OAKINS & FABERMAN

In the matter of *Oakins & Faberman*, Terry J of the Supreme Court of Victoria considered a dispute concerning the interpretation of a clause within a commercial lease agreement. The applicants, Oakins and Faberman, sought a declaration that the respondent, a commercial landlord, was not entitled to charge them for certain outgoings under the lease. The core of the disagreement lay in whether the landlord's expenditure on a new air-conditioning system constituted a "capital improvement" or a "repair and maintenance" expense, and consequently, whether it was recoverable from the tenants as an outgoing.

The primary legal issue before the Court was to determine the proper characterisation of the expenditure on the air-conditioning system. Specifically, the Court had to ascertain whether the installation of a new, more efficient system, replacing an older, less functional one, fell within the definition of "repair and maintenance" as contemplated by the lease, or if it constituted a capital improvement that the landlord was obliged to bear at their own expense. This involved a close examination of the lease terms and relevant case law concerning the distinction between capital expenditure and revenue expenditure in the context of commercial leases.

Terry J reasoned that the lease defined "outgoings" to include costs for "repair, maintenance, and replacement" of building services. However, the Court found that the installation of a new air-conditioning system, which significantly enhanced the building's functionality and efficiency beyond mere restoration, was more akin to a capital improvement. The judge applied the principle that where expenditure results in a lasting improvement or an addition to the property, rather than merely restoring it to its former condition, it is generally considered capital in nature. The Court noted that while some replacement might be considered maintenance, the scale and nature of the upgrade here went beyond that.

Consequently, Terry J held that the landlord was not entitled to recover the cost of the new air-conditioning system from the tenants as an outgoing under the lease. The Court made declarations to this effect, finding in favour of the applicants, Oakins and Faberman.