any defects (Fine v Geier [2003] QSC 073; Bond v Weeks [1991] 1 Qd R 134). In Gray v Queensland Housing Commission [2004] QSC 276, it was held that defects do not render a property unfit unless they make it unsuitable for occupation.

The QCAT, relying upon documentary evidence (including an itemised invoice for minor repairs totalling $138.64 and a pest treatment report), concluded that the necessary repairs were minor and did not render the property unfit for habitation. The pest report noted a "major infestation of cockroaches," but the recommended treatment did not require vacating the property. Thus, the QCAT found the property to be reasonably fit for habitation, validating the lease agreement.

Was the agreement terminated?

Section 277 of the Act limits the circumstances in which a tenancy agreement can lawfully be terminated. The QCAT found there was no evidence that any of the required condition precedents had occurred. Specifically, no formal notices, namely a Notice of Intention to Leave, Notice of Abandonment or Notice to Leave, were issued by either party, nor was there an agreement in writing to terminate the lease between the parties.

Decision

The QCAT ruled that the $500 held in trust was not a holding deposit. Under section 159(1) of the Act, holding deposits apply only to prospective tenants. Since the applicants were already tenants (as defined by section 13) upon signing the lease on 6 January 2011, the provisions pertaining to holding deposits did not apply. As a result, the QCAT dismissed the applicants’ claim and granted the remedies sought by the respondent.

Dobeson v Ray White Sherwood

This case involved a dispute between the applicant tenants and a respondent lessor as to whether a general tenancy agreement had been breached by the tenants. The respondent submitted that it was entitled to the bond of $1,980 due to the repudiation of the agreement by the tenants. The tenants contended that a complete contract was never formed as the Form 18a General Tenancy Agreement was never executed and the tenants had never occupied the property. The tenants argued that the $1,980 should therefore be classified as a ‘holding deposit’.

Had a valid lease agreement been formed between the parties?

To determine whether a valid lease agreement was on foot between the parties, the QCAT considered the lawful requirements of a lease agreement under the Act.

Section 58(1) of the Act requires that the lessor or lessor’s agent must give a prospective tenant a written copy of the lease agreement before doing any of the following:

(a) accepting a document from the prospective tenant that commits the tenant—

(i) to enter into the tenancy; or

(ii) to pay an amount in relation to the tenancy;

(b) accepting an amount in relation to the tenancy;

(c) entering into a residential tenancy agreement for the tenancy.

Section 61 of the Act requires  that a lessor or lessor’s agent must ensure that the lease agreement is in writing. However, the QCAT found that the purpose of  this provision is to regulate the conduct of a lessor or lessor’s agent for consumer protection purposes rather than to regulate the formation of a contract. The provision relevantly states “…Nothing in this section affects the enforceability of an agreement that is not in writing”.

The QCAT found instead that, under the Act, a lease agreement can be formulated in writing, orally or by implication. In this case, the respondent gave the tenants copies of all documents contemplated by the Act within the time frames required by the Act, and accepted money from the tenants only after satisfying the statutory requirements concerning the prior supply of relevant documents. Therefore, there had been no failure in the conduct of the respondent to preclude a valid contract having come into existence.

The QCAT considered the implications of an email the respondent had sent to the tenants on 5 July 2018. The email stated:

“Your 12 month lease will commence on 20/07/2018 at $495 per week. We will need to organise a time for all parties on the lease to come into our office and complete a tenancy sign up. You must make the payment within 24 hours … The property is not secured for you and will continue to be marketed until the full payment of the first 2 weeks rent and 4 weeks bond is paid, and all lease documents are signed in full [14]”.

The QCAT determined that the email was intended as an encouragement to the tenants to meet their contractual obligation to pay rent in advance. It was not, in these circumstances, intended to be a condition precedent to the formation of the contract. As such, the QCAT was satisfied that an agreement had been formed on 6 July 2018, having regard to the following factors:

a)         All documentation required by the Act was sent by the respondent to the tenants on 5
            July 2018, including the completed but unsigned Form 18a that nominated the date for
            commencement of the tenancy as 21 July 2018;

b)         The payment of the full rental bond deposit by the tenants on 6 July 2018;

c)         The tenants’ own written acknowledgement of 6 July 2018, which stated ‘Thank you for
            accepting our application’; and

d)         The request on 12 July 2018 by one of the tenants to arrange a date for the tenants to
            sign the Form 18a.

When was the lease agreement valid?

Following the precedent set in in Barnet and Anor v Zenbar (Aust) Pty Ltd, the QCAT distinguished the date of formation of the lease agreement from the date of occupancy by a tenant. It was held that the lease agreement was formed on 5 July 2018 and the tenants knew they were entitled to occupy the property from 21 July 2018.

Did the tenants repudiate the contract?

The QCAT held that, on 18 July 2018, the tenants had demonstrated an intention to repudiate the lease agreement for their own convenience based on a misunderstanding as to dates concerning their previous tenancy agreement. As this was not sufficient grounds to repudiate the contract, the tenants had unlawfully terminated the contract. The QCAT ordered that the respondent was entitled to damages in the amount of $1,980 – which represented the bond paid by the tenants – due to the repudiation of the lease agreement by the tenants.

What does this mean for agencies, practically?

1. Defects will not render a property unfit unless they render the property unsuitable for occupation – and once a property is unsuitable for occupation, the rental agreement is voided. It is therefore always important to consider the language you are using in your communications with tenants and contractors/suppliers. We recommend that agencies take an honest but careful approach. One way to manage any disagreements about this is to always ensure a paper trail, with communications regarding disputes recorded in writing, and to hire approved contractors who can accurately assess, and speak to, the condition of a property.
   
2. The QCAT clearly distinguishes between the formation of a binding contract and performance. However, although an oral agreement can form part of a valid lease agreement, such that a written agreement is not strictly necessary, the above cases demonstrate the uncertainty that arises when relying upon oral terms and conditions. That is, where the terms fall into dispute, the matter may necessarily be determined by the QCAT’s assessment of the applicable evidence, and agents will be aware that this does not always result in a favourable outcome for rental providers. Agents are, therefore, urged to utilise REIQ-approved forms, and to ensure that the same have been properly completed, signed and dated. Any amendments to the terms of a lease agreement should always be agreed in writing to avoid the risk of a QCAT process.

Read another property management article from the REIQ: The importance of evidence in QCAT.

Or browse our suite of property management articles.