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Landlords and Tenants – protect your leases, or else…

April 23, 2016

It was not usual practice in Western Australia for tenants to register leases or lodge caveats; landlords did not want to clog up their certificates of title with expired encumbrances and tenants did not want to incur additional costs at the commencement of their leases. This is changing. One case that has made landlords and tenants rethink their attitude is the Lighting by Design case (1), which illustrated what can happen if you don’t register your lease.

In 2004 Lighting by Design (Tenant) entered into a 7 year lease with the then owner of the premises. The owner sold the land in 2006 to Cannington Nominees (Landlord). On the registration of the transfer of land, the Landlord became entitled to the land free of encumbrances, and free of the unregistered lease. The Tenant became a trespasser and the Landlord would have been within its rights to require the Tenant to vacate the premises. However, the Tenant remained in occupation with the Landlord’s consent and so became a ‘tenant at will’.

At the date of the transfer of the land to the Landlord, the Tenant was paying rent at a rate less than the then current market rental value. The Landlord instructed its agent to find a new tenant and terminated the Tenant’s lease in February 2006. The Tenant commenced proceedings in February 2007 claiming that it was entitled to remain in possession.

An unregistered or ‘equitable’ lease of greater than 5 years is destroyed on the transfer of the land to a buyer. This includes any options to renew the lease for further terms that the Tenant has not exercised.

Because the Tenant in the Lighting by Design case remained in possession and the Landlord, through its agent, continued to collect rent and outgoings, the Court found that their conduct created a new lease by part performance.

Landlords also have an interest to ensure that leases are registered.

A contract for the sale of a commercial, retail or industrial property will contain a provision that require that the leases for the property are valid and binding. A buyer’s due diligence will quickly reveal unregistered leases, especially if the buyer is anxious to retain a tenant (e.g. an anchor tenant in a shopping centre). Failure to secure a tenant may cause a landlord to be liable for any loss suffered by tenants and buyers.

Another reason that landlords should make sure that their leases are registered is because a registered lease is a ‘legal’ lease. An unregistered lease is an ‘equitable’ lease. The leading case on this was Chan v Cresdon Pty Ltd (2). In this case, the High Court held that the words ‘this lease’ in a guarantee provision referred to a registered legal lease. The lease in question was not registered and accordingly the guarantor was freed from its guarantee and held not liable for the tenant’s default.

A landlord’s mortgagee may disregard an unregistered lease if it repossess the property on a landlord’s default. This is what happened in Epworth Group Holdings Pty Ltd v Permanent Custodians Limited (3). Because the lease was not registered and the mortgagee had not consented to the lease, the mortgage, which was registered, took precedence over the unregistered lease.

Section 91 of the Transfer of Land Act 1893 provides that a tenant may register a lease for any term exceeding 3 years. This 3 year term does not include options to renew the lease. A tenant with a lease of a term of 3 years, or less together with options to renew the lease may lodge a caveat. Once the option to renew is exercised and the lease term becomes greater than 3 years, the lease may be registered.

Tenants should lodge a caveat or register the lease to protect their rights under the lease and any options to renew the term should the landlord wish to sell the premises, or should the land be mortgaged and the landlord defaults under its mortgage. It is also important that the landlord’s mortgagee consent to the lease.

Landlords should require that leases be registered to ensure that the lease and any guarantees in them are binding, especially if they think they may sell the property one day.

This article is provided for your information only. It does not constitute legal advice and is not intended by the author to do so. It should not be relied on as providing advice and you should obtain your own legal advice before acting on any information in the article.


 

1. Lighting by Design (Aust) Pty Ltd v Cannington Nominees Pty Ltd [2008] WASCA 23.

    2. Chan v Cresdon Pty Ltd (1989) 168 CLR 242; [1989] HCA 63.
      3. [2011] SASC 81.