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Reducing a fixed term lease

Reduction of a fixed term tenancy agreement

If a tenant is living in a property subject to a fixed term tenancy agreement (‘FTL’) and they wish to leave the property before the FTL expires, they may be able to make an application to the Victorian Civil and Administrative Tribunal (‘VCAT’) for reduction of the term of the fixed term tenancy, pursuant to section 234(1) of the Residential Tenancies Act 1997 (Vic) (RTA).

For an application under section 234 to succeed, the applicant must convince a VCAT member that they have experienced an unforseen change of circumstances which will cause severe hardship if the term of the FTL is not reduced. In addition, an applicant must show that their severe hardship outweighs any hardship the other party will face if the term of the lease is reduced.

This statutory test creates a high threshold that must be met in order for an application under section 234 to succeed. In addition, landlords and their agents will usually seek to vigorously defend section 234 applications and it is rare for these matters to proceed by way of consent. Each of the key elements required to succeed in a section 234 application are discussed in further detail below.

If VCAT decides to grant an application for reduction of an FTL under section 234, they may also decide to make an order under section 234(3) requiring the applicant to pay an amount of compensation to the other party. 

Who can apply for reduction of a fixed term tenancy agreement?

Any ‘party’ to a fixed term tenancy agreement is entitled to make an application under section 234 for reduction of the FTL. This means that a landlord or a tenant (or one of a group of co-tenants) can make an application under section 234. An applicant tenant should name and serve any co-tenants as well as the landlord when making an application under section 234, as the co-tenant’s interests will potentially be affected by the outcome of the application. Applications by a co-tenant under section 234 frequently arise in situations where either a FVIVO or a PSIVO exists between the co-tenants and there are special provisions which address these types of situation (see ‘unforseen circumstances’ below for further detail).

It is also a requirement of section 234 that there is a FTL currently on foot. Where a previous FTL has expired and the tenant(s) have remained in possession, the FTL will have converted to a periodic tenancy as a result of section 230, and no application under section 234 will therefore be possible. Refer to ‘Creation of Tenancy’ for further information on these situations.

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

In order for VCAT to grant an application for reduction of a FTL pursuant to section 234, it must be satisfied of the following four criteria, as described in section 234(2):

a)     There has been an unforseen change in the applicant’s circumstances; and

b)    The applicant has suffered ‘severe hardship’; and

c)     The change of circumstances caused the severe hardship; and

d)    The severe hardship of the applicant if the term of the FTL were not reduced is greater than any hardship the other party would suffer if the term of the FTL were reduced.

These criteria are discussed in more detail below. It should also be noted that even where an applicant can establish these criteria, VCAT still has a discretion whether or not to reduce the term of an FTL, given the use of the word ‘may’ in section 234(2).

a)     ‘Unforeseen change of circumstances’ – FVIVOs and PSIVOs

There are two limbs to this phrase and it may be helpful to separate them in order to precisely clarify the grounds of an application. The two limbs are:

1.     There has been a change of circumstances; and

2.     That change of circumstances is unforseen.

In relation to point (1), it is important to note that the use of the words ‘because of’ in section 234 require that there be a direct causal link between the change in the applicant’s circumstances, and the relevant hardship they are relying on in seeking to have the term of the FTL reduced. 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 section 234 application to VCAT, and to assist when making submissions before a VCAT 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 section 234 is likely to fail. The change of circumstances should be more akin to something the applicant was unable to control or reasonably anticipate.

Importantly, section 234(2A) provides specific examples of situations where a VCAT member may be satisfied that the applicant has experienced an unforeseen change in circumstances that will cause the applicant to suffer severe hardship. These circumstances relate to situations where either a FVIVO or a PSIVO order has come into effect concerning the applicant. The two relevant situations prescribed by section 234(2A) are as follows:

1.     The applicant is excluded from the rented premises the subject of the FTL, pursuant to either a FVIVO or a PSIVO (i.e. the applicant is the respondent to the FVIVO or PSIVO); or

2.     The applicant is a protected person under an FVIVO or PSIVO and is seeking to reduce the term of the FTL in order to protect their own safety or that of their children.

There are two important things to note about the specific provisions given by section 234(2A).

·         Firstly, even where one of the above two section 234(2A) situations apply, VCAT is not bound to find that there has been an unforeseen change of circumstances that has caused the applicant severe hardship. This is due to the use of the word ‘may’ in section 234(2A). However, given how specific this provision is, it seems likely that VCAT would make such a finding if either of the above two situations applied; and

·         Secondly, the relevant FVIVO or PSIVO in the above two examples does not need to be a final order, and could be an interim order (in contrast to application under section 233A for a new tenancy agreement). 

b)    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 section 234 seems to further indicate that an application must demonstrate a significant or high-degree of ‘hardship’, although there is no judicial authority for this proposition, or any mention of this higher threshold in the commentary to the annotated RTA.

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.

·         For example, VCAT have previously found that a tenant had experienced an unforseen change of circumstances when that tenant became no longer able 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 its father. See Mercuri v Jefferis (Residential Tenancies) [2013] VCAT 2141 (22 November 2013.

·         Similarly, the Queensland equivalent of VCAT has considered a similar provision to section 234, and found that the requirement of ‘excessive hardship’ is satisfied where one of the tenants suffers serious injuries in motor accident, and this leads to significant drop in household income, problems accessing the property (mobility issues), and a need to relocate elsewhere closer to family supports. See Leddicoat v Walker [2010] QCATA 18 (26 May 2010) 

On this basis, 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 (e.g. where a FVIVO or PSIVO has come into effect);

·         Change in family circumstances requiring urgent relocation (e.g. such as having to care for a sick family member interstate or overseas).

Also, as the annotated RTA commentary at section 24 states, the Charter of Human Rights and Responsibilities Act 2006 (the Charter) may be relevant in determining a party’s hardship. In particular, the Charter may be relevant in the following three ways:

1.     All Victorian legislation, including the RTA, must be interpreted compatibly with human rights (Charter section 32(1)).

·         Decisions of domestic, foreign, and international courts and tribunals relating to human rights can be referred to by parties and the Tribunal (Charter section 32(2)).

·         The Charter outlines the human rights that Parliament specifically seeks to protect and promote in sections 8-27. Some of these rights are likely to be particularly relevant to an applicant tenant, including recognition and equality before the law (section 8), right to life (section 9), freedom to choose where to live (section 12), right to privacy and home (section 13), and protection of families and children (section 17).

·         Accordingly, it can be argued that some provisions in the RTA (including section 234) should be looked at anew or interpreted in a way that promotes a person’s rights under the Charter. 

2.     All public authorities must give proper consideration to and act compatibly with human rights, section 38 Charter.

·         Victoria’s largest landlord, the Director of Housing, and the registry of VCAT are public authorities who are required to ensure systemic compliance with Charter objectives.

·         However, it is unlikely that section 234 applications will ever occur in a public housing context, given that public housing tenants are not subject to fixed term tenancy agreements. 

3.     When VCAT is called upon to exercise discretion, whether under the RTA or the VCAT Act or upon a request to adjourn a hearing, consideration of the Charter’s human rights objectives may be added to the consideration of hardship and the balance of convenience. 

·         This is similar to point 1 above. It could be argued that in VCAT’s exercise of its discretion under section 234 (i.e. whether to make an order reducing FTL), a tenant’s rights under the Charter should considered along with other aspects of the tenant’s hardship.

In addition, as discussed above, s 234(2A) specifically provides that VCAT may find there has been an unforeseen change of circumstances causing severe hardship where an applicant has been excluded from a property pursuant to a FVIVO or PSIVO, or where the applicant is a protected person under a FVIVO or PSIVO, and needs to reduce the FTL to protect their or their children’s safety. In these circumstances, VCAT will generally more readily find that the applicant can show severe hardship, although they are not obliged to do so.

c)     The unforeseen change of circumstances causes the severe hardship

As discussed above, the wording of section 234(2) requires that this ‘severe hardship’ is caused by 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 FTL is not reduced (i.e. the applicant is forced to continue performing their duties under the FTL, such as paying rent).

Similarly, this criteria will not be met if a tenant’s severe hardship was pre-existing at the time the lease was entered into. Although it may be possible to argue that a pre-existing condition was significantly worsened because of an unforeseen change of circumstances. It is important to be clear about this distinction.

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

This criteria from section 234(2) requires the VCAT member to balance the severe hardship that the applicant will suffer if the term of the FTL is not reduced against any hardship the other party will suffer if the term of the FTL is reduced. Accordingly, it is important to be able to anticipate what the other party might argue their ‘hardship’ is at the VCAT hearing in order to be able to make cogent arguments about why an applicant tenant’s ‘severe hardship’ is greater. The type of hardship that the other party (or parties) to a section 234 application is likely to suffer will largely depend on who the other party is.

In all section 234 applications made by a tenant, the other party will include the landlord of the rented premises. In most cases, the hardship the landlord would suffer if the term of the FTL is reduced will be financial. As with compensation claims where a tenant has ‘broken their lease’ (discussed below), a landlord who is the respondent to a section 234 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 tenant; 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 landlord can be offset by VCAT making a compensation order (see below).

In addition, some section 234 applications by a tenant might also have a co-tenant as the other party, particularly where either a FVIVO or PSIVO is in place between those co-tenants. In such instances the ‘hardship’ of the other party would generally include the inconvenience any other party who is a co-tenant will experience if the term of the FTL is reduced, and they are forced to find new housing. However, for obvious reasons, where the other party is excluded from the premises under a FVIVO or a PSIVO, they will not be able to rely on this argument of inconvenience.

VCAT’s power to award compensation in a section 234 application

Where VCAT agrees to grant an application under section 234 they have a further power to order that a successful applicant compensate the respondent for any costs arising from the reduction of the FTL (section 234(3)). 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 landlord’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.

Relevantly for Homeless Law clients, VCAT’s ability to make an order for compensation under section 234(3)) could be raised as an argument against the landlord’s hardship outweighing that of the tenant. However, when running a section 234 argument, particularly where family violence is involved, lawyers should advocate strongly for VCAT not to make significant compensation orders against their client pursuant to section 234(3).

This is because the clear Parliamentary intention behind section 234 was to provide a mechanism whereby parties who have experienced an unforseen change in circumstances could apply to reduce the term of their FTL 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 section 234 if VCAT were to award compensation under section 234(3) on terms comparable to what a tenant might be liable to pay in relation to a lease break compensation claim pursuant to section 210.

This contrast between sections 234 and 210 is particularly evident given that one of VCAT’s key considerations in a section 234 application is the individual parties’ circumstances and hardship, whereas section 210 does not mention any such considerations.

Reduction of fixed term tenancy agreement v. ‘lease-breaking’

Section 234 applications  that result in the term of a FTL being reduced are different from situations where a tenant ‘breaks the lease’, i.e. leaves a property prior to the expiry of the fixed term lease without making any application to VCAT for a reduction of the term of that lease.

Homeless Law do not assist tenants with advice or representation in relation to breaking their lease, and clients seeking this assistance should be referred to the Tenants Union of Victoria.

VCAT application forms

Depending on a tenant’s circumstances, there are two different VCAT application forms that might be used to lodge a section 234 application for reduction of a fixed term tenancy.

Where the applicant tenant is a protected person in relation to a FVIVO or PSIVO, the ‘protected person’ application form should be used, available here: ‘Application by a protected person’.

Where the applicant is not a protected person in relation to a FVIVO or PSIVO, the general application form will suffice, available here: ‘General VCAT application’.

Resources:

·         Mercuri v Jefferis (Residential Tenancies) [2013] VCAT 2141 (22 November 2013): VCAT decision where FTL reduced because tenant lost benefit of disability payments in relation to a child who went to live with its father.

·         Leddicoat v Walker [2010] QCATA 18 (26 May 2010): Queensland’s VCAT equivalent, the QCATA, interpreting section 310 of Residential Tenancies and Rooming House Accommodation Act 2008, which allows parties to apply to terminate a tenancy on grounds of excessive hardship. Decision confirms initial Tribunal member’s finding that excessive hardship successfully shown where one of the tenants suffers serious injuries in motor accident, and this leads to significant drop in household income, problems accessing the property (mobility issues), and a need to relocate elsewhere closer to family supports.