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Ending a fixed term rental agreement due to hardship

Last updated: 29 Mar 2021

 

Please note – if your client wants to reduce their residential rental agreement due to family violence, and the family violence perpetrator is a party to the agreement, you should consider using the family-violence specific procedure of the Residential Tenancies Act 1997 (Vic) (RTA). The family violence provisions apply to both fixed and periodic rental agreements and may assist to reduce your client’s requirement to pay compensation . See “Family Violence provisions” for more information.

Reduction or termination of a fixed term residential rental agreement because of hardship

If a renter is in hardship and living in a property subject to a fixed term residential rental agreement (‘fixed term agreement’) and they wish to leave the property before the fixed term agreement expires, they can make an application to the Tribunal to reduce or terminate the term of the fixed term agreement (s 91U(1) RTA).

For the Tribunal to make an order under s 91U, it must be satisfied that the applicant has experienced an unforeseen change of circumstances which will cause them severe hardship if the term of the fixed term agreement is not reduced or terminated. The Tribunal must also be satisfied that the hardship of the applicant if the term is not reduced or terminated outweighs any hardship the other party will face if the term is reduced or terminated. It can be difficult to overcome this relatively high threshold, particularly as residential rental providers and their agents will usually seek to vigorously defend s 91U applications and it is rare for these matters to proceed by way of consent.

If VCAT decides to grant an application for reduction or termination of a fixed term agreement under s 91U, they may also decide to make an order under s 91U(3) requiring the applicant to pay an amount of compensation to the other party. This power is entirely discretionary and there is no obligation on the Tribunal to make a compensation order.

For Part 4A site tenants, an equivalent provision to s 91U exists in s 207L RTA.

Practice tip

There is no automatic right to appear in an application to reduce a fixed term agreement. Accordingly, leave will be required under s 62(1)(c) Victorian Civil and Administrative Tribunal Act 1998 (Vic) for the applicant to be represented. See further Where do I go? What do I say?.

Who can apply for reduction or termination of a fixed term agreement?

Any ‘party’ to a fixed term residential rental agreement is entitled to make an application under s 91U for reduction or termination of a fixed term agreement – including a residential rental provider, renter, or one of a group of co-renters. An applicant renter should name and serve any co-renters as well as the residential rental provider when making an application under s 91U, as the co-renter’s interests will likely be affected by the outcome of the application.

It is also a requirement of s 91U that there is a fixed term agreement on foot. Where a previous fixed term agreement has expired and the renter(s) have remained in possession, the agreement will have converted to a periodic residential rental agreement (s 91Q), and no application under s 91U is possible. Note however that this may be complicated if one co-renter has given a notice of intention to vacate the property without the other co-renters’ consent. There is conflicting authority on the status of the tenancy after that point: see Hammersmith and Fulham LBC v Monk [1991] UKHL 6, Pecotic v Karagiannakis (Tenancy) [2006] NSWCTTT 457; Duren and Duren v Knell and Slatter [1997] NSWRT 121, contrasted with the decision in T & K Family Super Fund Pty Ltd v Steed & Larkin (Residential Tenancies) [2020] VCAT 9.

Important practice tip

Because applicants under s 91U must be parties to a fixed term agreement, is important that clients wishing to avail themselves of this remedy retain keys to the rental property until VCAT has heard and determined their application. Return of keys will generally result in termination by abandonment under s 91F.

The result of this is that the lease may be treated as broken, meaning the renter would be left having to pay lease breaking costs and the application under s 91U would fail (see below at 5. ‘Reduction of fixed term residential rental agreement v. ‘rental agreement-breaking’). As such, it is important that you clearly advise your client of this, as residential rental providers and agents will often apply significant pressure on clients to return keys if they become aware that an application under s 91U has been or will be made.

How are reduction or termination of fixed term tenancy matters decided at VCAT?

In order for VCAT to grant an application for reduction or termination of a fixed term agreement under s 91U, it must be satisfied of the following four criteria (s 91U(2)):

  1. there has been an unforeseen change in the applicant’s circumstances; and
  2. the applicant will suffer ‘severe hardship’ if the term of the fixed term agreement is not reduced or terminated; and
  3. the change of circumstances caused the severe hardship; and
  4. the severe hardship to be suffered by the applicant outweighs any hardship the other party would suffer if the fixed term agreement was not maintained.

It should also be noted that even where an applicant can establish these criteria, VCAT retains a residual discretion as to whether to make an order under s 91U (noting the use of the word ‘may’ in s 91U(1)).

‘Unforeseen change of circumstances’

To satisfy this criterion, it must be shown that:

  1. there has been a change of circumstances; and
  2. that change was unforeseen.

In relation to point (1), note that the use of the words ‘because of’ in s 91U requires that there be a direct causal link between the change in the applicant’s circumstances, and the relevant hardship they are relying on. This should be kept in mind when seeking to identify and explain what the relevant change in circumstances is, for both the purposes of drafting a s 91U application to the Tribunal, and making submissions before a Tribunal member.

In relation to point (2) above, it is important to note that if the change was foreseen by the applicant, then their application under s 91U is likely to fail. The change of circumstances should be something the applicant was unable to control or reasonably anticipate.

The applicant has suffered severe hardship

The RTA does not provide any definition of ‘hardship’, and Courts have generally taken a common-sense approach to the word, asking what a reasonable bystander with knowledge of all the facts would conclude (Rukat v Rukat [1975] 1 All ER 343). The addition of the word ‘severe’ in s 91U seems to indicate that an applicant must demonstrate a significant or high-degree of ‘hardship’, although there is no judicial authority for this proposition.

In Cosic v Director of Housing [2007] VSC 486, Forrest J noted:

There is no statutory definition of the expression “hardship” within the Act. However, in many different contexts courts have, from time to time, expressed views as to the meaning of the word. In cases involving the application of the Family Law Act, “hardship” has been described as being “akin to such concepts as hardness, severity, privation, that which is hard to bear or a substantial detriment”. In Re Kabalan, a case involving the construction of the word in the context of the Bankruptcy Act and whether a filing fee was to be payable, Gummow J held that the expression was not to be limited to financial hardship, but included any condition which pressed upon a person with particular asperity.

Generally, ‘hardship’ has been held to potentially include any ‘appreciable detriment whether financial, personal, or otherwise [with] each case depending on its own particular facts’ (FG O’Brien Limited v Elliott [1965] NSWR 1473 at p 1475). Examples of where tribunals have considered applicants would suffer severe hardship if an order were not made include:

  • A renter became unable to care for a disabled child with complex needs, and therefore lost the benefit of additional social security payments when the child went to live with their father: Mercuri v Jefferis (Residential Tenancies) [2013] VCAT 2141 (22 November 2013).
  • A renter suffered serious injuries in a motor accident leading to a drop in household income and mobility issues to access the property, with the renter wishing to move elsewhere to access family supports (on the Queensland equivalent provision requiring “excessive hardship”): Leddicoat v Walker [2010] QCATA 18 (26 May 2010);
  • A residential rental provider was diagnosed with terminal cancer causing financial hardship and an “unexpected and urgent” need to sell the property subject to vacant possession: WXM v DDB [2019] VCAT 682 (10 May 2019)
  • Kumar v Soung (Residential Tenancies) [2020] VCAT 605 where the tenant was $11,212 in arrears but could not pay rent without suffering severe hardship during the COVID-19 pandemic.

Other examples of hardship might include:

  • loss of income (e.g. loss of employment or a change in Centrelink entitlements);
  • inability to live in the rented premises or to feel safe in the rented premises (though consider the separate family violence lease break regime – Family Violence Provisions);
  • change in family circumstances requiring urgent relocation (e.g. such as having to care for a sick family member interstate or overseas).

The unforeseen change of circumstances causes the severe hardship

As discussed above, the wording of s 91U(2) requires that the severe hardship relied upon has a causal connection to the ‘unforeseen change in circumstances’. It is therefore important to identify the link between the change in circumstances, and the resulting ‘severe hardship’ on the applicant if the term of the fixed term agreement is not reduced or terminated (i.e. the applicant is forced to continue performing their duties under the fixed term agreement, such as paying rent).

Similarly, this criterion will not be met if the severe hardship pre-dated the fixed term agreement. Note, however, that it is still possible to argue that a pre-existing hardship worsened because of an unforeseen change of circumstances.

The applicant’s ‘severe hardship’ outweighs the other party’s ‘hardship’

This criteria from s 91U(2) requires the VCAT member to balance the severe hardship that the applicant will suffer if the term if the fixed term agreement is not reduced or terminated against any hardship the other party will suffer if it is reduced or terminated. Accordingly, it is important to be able to anticipate what the other party might argue their ‘hardship’ is at the Tribunal in order to be able to make cogent arguments about why an applicant renter’s ‘severe hardship’ is greater. The type of hardship that the other party (or parties) to a s 91U application is likely to suffer will largely depend on who the other party is. You should also request evidence of any hardship that a residential rental provider submits they would experience.

In all s 91U applications made by a renter, the other party will include the residential rental provider of the rented premises. In most cases, the hardship the residential rental provider would suffer if the term of the fixed term agreement is reduced or terminated will be financial. As with compensation claims where a renter has ‘broken their lease’ (discussed below), a residential rental provider who is the respondent to a s 91U application may be able to establish the following three types of financial loss in the event that a fixed term lease is terminated early:

  1. Re-advertising expenses: reasonable costs incurred in having to re-advertise the premises; and
  2. Loss of rent: the rent lost between termination of the existing fixed term lease, and the property being re-let to a new renter; and
  3. Re-letting fees: the pro-rata percentage of the initial letting fee that has been effectively lost as a result of the fixed term lease terminating early.

However, these losses of the residential rental provider can be offset by the Tribunal making a compensation order (see below).

In addition, some s 91U applications by a renter might also have a co-renter as the other party. In such instances the ‘hardship’ of the other party would generally include the inconvenience any co-renter will experience if the term of the fixed term agreement is reduced or terminated, and they are forced to find new housing. However, for obvious reasons, where the other party is excluded from the premises under a family violence or personal safety intervention order, they will not be able to rely on an inconvenience argument.

Tribunal’s power to award compensation in a s 91U application

Where the Tribunal makes an order under s 91U(1), it has the further power to order that a successful applicant compensate the respondent for any costs arising from the reduction or termination of the fixed term agreement (s 91U(3)). This power is entirely discretionary. In making such an order, VCAT will normally attempt to make a reasonable pre-estimate of loss, and will be largely guided by the parties’ submissions. From a residential rental provider’s perspective, the relevant losses are likely to be based on the three types of loss set out above, i.e. lost rent, re-advertising and re-letting fees.

Importantly, the Tribunal’s ability to make an order for compensation under s 91U(3) can be raised as an argument for why the residential rental provider’s hardship does not outweigh that of the renter (as any hardship could be addressed through a compensation order). Nonetheless, when running a s 91U argument, lawyers should advocate strongly for the Tribunal not to make significant compensation orders pursuant to s 91U(3). It may be necessary to highlight that the clear parliamentary intention behind s 91U was to provide a mechanism for parties who have experienced an unforeseen change in circumstances to terminate or reduce the term of the fixed term agreement without being liable for the same costs that would arise in situations where a party unilaterally ‘breaks the lease’. Accordingly, it would seem to defeat the purpose of s 91U if VCAT were to routinely award compensation under s 91U(3) on terms comparable to what a renter might be liable to pay in relation to a lease break compensation claim under s 210 (where no consideration of hardship is required).

Reduction of fixed term residential rental agreement v. ‘rental agreement-breaking’

Section 91U applications are different from situations where a renter ‘breaks the lease’, i.e. leaves a property prior to the expiry of the fixed term agreement without a Tribunal order.

In such cases the fixed term agreement terminates due to abandonment under s 91F and the renter is generally liable for the residential rental provider’s pecuniary losses that flow from the abandonment. Under s 211A(3), in calculating the amount of compensation payable for lease breaking by renters or Part 4A site tenants, the Tribunal is required to:

  • determine advertising costs and reletting fees (if any) incurred by the residential rental provider or the site owner (as the case requires) on a basis that is proportionate to the actual cost of securing the renter; and
  • determine the amount of compensation for loss of rent (if any) by taking into account what loss could reasonably have been mitigated by the residential rental provider or site owner promptly reletting the rented premises; and
  • have regard to any severe hardship the renter or Part 4A site tenant would have been expected to suffer due to an unforeseen change in circumstances, if the residential rental agreement or site agreement had continued; and
  • not award any compensation for loss of future rent to the residential rental provider or site owner, if they served a notice to vacate on the renter or site tenant, unless the notice was served because the renter or site tenant terminated or repudiated the residential rental agreement or site agreement;
  • determine compensation payable after a renter or a site tenant has given the residential rental provider or the site owner a notice of intention to vacate under sections 91ZB, 91ZC or 207S.

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