Advisers must consider registration of leases

Lawyers acting for landlords of non-retail premises where the proposed lease term exceeds 3 years need to seriously consider whether to register the lease. This is one of the consequences of the Court of Appeal’s decision in Cooma Clothing Pty Ltd v Create Invest Develop Pty Ltd [2013] VSCA 106. If the lease is not registered, the term of the lease is assigned and the landlord is not a party to the assignment document, the assignee of the term will have the benefit of the contract but be excused from the burden of the contract.

In Victoria, a lease for a term in excess of 3 years may be registered. See: s.66 of the Transfer of Land Act 1966. A lease made by deed for a term of less than 3 years is also a legal lease. However, an unregistered lease for a term exceeding 3 years is a lease in equity.

In Cooma the facts were:

• the owner (Landlord) entered into a contract to sell land to a purchaser (Purchaser) which land was also leased to a tenant (Tenant) for a term of less than 3 years (Lease). The term of the Lease was close to its expiry date.

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• Before settlement and before expiry of the term of the Lease, the Purchaser’s agent wrote to the Tenant (Agent’s Letter) offering a new for a term of 3 years commencing upon expiry of the Lease . The Tenant accepted the agent’s offer by signing the Agent’s letter (Agreement for Lease)
• thereafter the Landlord, the Tenant and a third party (New Tenant) signed a documented entitled “Transfer of Lease” that assigned the balance of the term of the Lease to the New Tenant (Transfer).
• The Transfer contained a special condition in which the New Tenant acknowledged receiving the Agent’s Letter (ie the letter from the Purchaser to the Tenant) “in relation to the Lease renewal” and in which the New Tenant acknowledged and consented to the terms and conditions for the renewal of the Lease.
• The New Tenant occupied the land before the expiry of the Lease and the Purchaser became the registered owner of the leased land before the expiry of the Lease.
• Shortly after the expiry of the Lease the New Tenant vacated the premises. The Purchaser contended that the New Tenant was obliged to comply with the covenants contained in the Agreement for Lease. The New Tenant contended that it had the benefit of an option to renew or extend the Lease for a further 3 years which option had not been taken up. The Purchaser was successful in VCAT and in the Court of Appeal.

The Court of Appeal held:

(a) the Lease was a legal lease because it was for a term not exceeding 3 years;

(b) the Tenant’s signing of the Agent’s Letter gave rise to an equitable lease between the New Landlord and the Tenant (ie the Agreement for Lease);

(c) it was irrelevant that when the Agreement for Lease was made there was no privity of estate between the Purchase and the Tenant (ie because the Purchaser was not the owner of the land) because it was well established that a if two parties contract as landlord and tenant neither of them can deny the title of the other;

(d) a party to a contract for a lease that is not a legal lease (ie such as the Agreement for Lease) may assign the benefit of the contract but may not assign the burden;

(e) thus, the Transfer (which transferrred the Agreement for Lease from the Tenant to the New Tenant) was incapable of subjecting the New Tenant to the burden of the Agreement for Lease and under the general law this remained so ever after the New Tenant entered into possession under the Lease;

(f) after the Purchaser was registered as proprietor of the land it became, by reason of ss.141 and 142 of the Property Law Act 1958 (PLA), entitled to the benefit and the burden of the Lease;

(g) however, the assignment of the Agreement for Lease from the Tenant to the New Tenant had the effect of assigning the benefit of the contract to the New Tenant but not assigning the burden.

Thus, the position at general law was that the New Tenant had the benefit of the Agreement for Lease but was not subject to the burden of the Agreement for Lease.

Fortunately for the Purchaser the Agreement for Lease was a “retail premises” lease within the meaning of s.4 of the Retail Leases Act 2003 (2003 Act). See also s.3 of the 2003 Act. Section 8 of the 2003 Act provides that an assignment of a lease results in a continuation of the lease as opposed to creation of a new lease. Accordingly, despite the lack of privity of contract and estate between the New Tenant and the Purchaser, the transfer of the executory contract for a new lease (ie by the Transfer the Agreement for Lease was assigned) was in effect deemed by s.8 to have created privity of contract between them and thus conferred on the Purchaser a direct right of enforcement against the New Tenant.

The most important points arising from this case are that serious consideration needs to be given to whether a lease should be registered and, if the lease is not to be registered, ensuring that the clause governing assignments requires the landlord to be a party to the assignment document so as to ensure there is privity of contract between the landlord and the assignee of the term.

I will be doing a further blog concerning this case.