A warning to property managers about letting properties for an unauthorised purpose

A recent decision of the Queensland Civil and Administrative Tribunal Appeal Tribunal (Appeal Tribunal) highlights the risks for property managers in arranging for the letting of a property for an unauthorised or unapproved purpose.

However, just because the purpose might be unapproved, it does not mean that the tenant may avoid all their obligations.

Background

This appeal arose from a tenancy dispute between the property manager, Song Tae Park (the property manager), who managed rental property at Southport, and the tenant, Manee Saechun (the tenant).

On 16 July 2023, the property manager and the tenant entered into a General Tenancy Agreement for the tenant to occupy the downstairs level of a two-storey residence (the property) from 22 July 2023 for a period of 12 months at $650.00 a week. The property manager agreed that the tenant could conduct a massage business from the property, and the tenant carried out structural improvements by building a separate room for massage treatment in the downstairs level, with the permission of the property manager. The tenant spent $2,450.00 on these improvements.

But the problem was, the property were not zoned or approved for that business use.

After occupying the downstairs level for 19 weeks, the tenant decided to move out of the property. The reason given was that she wanted to register her business, but she was told by the property manager not to do that or the property manager (or his son) would “get into trouble” if the Council came to inspect the property. This statement proved prophetic, as, in due course, a Notice to Show Cause was issued by the Gold Coast City Council on 10 April 2024 with respect to the unapproved use of the property, citing section 114 of the Building Act 1975 (Qld).

The tenant’s occupancy of the downstairs level of the property, and operating a massage business from there, was unlawful.

The tenant vacated the property on or about 1 December 2023, but she did not remove the massage treatment room or make good the property. She had also paid two weeks’ rent in advance when vacating.

There were text discussions between the property manager and the tenant about a “break-lease” fee, but the tenant did not pay any money to the property manager for breaking the tenancy agreement.

The first proceeding

After the tenant vacated the property, on 5 February 2024 the property manager commenced a proceeding in the minor civil disputes (residential tenancy) jurisdiction of QCAT claiming a break lease fee, outstanding rent, and repairs in the sum of $2,200.00. The tenant counterclaimed seeking a refund of all rent paid ($12,350.00), a refund of additional rent paid in advance ($1,300.00), the cost of the improvements, and the bond of $2,600.00.

At the hearing of both applications, there was no dispute that the occupancy of the downstairs level of the property was unlawful. The adjudicator relied upon s 181 of the Residential Tenancies and Rooming Accommodation Act 2008 (Qld) (RTRA) to determine that the property manager had breached the tenancy agreement.

The adjudicator made a finding of fact that the property manager knew, or ought to have known, about the legal impediment at the time of letting the downstairs level of the property to the tenant.

On the basis of the finding that the tenant’s unlawful occupancy of the property was an insuperable legal impediment to the efficacy of the tenancy agreement, the adjudicator ordered that the property manager repay to the tenant all of the rent, cost of improvements and the bond, totalling $16,100.00 plus the tenant’s filing fee of $379.50. The property manager’s claim was dismissed.

The appeal

On 6 June 2024, the property manager filed an application for leave to appeal the adjudicator’s decision. Leave to appeal was required under s 142(3)(a)(i) of the Queensland Civil and Administrative Tribunal Act 2009 (Qld) (QCATA), because the appeal was from a decision of an adjudicator on a mixed question of facts and law.

The Appeal Tribunal identified the essence of the appeal to be that the adjudicator had erred in giving judgment to the tenant, because:

1. the tenant did not have permission to make the improvement/massage room;
2. she was aware of the reduced ceiling height;
3. she utilised the room for her massage business;
4. she failed to remove the room/improvement; and, so
5. the tenant had illegally created the improvement.

The Appeal Tribunal identified that the application raised questions of law about the basis upon which the adjudicator had formulated and allowed the damages claimed in the tenant’s initial application, and the fact that the adjudicator had proceeded on the assumption that the tenancy agreement was an illegal contract.

The Appeal Tribunal’s analysis

The Appeal Tribunal identified a fundamental error in the original decision of the adjudicator, namely that the adjudicator had failed to properly consider the legal consequences of the tenant’s unlawful occupation of the property. The reason the tenant terminated the tenancy agreement was not due to the Notice to Show Cause (which issued several months after the tenant vacated), but the information conveyed to her from the property manager that she could not lawfully carry on the business at the property.

This supported the conclusion that the property manager knew all about the unlawful nature of the arrangement.

The tenancy agreement was therefore voidable, at the tenant’s option. But the Appeal Tribunal also held that the adjudicator had erred by ordering a full refund of rent.

This was because, although the tenancy agreement was unenforceable by the property manager, and voidable by the tenant, restitution of rent was not justified. The Appeal Tribunal explained that the award of restitution depends on whether it would be unjust for the recipient to retain the benefit:

[22] Clearly, because of the legal impediment, the tenancy agreement is unenforceable by the applicant. However, that does not mean the tenant is entitled to restitution on the basis of the illegality insofar as it relates to the rent. In Equuscorp Pty Ltd v Haxton (“Equuscorp”) ^[1] the High Court provided some general guidance as to when a claim in restitution might be made when parties enter into a contract, the performance of which is unlawful:

The outcome of a restitutionary claim for benefits received under a contract which is unenforceable for illegality, will depend upon whether it would be unjust for the recipient of a benefit under the contract to retain that benefit. There is no-one-size-fits-all answer to the question of recoverability. The central policy considerations at stake…is the coherence of the law. In that context it will be relevant that the statutory purpose is protective of a class of persons from whom the claimant seeks recovery.

Therefore, while the adjudicator was correct to find a legal impediment to the tenancy agreement existed under section 181 of the RTRA, the Appeal Tribunal held that the adjudicator’s analysis of remedies available in those circumstances was wrong, and did not provide any justification to award the damages sought by the tenant in her application. The Appeal Tribunal was satisfied that the tenant had enjoyed the property and operated her business for 19 weeks and, so, refunding all rent effectively rewarded the tenant with an unjust, rent-free benefit of the use of the downstairs level of the property.

It is important to note that the Appeal Tribunal distinguished this finding that the tenant was not entitled to a full refund of rent from the claim for costs incurred by the tenant as a result of the improvements. It found that the property manager had been unjustly enriched by the construction of the massage room, which he had approved and later benefited from, by advertising the property as a two-bedroom tenancy. As the tenant could never recover the value of her expenditure, the Tribunal held that restitution ought to be awarded to the tenant for the cost of improvements and painting.

Finally, the Appeal Tribunal held that the tenant was entitled to the bond, given the legal impediment under section 181 of the RTRA to the tenancy agreement.

The final result was a mixed result for both parties; while the tenant could recover costs for improvements and the bond, she was not entitled to a refund of rent.

Conclusion and orders

The Appeal Tribunal set aside the order of the Tribunal that the property manager pay the tenant $16,479.50 and, instead, ordered the property manager pay the tenant the amount claimed, less the rent of $12,350.

The property manager clearly erred in allowing the use of rental property for a purpose known to be unauthorised.

But the legal impediment which afflicted the tenancy agreement did not mean that all the rent paid should, as a matter of equity or fairness, be refunded to the tenant.

For the same reason, given that the property manager had the benefit of the improvements, which remained in situ, the tenant was entitled to the cost of the new room, which the property manager kept and rented.

This is a case where an avoidable error – that is, renting a property for a purpose known to be unapproved – badly rebounded on the property manager. But, the underlying illegality of the tenancy agreement did not mean the tenant could avoid paying rent.

Read more from Cartner Newell Lawyers: QCAT update – Compensation claims.

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