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Leases (SA) - Step-by-Step Guide

Author: By Lawyers For Lawyers

The law is explained as it applies generally and as it applies in particular to retail leases. All lease precedents, retail, commercial, industrial, residential, rural, are provided as are agreements to lease, disclosure statements, licenses and a library of additional clauses and notices, all letters and all that is required for the quick production of a lease following receipt of instructions. For ease of understanding the first lease clause is a summary of the lease, all matters of money are dealt with in one place and changes to the standard clauses, which are even handed to both the lessor and lessee, are to be made in a part set aside for that purpose. Sublease, assignment, transfer, variation and surrender are provided as are various statutory declarations.

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Leases

South Australia

A full commentary on the law and practice as it currently applies to lease matters.



Table of Contents:

Overview

Types of lease

Formality

Agreement to lease

Disclosure

The components of a lease

Options to renew

Form of renewal

Option to purchase

Disputes

Change of parties

Change of ownership of leasehold by sublease or assignment

Surrender of lease

Stamp duty

Mortgage of lease

Registration

Legal costs

Original lease

Further information



Getting the matter underway

Overview

The owner of real estate may allow someone possession of that real estate, giving that person the right to use and enjoy the property to the exclusion of the entire world, including the owner. Such a right is recognised as a proprietary right and thus protected by the law. Ownership of the property does not pass and the owner retains the right to reclaim full enjoyment at the expiration of the lease - a right known as the right of reversion.

The two key elements arising from this description of a lease are:

  • Exclusive possession - The lessee must be exclusively entitled to enjoy the premises to the exclusion of all others, including the lessor.
  • Definite time span - The lease must be for some definable period of time. This might be a fixed term, such as one year, or a periodic term, such as from week to week.

If the arrangement fails to satisfy either of these basic criteria it will not qualify as a lease and will be regarded as a licence, which is merely a contractual relationship that does not attract the benefits available to a proprietary interest.

Types of lease

Residential leases

A residential lease is governed by the Residential Tenancies Act. It need not be in writing, but at the time one is entered into the lessor must give the lessee the prescribed Information Brochure, which summarises the mutual obligations and rights. For more information on residential leases refer to the separate commentary: Residential leases.

Commercial and industrial leases

These leases are governed by the Retail and Commercial Leases Act and are substantially in the same form as a retail lease without those matters specific to shopping centres.

Note however that no disclosure statement is required for a commercial or industrial lease.

Rural leases

These leases are not covered by specific legislation.  

Right to emblements

A lessee of an agricultural property enjoys the additional common law right to the produce of the land. This may be enforced even after termination of the lease.

Hohn & Anor v Mailler [2003] NSWCA 122

Retail leases

Retail leases are governed by the Retail and Commercial Leases Act 1995. No form of lease is prescribed, but a lessor must give a lessee a disclosure statement in the prescribed form before the lease commences. This form is included in the precedents.

Casual mall licences

South Australia is the only state with regulations governing the lease of part of a common area in a shopping centre. The Casual Mall Licensing Code is found in the Schedule to the Retail and Commercial Leases Act.

Under the code, landlords cannot grant a casual mall license unless they have a casual mall licence policy. Landlords must meet a range of disclosure requirements and there are restrictions on granting licenses that may compete unreasonably with adjacent tenants.

Retail leases are dealt with in detail below.

Lease or tenancy

In the past the meanings of lease and tenancy may have differed, but the terms are now interchangeable. To lease premises is the same as to rent them. Landlord means the same as lessor, and tenant as lessee.

Lease or licence

A lease is a proprietary right and enjoys the protection of the law. The lessee is entitled to enjoy the right until the lease expires and may enforce that right against the entire world. A licence, however, is merely a contractual right between the parties to the contract. It is not enforceable against third parties and may be revoked by the grantor, subject to contractual remedies available to the licensee.

Babka P/L v Glenbarry P/L [2003] VSC 402
Sigma Constructions (Vic) P/L v Marvell Investments P/L [2004] VSCA 242

Someone who enters onto land without even the licence of the owner, such as a squatter, or remains on land after a licence has been revoked may be subject to the summary procedure for possession. This is available even if the occupier’s name is unknown, but should not be used if there are doubts as to whether the occupier is in possession under a lease.

Parker v Mielicki [2003] VSC 263 – Family member
Williams and Nyrogen P/L v Rampino [2002] VSC 343 - Licence associated with contract of sale of land
Moar & Anor v Duman [2007] VSC 266 – De facto
Collins, Julie Maree v Collins, David John & Hancock, Penelope [2009] VCC 824 – Family member
Byrne & Anor v Ritchie & Ors [2009] VSC 114 – Procedure not appropriate
V & O Princi P/L v Prestige Holdings Group P/L & Anor [2010] VSC 627 - Not appropriate for ex-lessee

Formality

Validity

The common law has customarily required proprietary rights to be formally established: indeed the fundamental requirement for creating interests in land is that this be done by deed, which is a document formally executed under seal. An arrangement that does not satisfy this level of formality will be invalid or void at law.

However, an exception has always existed for leases of less than three years which may be created orally: s 30 Law of Property Act 1936. Provided that one of the parties can satisfy the court of its essential terms, such a lease will be valid.

NZI Insurance Australia Ltd v Baryzcka and Adelaide Property Investments Pty Ltd (Intervener) [2002] SASC 16

Enforceability

The modern equivalents to the statute of frauds require that, for contracts relating to land to create a legal estate and be enforceable, they must be in writing and signed by the parties. If not, such arrangements are unenforceable unless equity can be called on.

Ability of liquidator to disclaim lease

The High Court in Willmott Growers Group Inc v Willmott Forests Limited (Receivers and Managers Appointed) (In Liquidation) [2013] HCA 51 has held that a liquidator of an insolvent lessor company has the ability to disclaim a lease under section 568(1) of the Corporations Act 2001 (Cth) with the effect of extinguishing the leasehold interest in the subject land, and terminating the accrued rights of the lessee.

The High Court's decision turned on the finding that a lease is fundamentally a contract and, as such, falls under the statutory power to disclaim contracts entered into by the company.

The court did not consider whether the leave of the court was required under section 568(1A) before disclaiming the lease.

Under section 568B(3) a court may set aside a disclaimer only if satisfied that it would cause the party affected prejudice grossly out of proportion to the prejudice that setting aside the disclaimer would cause to the company's creditors.

The lessee may make an application for the disclaimer to be set aside failing which the lessee may claim in the liquidation as an unsecured creditor for losses suffered.

Equitable lease

Equity is a doctrine, applied by all our courts, which allows just results to be delivered, despite there not being compliance with technical legal rules. It regards as done that which ought to be done.

Thus an agreement for a lease of more than three years that would legally be regarded as void, because it was not executed as a deed, may be enforceable as an equitable lease. If the agreement is either supported by something in writing or by part performance and the lessee is not in any breach – that is, he comes ‘with clean hands’ - the lessor may be compelled to grant a lease and execute any necessary documents.

NZI Insurance Australia Ltd v Baryzcka [2003] SASC 190

The principles in relation to an equitable lease were established in Walsh v Lonsdale (1882) 21 Ch D 9.

It has been held that the requirement of part performance does not apply to a lease but rather to an agreement to lease, which is the relevant ‘contract’.

Laserbem P/L v Gainsville Investments P/L [2004] VSC 62

Registering standard terms and conditions  

Under s 119A of the Real Property Act a copy of standard terms and conditions to be incorporated in a lease may be registered at the Lands Titles Office. This allows shorter form leases to be drawn incorporating those standard terms and condition by reference in the lease. If the lease is drawn up in this way, the lessor must provide the lessee with a copy of the standard terms and conditions, before the lessee executes the document.

Application of the Retail and Commercial Leases Act 1995

The Retail and Commercial Leases Act applies to premises that are a retail shop or a retail shop and adjacent dwelling. A retail shop lease is taken to have been entered into when the parties have executed the lease, the lessee enters into possession of the shop as lessee, or a party begins to pay rent as a lessee under the lease or proposed lease.

The definition for a retail shop is broad and includes all business premises at which goods are retailed to the public or at which services are provided, and other premises classified by regulation.

Exclusions from the scope of the Act

The Act does not apply to retail shop leases where:

  • the annual rent exceeds $400,000 (Retail and Commercial Leases Regulations regulation 4);
  • the lease is for 1 month or less;
  • the occupation rights arise under a sale or purchase of property, a mortgage or a defined scheme;
  • the lease is to a public company or its subsidiaries, insurance companies, local councils or to the Crown: s 4.

Premises may also be excluded by regulation. For example, regulation 4 Retail and Commercial Leases Regulations excludes premises where the lessor is a body corporate and the lessee has a controlling interest; or the lessee and lessor are both bodies corporate and the same person has a controlling interest in each.

The Act does not specifically provide for unconscionable or misleading and deceptive conduct. However, s 75 of the Act provides that no party to a lease may engage in conduct that is, in all the circumstances, vexatious in connection with the exercise of a right or power under the Act or the lease.

Applicability of the Competition and Consumer Act

Whilst the lessor has usually had the upper hand in negotiating and setting lease terms, competition and consumer legislation has sought to equalise negotiating power. Where State legislation does not provide ready remedies for misleading and deceptive conduct, many lessees relied on such concepts under Federal legislation to deal with disputes, particularly during the economic downturn of the early 1990s.

Jaldiver P/L & Ors v Nelumbo P/L (1993) ATPR (Digest) 46-097
IOOF Australia Trustees (NSW) Ltd ACN 000 329 706 v John Pravit Tantipech & Anor [1998] FCA 924

Building industry energy efficiency

The Building Energy Efficiency Disclosure Act 2010 (Cth) imposes disclosure obligations in respect of properties over 2000 square metres.

Agreement to lease

As equity is prepared to enforce an agreement to lease. It is often said that such an agreement is as enforceable as a lease. This concept has merged with modern legal concepts to establish the principle that, where it would be unconscionable for either party to resile from the agreement, that party will be estopped from denying the existence of the lease. To this extent, an agreement to lease is as enforceable as a lease.

Waltons Stores (Interstate) Ltd v Maher [1988] HCA 7
Guilfoyle P/L v The National Mutual Association of Australasia Ltd [2000] VSCA 25
Kellow-Falkiners Motors P/L v Nimorakiotakis & Ors [2000] VSCA 1
IGA Distribution P/L v King & Taylor P/L [2002] VSC 440
Azkanaad P/L v Galanos Bros P/L [2008] NSWCA 185 – no agreement

These rights however may be limited to the parties to the contractual agreement.

Chan v Cresdon P/L [1989] HCA 63
McMahon v Ambrose [1987] VicRp 66

Before this principle of estoppel applies it must be established that a concluded agreement exists. The best evidence of such an agreement is the payment of rent and the taking possession, but those events are not necessary if the agreement can be established by other evidence. Mere negotiations do not, though, constitute agreement and the parties may withdraw from negotiations at any time.

Sydney Harbour Casino Holdings Ltd v NMBE P/L [1998] NSWSC 595
Waipara P/L & S H Rayburn Nominees P/L v The Police Association (1998) V ConvR 54-583
Fush v McKendrick & Co P/L [2003] VSCA 88

Disclosure statements

Disclosure statements for retail leases

Disclosure statements s 12 and draft leases s 11 are requirements of the Retail and Commercial Leases Act. A copy of the lease and the prescribed retail tenancy guide must be made available as soon as negotiations commence. And before the lease is entered into the lessee must be given a disclosure statement in the form prescribed in Schedule 1 of the Retail and Commercial Leases Regulations.

If no disclosure statement is given the lessee may apply under s 12 of the Act to a Magistrates Court for an order to avoid the lease in whole or in part, vary the lease, require the lessor to repay money paid by the lessee or to pay the lessee compensation.

The lessee should sign an acknowledgement of receipt of the lessor's disclosure statement before signing the lease.

On renewal, a disclosure statement update should be done which, together with the original, constitutes the new disclosure.

Disclosing lease and fit out costs for retail leases

If the disclosure statement discloses in sufficient detail the obligation to fit out, refit or provide fixtures, plant or equipment for the lessee to obtain an estimate of likely costs, and the lessee agrees to this by signing the disclosure statement, those costs become his financial responsibility: s 14. In that case, the lessee will own the fittings even though they may be affixed to the premises.

If the lease provides for the lessee to pay the lessor an amount towards preparation, stamping and registration of the lease – the ‘ preparatory costs’ - the lessee is not liable to pay until the lessor has provided him with a copy of the account, but only to the extent of:

  • registration fees; and
  • half the other preparatory costs, such as fees charged by a mortgagee for consenting to the lease and costs of attendances on the lessee by the lessor or lessor's lawyer.

The components of a lease

Defining premises

Incorrectly defining or describing the premises may give the lessee a right to damages.

Foong & Leong v Great Union P/L [2001] VCAT 1540

The definition of the lettable area in a lease must be appropriately drafted and scrutinised to ensure that it encapsulates the intention of the landlord and the tenant. How the lessor determines the lettable area, in practice, must be defined when the lease is drafted.

For the lessor this is critical in enabling the apportionment of costs to and recovery of costs from the lessee. For the lessee the areas of a building defined as lettable will impact on the proportion of the outgoings the lessee is liable to pay.

Ray Mullins & Sons P/L v Skycorp Investments P/L [2011] WASCA 49

Use of premises

The lessee is bound to use the premises as specified and failing to do so constitutes a breach. If the lease provides that the use may be altered with the lessor’s consent, there is no implied obligation that the lessor must not withhold consent unreasonably.

Re Archos [1994] 1 Qd R 223

Suitability for proposed use - retail

The premises must be suitable for the proposed use at the time the lease commences: s 18.

JF Hillam Pty Ltd v KL Mooney & PH Hill (1988) 48 SASR 381

If the lessor under a retail shop lease had notice from the lessee before entering into the lease that the premises were required for a particular business, the lease will include an implied warranty that the demised premises are structurally suitable for that purpose for the duration of the lease: s 18(1). This may be expressly excluded from the lease by the lessor.

Commencement date

A lease must have a specified or definable commencing date or it will be void.

Darling Point Securities P/L v Industrial Equity P/L (1991) NSW ConvR 55-589
(2001) 76 ALJ 86

Duration in general

A lease for one year is obviously of fixed duration. A lease from week to week, although theoretically it might go on forever, is still regarded as of fixed duration since either party could terminate it at the end of each repeating period. Contrast arrangements ‘for the duration of the war’ or ‘until the land is required by the council’. These are not for a fixed or determinable duration and are not a lease. They are licences.

Prudential Assurance Company Ltd v London Residuary Body and others [1991] UKHL 10

Statutory term for a retail shop lease

Section 20B of the Retail and Commercial Leases Act provides for a minimum five-year term, including options, for all retail leases. This term is worked out on the assumption that all options given at the commencement of the lease are in fact exercised. A right or option of renewal is not taken into account if given after the lease is entered into.

If the term is for less than five years then, without affecting the validity of the lease, the section extends the period by such time as is necessary to bring it to five years. For example, if a lease is entered into for a term of three years, its term is extended by two years to five years. If it is entered into for a term of two years with an option for a further one year after that initial two years, the term is extended to four years - with the option for a further one year after that initial four years.

This section, however, does not apply if:

  • the lease is a short-term lease (i.e. for a fixed term of six months or less);
  • the lessee holds over with the lessor’s consent and the holding over does not exceed six months;
  • the lease contains a certified exclusionary clause;
  • the lessee has been in possession of the premises for at least five years; or
  • the lease is a sublease, and the term is as long as the headlease allows; or
  • the lease is excluded by regulation.

Leases excluded by regulation 7 are those where the right of occupation granted under the lease is for less than an average of 15 hours in each week over the term of the lease and:

The certified exclusionary clause is one provided under section 20K of the Retail and Commercial Leases Act by a lawyer, or a licensed conveyancer not acting for the lessor, and which certifies in writing that the lessee has requested the certificate and understands that section 20K of the Act does not apply to the lease. The certificate included in the precedent retail lease is self-explanatory.

Periodic leases

Periodic leases roll on until terminated by notice of either party. In the absence of a contrary agreement, the notice must expire at the end of the period after the period in which it is given.

Geographical restrictions – retail

The lease must not restrict the lessee from carrying on business outside the retail shopping centre either during or after the lease expires.  However, it is permitted to restrict the lessee from using the name of the centre in connection with a business carried on outside the centre: s 59.

Security deposit

Many leases provide that the lessee pay a security deposit to secure compliance with the lease terms. Special rules apply to residential and retail tenancies. Generally speaking, there is no presumption that the lessor hold the security deposit in trust for the lessee and so the lessor may use it as they see fit, merely being liable at the lease’s expiration to account to the lessee for that sum. However, the lease may stipulate that the lessor hold that sum on trust, in which case it must be kept separate and not mixed with the lessor’s funds.

Banksia Forge P/L v Veretta P/L (1992) V ConvR 54-440

A security deposit paid during negotiations will ordinarily be returnable to the prospective lessee if the negotiations do not conclude in an enforceable lease.

Sydney Harbour Casino Holdings Ltd v NMBE P/L [1998] NSWSC 595

A mortgagee exercising the power of sale will not be liable to the lessee for a refund of the security deposit paid by the lessee to the mortgagor, or a right to damages that the lessee may have against the mortgagor.

Security bond - retail

The lessor can only require the value of four weeks rent as security: s 19.

Citibank P/L v Simon Fredericks P/L [1993] VicRp 66
Piazza Grande P/L v Portis P/L (1993) V ConvR 54-460

Premium/key money – retail

Key money or any amount sought or given as a premium in connection with the grant of a retail shop lease, or a renewal of a lease, or the assignment of a lease is prohibited: s 15.

Outgoings

Whether the lessor or the lessee is responsible to pay outgoings in relation to the leased premises will depend on the agreement. Leases often require the lessee to pay outgoings such as rates and taxes, but what is included depends on how the obligation is phrased.

Insurance premiums are not outgoings.

FAI Traders Insurance Company Ltd v Savoy Plaza P/L [1993] VicRp 76

‘Costs and expenses paid or incurred’ includes administrative expenses associated with calculation and collection of the lessee’s liability.

Thirty-Fourth Agenda Ltd v S E Dickins P/L (1992) V ConvR 54-432

‘Periodic expenses’ may include gardening and security expenses.

(1990) PLB Dec 25

Under section 73 Residential Tenancies Act lessees cannot be required to pay land tax assessed in relation to the premises. In a retail lease land tax cannot be recovered from the lessee, however the lessor’s liability may be taken into account in assessing the rent: section 30 Retail and Commercial Leases Act.

Retail outgoings

Retail outgoings are not recoverable from the lessee unless the lease provides so, and specifies how the amount is to be determined, apportioned and recovered by the lessor.

  1. Costs of advertising or promoting a retail shop or retail shopping centre are not outgoings for the purpose of section 26 Retail and Commercial Leases Act.
  2. Sinking fund: A lessee may be required to contribute to a sinking fund for repair or maintenance if reasonable details are disclosed in the disclosure statement.
  3. Land tax is not a recoverable outgoing and a contrary provision is void. The lessor may take land tax into account in assessing the rent.
  4. Capital costs are recoverable only if they are ‘permissible obligations’ - that is, the lease or the disclosure statement has specified them so that the lessee can estimate the cost.

Before the lease is entered into and one month before each accounting period, the lessor must give the lessee a written statement setting out estimates as to the lessee’s liability.

In addition to the statement of estimates of outgoings, the lessor must also provide an auditor's report within three months of each accounting period which includes a statement as to whether or not the amounts payable by the lessee were properly incurred. The report must be audited unless the lessee is only liable to pay council rates, water and sewerage rates and insurance premiums, provided receipts are provided with the report.

Retail - advertising, promotion and marketing plans

A lease provision requiring the lessee to advertise or promote its business is void under s 53 Retail and Commercial Leases Act. However if the lease requires the lessee to contribute towards advertising and promotion costs incurred by the lessor, the law implies provisions that the lessor must:

  • give the lessee a marketing plan, a written expenditure statement, and an advertising statement accompanied by an auditor's report on advertising and promotion expenditure two months before each accounting period; and
  • consider the lessee’s proposals for change; and
  • carry forward unexpended contributions.

Retail - trading hours

Under s 61 Retail and Commercial Leases Act trading hours can be regulated only if:

  • the shop is within an ‘enclosed shopping complex’ – that is, a group of three or more retail shops under common ownership or management with a common area through which public access is obtained to all or some of the shops and which is locked to prevent public access through that area when those shops are closed for business;
  • the lease does not reduce permitted hours to fewer than 50 hours per week;
  • core trading hours do not exceed 54 hours per week, do not include Sundays, and have been approved by 75% of lessees in the shopping complex.

Read these provisions together with the Shop Trading Hours Act 1977.

Rent review

Rent review during the term of the lease

In the absence of a review clause, rent will remain the same during the full term of the lease and, depending on the option clause, possibly even through a further term. However, most leases have a rent review clause which may provide for rent to be reviewed during the term of the lease and on renewal by a fixed dollar amount, or a fixed percentage, or by reference to an index (such as CPI), or the market.

Who can initiate a review

This will depend on the review clause, many of which provide that only the lessor can initiate a review. If only one party is nominated as capable of initiating a review that party may elect not to do so, in which case the current rent continues.

R & H Australia P/L v Salta Constructions P/L (1993) V ConvR 54-462
Compare:
Sheralex Nom P/L v Johnson Taylor P/L (1993) V ConvR 54-489

The lessee may also be able to resist a review of rental on the exercise of an option to renew the lease if the option clause nominates the lessor as the party capable of initiating a review in those circumstances.

Highpoint Homemaker Centre (Vic) P/L v Sanstar P/L (1997) V ConvR 54-564

What if the time for a review passes

If the lease provides for a review at a particular time but that time passes, the courts have usually allowed either party, usually the lessor, to seek a review.

Innvale P/L v Barristers’ Chambers Ltd (1989) V ConvR 54-330

This may not be so if the lease provides that time shall be of the essence in relation to the review.

G R Mailman & Associates P/L v Wormald (Aust) P/L (1991) 24 NSWLR 80

Retrospective review may even be available during overholding.

Frater Williams & Co Ltd v Australian Guarantee Corporation (NZ) Ltd (1995) ANZ ConvR 247

Rent review - retail

The base rent cannot be increased to current market rent more than once in 12 months. However, the lease may provide for the rent to increase by a set amount at specified periods during a year. It may also, for example, provide for the rent to be increased to current market rent after 12 months and then be increased by, say, a fixed dollar amount, or a fixed percentage, or by reference to an index (such as CPI), or the market.

Under s 22 — Restrictions on adjustment of base rent provisions are void to the extent that they:

  • reserve to one party a discretion to decide which of two methods to apply to calculate a change or if a particular stipulated method of calculation will be used on a particular occasion; or
  • provide that the base rent increase can be decided by the higher or highest of two or more methods of calculation; or
  • enable the lessor to prevent a decrease in rent as a result of an agreed method of calculating the change.

Market rent review

The terms of a review to current market rent must be based on what would be reasonably expected if the shop were unoccupied and offered for rental for the use to which the shop may be put under the lease. The value of goodwill created by the lessee's occupation and the value of the lessee's fixtures and fittings on the retail shop premises must be ignored in making the assessment: s 35.

If the parties cannot agree, the Act provides for appointment of a valuer, with the costs of valuation to be shared between them. There is no need for a valuation if the parties to the lease agree on the amount of the rent.

Consumer price index (CPI) information

Recorded information is available by phone on 1300 135 070.

Information is also available at the Australian Bureau of Statistics.

Lessee’s right to quiet enjoyment

The lessee’s ‘right to quiet enjoyment’ of the leased premises is the right to possession, free of interruption from the lessor or any other person. It is the lessee’s principal right under the lease and is created by the lessor covenanting with the lessee to pass quiet enjoyment. The lessor will be liable for any damage caused to the lessee as a result of the lessor’s breach of this covenant. A lessee may be able to use breach of this right by the lessor as a defence to an action for possession of the premises.

MEK Nominees P/L v Billboard Entertainments P/L (1993) V ConvR 54–468
Hirlmont P/L v Dybka & Anor [1998] QCA 305
A F Textile Printers v Thalut Nominees P/L & Ors [2007] VSC 73

By common practice the lessor is not responsible for any breach of the lessee’s quiet enjoyment of the premises caused by a third party. However, some recent cases have held the lessor liable for a breach by a third party.

Aussie Traveller P/L v Marklea P/L [1997] Q ConvR 54-485 - actions of another lessee
Southwark London Borough Council v Mills [1998] 3 WLR 49 - residential tenancy

A shopping centre may be liable for the actions of customers using the common property in such a way as to interfere with the lessee’s quiet enjoyment.

Chartered Trust PLC v Davies [1997] EWCA Civ 2256
See (1998) 72 ALJ 497

Compensation for disturbance – retail

A retail shop lease is deemed to provide that if particular kinds of disturbance occur – for example, failing to rectify an equipment breakdown – and the lessor does not rectify the problem as soon as reasonably practicable, under s 38 of the Act the lessor is liable to pay the lessee compensation for loss or damage suffered as a consequence.

The lease may prevent or limit a claim for compensation under this section if the lessee’s attention was specifically drawn to the possibility of the disturbance occurring before signing the lease. Therefore it is prudent to include any such likelihood in the disclosure statement.

Right to fixtures

By exceptions to the doctrine of fixtures, a lessee has the right to remove lessee’s ornamental and trade fixtures at the expiration of the lease, subject to a contrary provision in the lease.

Lessor's rights

As the lessor generally prepares the lease, it usually creates rights in favour of the lessor by requiring the lessee to covenant to do, or not do, certain things and empowering the lessor to enforce those covenants. A lessee will normally covenant to pay rent, pay outgoings relating to the premises and legal costs on preparation of the lease, to maintain the property, and to deliver up the property at the end of the term, et cetera. The lessee’s failure to comply constitutes a breach of covenant, entitling the lessor to terminate.

Repair

The lease has by common practice been prepared by the lessor’s solicitor. This meant the lessor could specify the terms and conditions. It was normal practice to require a lessee to deliver up the premises at the lease end in the same condition as they had been at the beginning of the lease, fair wear and tear excepted. To achieve this, the lessee had to maintain the premises in good repair. Thus it became common to impose a corresponding liability to repair on the lessee.

This liability did not extend to undertaking structural repairs. However the dividing line between structural and non-structural repairs has always been uncertain, particularly if the lease is for a long period.

Alcatel Australia Ltd v Scarcella & Ors [1998] NSWSC 483
Gimtak P/L v Cathie & State of Victoria [1998] VSC 6

Even if the repairs were clearly of a structural nature, the common law did not impose an obligation on the lessor to undertake structural repairs, except in the case of furnished residential premises. However, it became common for the lessor to accept such an obligation and this is now regularly included in leases.

Statutory reforms such as the Retail and Commercial Leases Act 1995 and the Residential Tenancies Act 1995 have also moved towards equalising the obligations of the parties and requiring the lessor to undertake necessary repairs in those particular situations.

Occasionally a lessor may assume a responsibility to maintain the premises in good and substantial repair, thus relieving the lessee of that responsibility, but this is rare.

The responsibility to repair often overlaps with rent abatement clauses relating to the lessee’s right to abate rent in the case of major damage by fire or storm.

Hirlmont P/L v Dybka & Anor [1998] QCA 305

In connection with the lessor’s obligation for structural repairs, recent cases have extended the lessor’s liability for personal injury suffered on the premises, not so much on the basis of the contractual lease between the parties, but rather on the basis of negligence and foreseeability.

Northern Sandblasting P/L v Harris [1997] HCA 39
Assaf v Kostrevski (1999) NSW ConvR 55-883
Jones v Bartlett [2000] HCA 56 - unsuccessful claim for injury to lessee’s invitee
Gration v C Gillan Investments P/L [2005] QCA 184
And to the lessor's agent:
Laresu P/L v Clark [2010] NSWCA 180

Lessee's obligation to repair

Lessors have by common practice sought to pass the obligation for repairs onto the lessee, but if the lease creates an obligation on the lessor to repair, responsibility to do so usually only arises after the lessor receives notice of the need for repair.

O’Brien v Robinson [1973] UKHL 1

However, if the lessor has an ongoing responsibility to maintain adjoining or associated premises, such as common property, the obligation is continuous and no notice is required.

British Telecommunications P/L v Sun Life Assurance Society P/L [1995] 3 WLR 622

A lessor’s obligation to repair may require the lessor to remedy an inherent structural defect.

Credit Suisse v Beegas Nominees P/L [1994] 4 All ER 803

An obligation on the lessee to repair and maintain a particular part of the premises, for instance ‘the inside’, may create a ‘correlative obligation’ on the lessor to maintain another part, such as ‘the outside’.

Barrett v Lounova (1982) Ltd [1990] 1 QB 348

In other jurisdictions the rationale of this case has been doubted.

Ali v Hazim [2002] VCAT 274
Also see article (2000) NZLJ April 105

Two recent unsuccessful attempts by commercial lessees to force lessors to undertake repairs on the basis of an implied obligation are:

Carbure P/L v Brile P/L and Ors [2002] VSC 272
Becker v Cariste [2001] NSWSC 663

If the lease includes a specific covenant requiring the lessor to undertake specific rectification works, such as roof repairs, then the failure to do so will constitute a repudiation entitling the lessee to terminate the lease.

G Vaccari Investments P/L v Vega Press P/L (1991) V ConvR 54-416

A failure by the lessor to undertake statutory repairs will justify termination by the lessee.

Weeks & Anor v Bond [1997] QCA 349 (residential property)

Rectification

Errors may be rectified by the court.

Thermoplastic Foam Industries P/L v Imthouse P/L (1990) ANZ ConvR 532

Preference to be accorded to existing lessee – retail

Except for leases which have a right of renewal, the lessor must presume that the lessee wants a renewal or extension – unless the lessee notifies the lessor otherwise within 12 months before the end of the term.

If a lessor of premises in a retail shopping centre proposes to re-let the premises, and an existing lessee wants a renewal or extension of the term, the lessor must give preference to the existing lessee over other possible lessees of the premises: s 20D Retail and Commercial Leases Act.

If the lease grants the lessee a right of preference the lessor must, between 12 months and six months before the lease ends, start to negotiate in good faith with that lessee for a renewal or extension of the lease.

Under s 20E before agreeing to a lease with another person, the lessor must:

  • offer to renew or extend the existing lease on terms and conditions no less favourable to the lessee than those of a proposed new lease; and
  • provide the existing lessee with a copy of the lease or proposed lease (as renewed or extended) and the required disclosure statement.

The offer to renew or extend must remain open for at least 10 business days after it is given or until its earlier acceptance. If the lessee wishes to accept, this must be done in writing to the lessor within the time stated, or the offer lapses.

The negotiations must continue until either the lessee rejects the offer, or the offer lapses, or the lessee gives written advice that he does not want to continue negotiations.

These provisions do not apply to:

  • a lease containing a certified exclusionary clause;
  • fixed-term leases of six months or less;
  • a sublease where the term is as long as the headlease allows; and
  • a lease excluded by regulation.

Section 20H provides for fair dealing between lessor and lessee over a renewal of lease. Disputes may also be referred to the Commissioner for Consumer Affairs for mediation, or referred to the Magistrates Court.

Options to renew

Options to renew generally require the lessee not to be in default of any covenant as a condition of exercising the right.

B S Stillwell & Co P/L v Budget Rent–A-Car System P/L [1990] VicRp 52

Compare with:

Caltex Properties Ltd v Pittard (1991) ANZConvR 613
Downward Bricklaying P/L v Goulburn-Murray Rural Water Authority [2003] VSC 171

What if the exercise is out of time

Courts have usually construed time limits strictly and a late exercise will be invalid.

Duncan Properties P/L v Hunter [1991] 1 Qd R 101
However compare:
Photo Art & Sound (Cremorne) P/L v Cremorne Centre P/L (1987) 76 ANZ ConvR 347
See Hillier v Goodfellow (1988) V ConvR 54-310
Bezden P/L v A Castellano Nominees P/L [2003] VSC 70

A lessee may not be entitled to protection when even just one day late.

Leads Plus P/L v Kowho Intercontinental P/L  [2000] NSWSC 459

Late exercise of an option, whilst ineffective in itself, may constitute an offer to enter into a new lease and the lessor’s acceptance may constitute an agreement for a new lease.

Traywinds P/L v Cooper [1989] 1 Qd R 222
Abjornson v Urban Newspapers P/L [1989] WAR 191
Duncan Properties P/L v Hunter [1991] 1 Qd R 101
Mossop & Others v Carpet Call (Vic) Pty Ltd [2009] SADC 89

A lessor may be estopped from denying the exercise of an option to renew.

S and E Promotions P/L; John McGrath and Stephen Bates v Tobin Brothers P/L [1994] FCA 1109
Lifoon P/L v Gillard & Ors; Hendriks & Ors v Gillard & Anor [2006] NSWCA 182

Compare Mossop & Others v Carpet Call (Vic) Pty Ltd [2009] SADC 89 where the lessee was estopped from denying the exercise of the option.

Even if the lessee does not have an option, the lessor may be estopped from denying that a promise of a new lease ought to be enforced.

William Hollier & Anor v The Australian Maritime Safety Authority & Ors [1998] FCA 176
(Claim unsuccessful on the facts)

Can the lessee recall the exercise of an option to renew

Once the lessee exercises the option to renew the lessor has a contractual right to require the lessee to proceed with the renewal.

Yulin P/L v Japan Building Projects (Aust) P/L (1991) ANZ ConvR 390
Traywinds P/L v Cooper [1989] 1 Qd R 222
Antonino Giuseppina Ensabella & Sons Pty v Players On Downunder P/L [2000] VSCA 73

Is a purchaser of the freehold bound by the option

It has long been held that an option falls within the lessee’s total interest under the lease.

Mercantile Credits Ltd v Shell Company of Australia Ltd [1976] HCA 9

In jurisdictions where leases are registered on title, the option has been held to be enforceable against subsequent freehold owners.

Tenstat P/L v Permanent Trustee Australia Ltd (1992) 28 NSWLR 625 (registered lease)
Chaisumdet v Ming On Trading P/L (1990) ANZ ConvR 525 (unregistered lease)

Rent paid pending rent review will generally be on account of new rent, which will apply from the commencement of the new term when finally fixed.

American Home Assurance Company v Grimes George St Garage P/L [2008] NSWCA 318

Form of renewal

The lessee is entitled to a lease that is identical to the expired lease and a renewal does not present the lessor with an opportunity to review the lease. The only justified changes are those necessary to reflect the effluxion of time and any change in the parties.

The lessor retypes, prints out, or otherwise copies the exact terms of the expired lease, or simply prepares a deed of renewal of lease which incorporates the expired lease by reference and sets out the necessary changes.

Option to purchase

A right of first refusal or right of pre-emption in favour of a lessee may be included in a lease. Such a right is regarded as different to an option to purchase. It is a purely contractual right, giving the lessee no additional interest in the land.

Attorney-General v Methodist Church [1996] 1 NZLR 230
Walker Corporation P/L v W R Pateman P/L (1990) 20 NSWLR 624
However compare:
Bob Jane T-Marts P/L v Baptist Union of Victoria [1999] VSC 346
Robertson v Lagreg Investments P/L [2004] VSC 86
Pumps & Systems Pty Ltd v LP Reed Investments Pty Ltd [2009] SADC 110

The practical application of such clauses often causes difficulty for the lessor and care must be taken in drafting. There must be some clearly definable end point to the lessee’s right or the lessor may be unable to sell the property to a third party without constantly rechecking with the lessee.

Most option clauses are only exercisable if the party having the benefit of the option is not in breach of the primary agreement, in this case, the lease. However, it may be that a lessee in breach of the lease may still be able to enforce the option if the lessee can show that the lessor is estopped from relying on the breach to avoid the option.

Re Allen Reed and Yvonne Reed v James Lawrence Sheehan [1982] FCA 1
Phillip Webb P/L v 483 Whitehorse Rd P/L [2006] VCAT R78/2006

Can the option be exercised out of time

Time restrictions are usually interpreted strictly but a lessee seeking to exercise an option to purchase out of time may be able to rely on equitable principles to excuse a minor time delay.

Hillier v Goodfellow (1988) V ConvR 54-310

Disputes

Retail

Disputes commonly arise in shopping centres in relation to relocation, exclusivity, fit out requirements, turnover rental, promotion funds and signage.

For other shops, shared parking and repairs and maintenance are often the cause of argument. Old air conditioning units that constantly malfunction test the understanding of the distinction between maintenance and replacement with neither party wishing to incur any cost.

In professionally run centres, parking is organised, replacement lessees are readily found and centre management administers rent and outgoings and contributions to promotion and advertising in a professional fashion.

With leases of shops by mum and dad owners, the administration often falls behind and contributions to outgoings or CPI increases in rentals are often overlooked and are sought perhaps years after the event, causing conflict and trouble.

Including the outgoings in the rental and providing for payment of all outgoings other than consumables by the lessor readily overcomes this administrative problem. However, consider that while GST is payable on the rent, many outgoings do not attract GST. Additionally, outgoings do not necessarily increase by the same amount by which rent increases.

Part 9 of the Retail and Commercial Leases Act 1995 covers how disputes are to be handled. Applications for orders are made in the Magistrates Court and if they involve a monetary claim above $100,000 are referred to the District Court. Disputes may also be referred to the Commissioner for Consumer Affairs for mediation. The Commissioner may intervene in any court proceedings which have already been commenced.

Relocation – retail

If a retail shop lease provides for the lessee's business to be relocated, the lease is also taken under section 57 to have other provisions to ensure that the disruption to the lessee is minimised and allowing the lessee either to accept the offer of the alternate premises - on the same terms as the existing lease - or terminate without penalty. The section does not prevent the parties negotiating a new lease by which to relocate the lessee.

Demolition – retail

Demolition of a building of which a retail shop forms part includes a substantial repair, renovation or reconstruction of the building which cannot be carried out practicably without vacant possession of the premises.

The lessor may only terminate a lease on the grounds of a proposed demolition of the building of which the retail shop forms part if the lease so provides. The lease must also contains terms requiring the lessor to give six months notice of the event and allowing the lessee to terminate on seven days notice within that six-month period.  For a short-term lease the lessor’s notice period becomes three months. If the demolition does not occur as planned, the lessor may be liable to the lessee for compensation or damage suffered by the lessee as a consequence of the early termination of the lease: s 39.

Breach of lease

The consequences of a breach depend on the terms of the agreement between the parties. The lease may have detailed and specific clauses relating to breach and its consequences. Broadly speaking, a breach that is not remedied entitles the other party to end the lease. There will be no obligation to terminate, merely a right to do so.

Breach by lessor

If the lessor breaches the lease, usually by failing to honour the covenant for quiet enjoyment, the lessee may:

  • seek an order from the court requiring the lessor to comply with the lease;
  • accept the breach as a repudiation of the lease and rescind the lease, thus bringing the lease to an end.

Laurinda P/L v Capalaba Park Shopping Centre P/L [1989] HCA 23

The lease may well require a party relying on a breach to give notice to the party in breach to rectify that breach before rescinding.

World Best Holdings Ltd v Sarker [2010] NSWCA 24

After rescission, the rights of the parties under the lease come to an end and the parties may enforce any rights existing at the date of termination, including the right to sue for damages for breach of contract.

Nangus P/L v Charles Donovan P/L (In Liquidation) [1989] VicRp 17

After the lease is terminated, the lessee has no right to possession.

Breach by lessee

If, as is more common, the lessee has, or is alleged to have, breached the lease, the lessor has a number of options:

  • The lessor may elect to treat the lease as remaining in force and may take action against the lessee from time to time in relation to those breaches. In this case, the lease remains in force and the parties’ obligations continue. The lessee is entitled to possession and obliged to pay rent, et cetera. By usual practice there has been no obligation on the lessor to mitigate loss in such circumstances but see:
    Vickers & Vickers v Stichtenoth Investments P/L (1989) 52 SASR 90
    Compare:
    J and S Chan P/L v Victor Geoffrey Mckenzie and Lynette Anne Mckenzie [1994] ACTSC 1

Abandonment of the premises by the lessee is usually treated as a surrender by operation of law or implied surrender (see above).

Consequences of termination

If the lease is terminated by the lessee for breach by the lessor, then the lessee is entitled to damages. However such situations are rare, as the lessee is ordinarily satisfied to be free of the lease, or else would have sought specific performance.

If the lease is terminated by the lessor for breach by the lessee, then the lessor is entitled to damages for loss of the bargain, indicated by the amount of rent that the lessor would have received had the lease continued. There are a number of technicalities associated with such damages, such as the common law duty to demand rent and the obligation to comply with the applicable legislation.

Termination where no right or option to renew the lease exists - retail

Between 12 and 6 months before the end of the lease, the lessor must give the lessee written notice:

  1. either offering the lessee a renewal or extension of the  lease on terms and conditions specified in the notice; or
  2. informing the lessee that the lessor does not propose to offer a renewal or extension.

This notice may include other information about the lessor's intentions - for example, that the lessor intends to allow the lessee to remain in possession of the shop as a periodic tenant under a provision of the lease for holding over, or as a tenant at will - and may not be revoked for one month after it is made.

If the lessor fails to give this notice and the lessee requests an extension of the lease under s 20J by giving the lessor written notice of this at any time before the lease ends, the term of the lease is extended until the end of six months after the lessor giving the required notice.

The lessee may terminate the lease by giving not less than one month's written notice of termination to the lessor.

Where the term of the retail shop lease is 12 months or less, the periods mentioned in s 20J become six months and three months.

Forfeiture

Forfeiture is the process whereby the lessor, relying on a breach of a fundamental term of the lease by the lessee, treats the lessee’s rights under the lease as forfeit and thereby becomes entitled to repossess the premises and re-enter. Forfeiture was usually aided by a clause in the lease authorising re-entry on forfeiture. To prevent abuse of this power, certain statutory restrictions are placed on forfeiture. Before exercising this right the lessor must give the lessee notice of the breach and the opportunity to remedy the breach, although such notice is not required in the case of a breach constituted by non-payment of rent.

Rokeba Nominees P/L v Mag Auto Spares P/L [2000] VSC 74

The lessee may seek an injunction and apply to the court for relief against forfeiture. The court has a wide discretion to grant such relief.

Chelfield P/L v Goldsea P/L [2003] QSC 40
Novasource Consulting P/L v Primelife Property Holdings P/L [2002] VSC 568
Tribalant P/L v Kirshu P/L [2007] VSC 449
MESATA P/L v Rastogi (Retail Tenancies) [2007] VCAT 1242
Lontav P/L v Pineross Custodial Services P/L [2011] VSC 278

Self help

The lease passes the right to possession to the lessee. If the lease is terminated, the lessee’s right to possession ceases and the lessor is entitled to repossess the property. If the lessor is able to effect re-entry and repossess the premises without disturbing the peace, then the lessor is entitled to do so. Securing the premises so as to deny the former lessee access would achieve this outcome.

However, relief against forfeiture may remain available to the lessee until such time as the lessor obtains an order for possession from a court.

Haniotis v Dimitriou [1983] VicRp 46
Vuksic v Metimex (1995) V ConvR 54-511

Obtaining possession

If a lease has been terminated and the lessee refuses to deliver up possession, the lessor may issue proceedings.

Avin Operation P/L v Clover Pines P/L [2003] VSCA 58

Abandoned goods

If a lessee vacates the premises leaving goods behind, ownership of those goods remains with the lessee and the lessor has no initial claim on them. If the lessee requests access to the premises to remove the goods and is denied, the lessor is liable to an action for detinue if he continues to hold the goods or conversion if he uses the goods. Even though the lessee may owe the lessor money, at this stage the lessor has no rights over the lessee’s possessions.

Kiwi Munchies P/L v Nikolitsis [2006] VCAT 929
Burnett & Anor v Randwick City Council [2006] NSWCA 196

Whilst the lessor is entitled to remove and store the goods the lessor is not obliged to do so and, after giving notice to the lessee, may remove the goods from the lessor’s premises.

Haniotis v Dimitriou [1983] VicRp 46

If the lessor does remove and store the goods and they are not claimed within three months, the lessor may arrange to sell the goods but, after deducting the costs of removal, storage and sale, must forward any balance to the unclaimed moneys fund.

AMP Society v Bellos [2000] ANZ ConvR 360

As an alternative, the lessor can obtain a judgement against the lessee for any money owing and then issue a warrant for sale of the goods in satisfaction of the debt. The sheriff is advised of the location of the goods and a sale by the sheriff may result in a payment to the lessor as a judgement creditor.

Some standard leases provide that ownership of abandoned goods passes to the lessor. The validity of such a clause is uncertain.

GM & MY Campbell & Co P/L v Cotton (1992) ANZ ConvR 610

As to the rights of third parties in relation to lessee’s goods see:

Auto-P Services P/L v Sakura Holdings P/L Vic Sup Crt 11/5/98

Special rules apply to residential tenancies.

Change of parties

A lease is fundamentally a contract and the normal rules of privity of contract apply. But a lease also relates to real estate, and property law has by common practice affected more than just the parties to the contract. Rights arising from property law may therefore result in the lease affecting more than just the parties to the original contract and may make those rights enforceable against third parties, such as subsequent owners of the freehold or leasehold.

Change of ownership of freehold

Lessor A may enter into a lease with lessee X, thus passing possession of the property to X for the duration of the lease. But A still enjoys ownership of the property, which at that stage is known as the right of reversion or reversionary interest. As property, that right may be transferred to another person and A may sell the freehold to B, who will then be the owner of the reversionary interest and entitled to receive the rents and profits from the property.

It is not customary for lessee X to be invited to be a party to the contract for the sale of the reversion and so there is no contractual relationship between lessee X and the new owner of the reversion, B. Thus these parties cannot rely on contract law to enforce their rights arising from the lease. Property law steps into the breach and provides that all the rights and obligations of the lessor pass to B, thus allowing B to enforce the lease against X and equally allowing X to enforce the lease against B.

Snowlong P/L v Choe and Others (1991) 23 NSWLR 198

The outgoing lessor must appreciate that, on sale of the reversion, the rights under the lease pass to the new freehold owner and the old lessor loses the ability to enforce any rights against the lessee. Any money owed by the lessee, such as arrears of rent, cannot be recovered by the old lessor after settlement, unless special arrangements are made in the contract of sale with B.

Ashmore Developments P/L v Eaton [1992] 2 Qd R 1

Vendor/lessor copy of lease

Where a property is sold subject to a lease the purchaser is entitled to insist on production of the lessor’s copy of the lease. This is the document that entitles the lessor to possession of the premises on the termination or expiration of the lease and as such it forms part of the vendor’s title.

A subsequent freehold owner will ordinarily be bound by any lease variations entered into by a previous owner.

Figgins Holdings P/L v SEAA Enterprises P/L [1999] HCA 20

A subsequent freehold owner may not be obliged to return a security deposit paid by the lessee to the former lessor as this is a personal, rather than proprietary, right.

Hua Chiao Commercial Bank Ltd v Chiaphua Industries Ltd [1987] 1 All ER 1110

This would only appear to be the case if the subsequent freehold owner did not receive the security deposit when acquiring the property. If the deposit was in fact transferred to the subsequent freehold owner, the lessee might make a claim based on unjust enrichment.

A subsequent freehold owner is not liable to the lessee for any rights of set off that the lessee may have had against the previous lessor.

Edlington Properties Ltd v J H Fenner & Co Ltd [2006] EWCA Civ 403
Also see (2006) 80 ALJ 639

Enforceability of guarantee on sale of freehold

Whilst formerly there was some doubt about this and some lessors required the guarantor to specifically confirm the extension of the guarantee that is no longer necessary as there is High Court authority that the guarantee is enforceable by the freehold purchaser.

Lang v Asemo P/L [1989] VicRp 67
Gumland Property Holdings P/L v Duffy Bros Fruit Market (Campbelltown) P/L [2008] HCA 10

Change of ownership of leasehold by sublease or assignment

Sublease

A third party may be introduced to the lease by way of a sublease of the lessee’s interest in the land. A sublease is used when it is intended that the new arrangement will be for a period of time less than the term of the lease. Thus all subleases must terminate at least one day before the head lease. The form of the sublease ought to mirror the form of the headlease and may in fact be a copy of same, except for the parties and the date of termination.

A sublease may contain an option to renew, but that will depend on the existence and exercise of an option in the headlease.

Estoppel will apply to the relationship between lessee and sublessee.

Lee v Ferno Holdings P/L (1993) 33 NSWLR 404

Assignment

An assignment or transfer of lease is used where it is intended to transfer the whole of the lessee’s interest in the property to the new lessee. The assignor, who is the current lessee, passes their interest in the property to the assignee, the new lessee. The assignor does not intend to reclaim an interest in the property before the lease ends.

Liability under sublease

The parties to a sublease intend the lessee to return to ownership of the leasehold at some time before the lease expires. It is not intended that the lessee’s obligations will be diminished, merely temporarily assumed by the sublessee, so the lessee remains primarily liable for compliance with the lease, despite the sublease.

Lessor’s role in a sublease or assignment

The lessee is not normally a party to the transfer of the reversion to the lessor, but the lessor is normally a party to any document dealing with the leasehold interest – whether by way of sublease or assignment. This reflects the relative strengths of the parties.

Liability under assignment

The original lessee and the new lessee intend the original lessee to transfer all of the lessee’s interest in the property to the new lessee. These parties may consider that the original lessee is no longer liable under the lease. However lessors usually require original lessees (assignors) to retain liability in relation to the property as a condition of the lessor’s consent to the assignment.

The extent of this liability depends on the agreement signed by the parties. Liability would not ordinarily extend beyond the term of the lease during which the assignment is made, unless the agreement clearly provides otherwise.

City of London Corporation v Fell [1993] UKHL 11

Lessor’s consent to sublease or assignment

The lessor’s consent has always been regarded as essential to enforceability of the sublease or assignment. Virtually all written leases include a covenant either prohibiting a sublease or assignment absolutely, or forbidding it without the lessor’s consent. If the lease allows a sublease or assignment but requires the lessor’s consent, that term may allow the lessor to withhold consent arbitrarily.

Australian Mutual Provident Society v 400 St Kilda Rd P/L [1990] VicRp 56 and [1991] VicRp 80

Unless the lessor can withhold consent arbitrarily, it is an implied condition that consent will not be arbitrarily withheld - that is, that it will not be unreasonably withheld.

If the lease requires the lessor to act reasonably, a lessor who fails to do so by unreasonably withholding consent may be liable to the lessee for any consequential loss.

Arball P/L v Liu & Chow (1992) V ConvR 54-429

A lessor must be given adequate time to consider the request for consent and may reject the application on commercial grounds.

Provident Capital Ltd v Zone Developments P/L [2001] NSWSC 843
Tamsco Ltd v Franklins Ltd [2001] NSWSC 1205
Kids Campus Holdings P/L v Kelly & Anor [2007] VSC 282

In summary a lease may:

  • prohibit subletting or assignment;
  • allow subletting or assignment with consent and may specifically provide that consent may be at the absolute discretion of the lessor; or
  • allow subletting or assignment with consent and, if nothing else is provided, consent cannot be unreasonably withheld. 

Assignment - retail

The outgoing lessee must request the lessor's consent, which must not be unreasonably withheld, and must provide the incoming lessee with any disclosure statement previously received by the lessee and updated information. The lessee may request the lessor to provide an updated disclosure statement, but does not need to do so if the updated information is otherwise available. If the lessee follows the procedural requirements in relation to the disclosure statement as set out in section 45A, the lessee’s obligations and liabilities under the lease are limited.

The lessor may take up to 42 days to consent to, or reject, the assignment of the lease. If the lessor does not respond in this period, the assignment is deemed to have received consent: s 45(d).

The lessor may withhold consent to assignment if:

  • the assignee proposes to change use of the premises;
  • the assignee is unlikely to be able to meet its financial obligations as lessee under the lease;
  • the assignee's retailing skills are inferior to the assignors; or
  • the lessee has not complied with procedural requirements.

Surrender of lease

Surrender by agreement

The parties may agree, or be deemed to have agreed, to terminate the lease by the lessee surrendering, and the lessor accepting the surrender.

Surrender of, possession

Tasita P/L v Sovereign State of Papua New Guinea (1991) 34 NSWLR 691

Surrender by operation of law

If a lessee abandons possession of the premises and the lessor acts in such a way as to unequivocally indicate that the lessor regards the lease as at an end, usually involving the lessor resuming possession of the premises, then the law regards the lease as having been surrendered by operation of law. This is also known as ‘implied surrender’.

Konica Business Machines Australia P/L v Tizine P/L (1992) 26 NSWLR 687

The lease ends when the lessor accepts the abandonment and the lessor is thereon entitled to sue for damages for loss of the bargain. These damages are usually based on the rental the lessor would have been entitled to receive under the whole term of the lease. Issues of mitigation of damages may be relevant.

Progressive Mailing House P/L v Tabali P/L [1985] HCA 14
Wood Factory P/L v Kiritos P/L (1985) 2 NSWLR 105

Stamp duty

Stamp duty was abolished on leases first executed on or after 1 January 2004. Also exempt are leases whose term commences on 1 January 2002 and whose average annual rental or current market rent does not exceed $50,000 per annum.

However some documents are still required to be stamped, although exempt from payment of duty. These include:

  • Transfers of lease pursuant to a conveyance of land or a business. The document is stamped ‘adjudged duly stamped’ if submitted with the business sale documents on which ad valorem duty is payable.
  • Surrenders of lease, where the lessee pays a consideration, or for no consideration. Ad valorum transfer duty remains payable on a surrender of lease where the lessor pays consideration.

Mortgage of lease

A lease is a proprietary interest in land. Like any other proprietary interest it may be used to secure a loan. The lease may provide that the lessee obtain the lessor’s consent before giving a mortgage over the lease. Failure to do this constitutes a breach of lease.

On this topic generally see:

Church of England Collegiate School of St Peter v Chesser House P/L (1993) ANZ ConvR 110

Consent of mortgagee to lease

Unless the mortgagee has consented in writing before the lease of mortgaged land is registered, it is not valid and binding against the mortgagee: s 118 Real Property Act.

Unless the proposed lessee ensures the freehold mortgagee’s consent to the lease, the lessee is vulnerable to losing possession if the mortgagee wants possession on the lessor’s default under the mortgage. The prior-in-time interest of the mortgagee will defeat the lessee’s later-in-time interest.

Conversely, if the lease is created before the mortgage, the lessee has the prior-in-time interest if the lease:

  • is for less than a year and the lessee is in actual possession - the lease does not have to be registered; or
  • is for more than one year and is registered.

Sections 69 and 119 Real Property Act
R M Hosking Properties Pty Ltd v Barnes [1971] SASR 100
Upheld Epworth Group Holdings Pty Ltd v Permanent Custodians Limited [2010] SASC 327

If the lessor and lessee have agreed to lease subject to the mortgagee’s consent, the lessor cannot then request the mortgagee to withhold consent as a way of allowing the lessor to avoid the agreement to lease.

Misiaris and Another v AFC Holdings P/L (1988) 15 NSWLR 231

The lease may provide a specific clause passing the costs of obtaining consents on to the lessee. In the absence of such a clause it appears that the lessor is liable for these costs on the basis that they are expenses associated with the lessor’s proof of his/her ability to lease the land - similar to a vendor’s obligation to make title. A general clause requiring the lessee to pay costs associated with the lease probably does not pass this cost on to the lessee.

Registration

Leases in South Australia are not required to be registered. However, unless registered the lease or agreement to lease is not valid as against any subsequent purchaser, reversioner, mortgagee or encumbrancer of the freehold: s 119 Real Property Act.

The exception is where the lessee holds the premises for a term of less than 12 months and is in actual possession of the premises at the time the subsequent purchaser or mortgagee registers their dealing. Such a lease has priority of possession over the registered proprietor for the term of the lease.

This is reinforced by s 69(h) Real Property Act, which qualifies a registered proprietor’s absolute and indefeasible title in the same circumstances.

Under s 119 therefore the implication is that, if a lessee in actual occupation under a lease for a term in excess of one year is to have the benefit of priority under the Act, that lease must be registered.

R M Hosking Properties Pty Ltd v Barnes[1971] SASR 100
Epworth Group Holdings Pty Ltd v Permanent Custodians Limited [2010] SASC 327

There is no time limit for registering a lease, but an extension of lease must be lodged for registration within two months of the lease expiring: s 153(2).

Legal costs

Normally the lessor arranges for preparation of the lease. In the past, these costs were passed on to the lessee. However, legislative reform has evened the balance. Section 14 of the Retail and Commercial Leases Act limits the lessee’s liability for preparation costs. Preparation costs for a residential lease must be borne by the lessor under s 50 of the Residential Tenancies Act.

Original lease

Written leases are customarily prepared in duplicate so both the lessor and lessee hold a ‘copy’. The lease forms the basis of the lessee’s right to possess the property and to prove that right he is entitled to hold the original lease. The lessor is entitled to retain the certificate of title to the land to prove ownership.

Lessor’s obligations to provide executed and stamped copies

Recognising that the lease document is the basis of the lessee’s right to possess the property, under s 16 of the Retail and Commercial Leases Act, a lease is deemed to provide that:

  • if the lease is not to be registered, the lessor must provide the lessee with an executed copy of the lease - stamped where the duty is payable for pre-2004 executed documents - within one month after the lease is returned to the lessor or the lessor's lawyer or agent following payment of stamp duty on the lease;
  • if the lease is to be registered, the lessor must lodge the lease for registration within one month after the lease is returned to the lessor or the lessor's lawyer or agent following payment of any stamp duty on the lease; and
  • the lessor must provide the lessee with an executed copy of the stamped - where necessary - and registered lease within one month after the lease is returned to the lessor or the lessor's lawyer or agent following registration of the lease.

Practitioners who process more than 10 stamp duty related documents a year may find it useful to register using RevenueSA’s RevNet, which enables duty to be assessed and paid online.

Further information



© Copyright By Lawyers For Lawyers, 2012, Sydney. All rights reserved.Last Updated: 03/11/2014


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