by Racha Abboud, Coleman & Greig Solicitors & Notaries
NSW Jurisdiction
Many Landlords and tenants assume that until a retail lease is executed by both parties the creation of the lease is not legally binding. However, recent case law has shown that even without a formal document in place, a retail Lease may still come into effect.
In the recent decision of Chesterman ADCJ in Helou & ors v Bong Bong Pty Ltd & anor trading as Regional Retail Properties [2006] NSWADT 128 the Administrative Decisions Tribunal (ADT) found that although no formal lease had been entered into between the parties, they had attained a sufficient consensus to attract the operation of s.8(1) of the Retail Leases Act 1994 (the Act) and had notionally entered into possession of the Premises and started paying rent.
In this particular case, the Applicant lessee had purchased a green grocery business in a small shopping arcade. At the time of the purchase, the previous owners of the business were trading as a monthly tenant.
Prior to settlement of the purchase of the business by the Applicant, the Respondent lessor had in 2004 lodged a development application with Council which envisaged redevelopment of all the buildings on the site. At that stage various discussions had taken place between the parties, none of which were recorded. However, there was evidence that these discussions related to some concerns that the Applicant had in purchasing the business without the certainty of having a lease in place.
On completion of the sale of the business, the Applicant took possession of the premises (on or soon after 18 September 2004) and continued to pay the monthly rent to the Respondent on the same terms under which the previous owners had operated the premises as a monthly tenant.
On 25 November 2004, Council notified the Respondent that it had approved the development application, and the parties commenced negotiations over a new lease. On 22 February 2005, the Respondent delivered to the Applicant a five page letter (the Letter) formally setting out the terms of an agreement for the future lease and asked for a “security deposit” of $5,000.00 to be held as deposit and credited to the Applicant’s rental account (should they proceed with the new lease).
The Letter also contained two clauses, designed to defer the creation of legal obligations between the parties until formal lease documents had been prepared and signed, as follows:
Acceptance of this offer by the lessor will not in any circumstances create a legally enforceable lease between the parties. The lease will be prepared by the lessor’s Solicitors, incorporating the above terms and conditions and no agreement will be legally enforceable unless acceptable and executed by both parties.
Occupation of the premises will not be granted until the lease documentation has been completed to the satisfaction of the lessor’s solicitors, provision of bank guarantee, public risk insurance and all fees paid by the lessees.
On 8 March 2005, during a meeting between the parties, the Applicant signed the Letter and handed the Respondent the security deposit required. On 14 or 15 March 2005, a letter was sent from the Respondent to the Applicant advising them that the redevelopment of the center would not be proceeding. In August 2005, the Respondent served a Notice to Quit on the Applicant which resulted in the application to the Tribunal.
The issues in dispute were as follows:
1. Whether a new lease was granted in September 2004 when the Applicant took possession of the premises;
2. Whether the disclaimer words contained in the letter of 22 February 2005 postponed the creation of contractual liability to comply with the Common Law rules imposed by Masters v Cameron (1954) 91 CLR 353 and whether that should prevail over the Act; and
3. Whether the term of the lease should be for a period of 5 years commencing from 8 March 2005, being the date that the offer was accepted.
The Tribunal found that although the disclaimer words were sufficient to prevent the creation of a binding lease, application of sections 7, 8 and 16 of the Act meant that a lease for a term of five years was in place. In reaching its decision, the Tribunal noted the following:
1. “Firstly, a person who is already in possession of retail shop premises pursuant to a pre-existing tenancy not covered by the Act may be said notionally to ‘enter into possession… as lessee under the lease’ without vacating and re-entering the premises, once an agreement for a new lease falling within the Act is concluded”;
2. “Secondly, the commencement of a lease by virtue of entry into possession or payment of rent by the lessee may occur under s 8(1) even though no formal deed or agreement of lease is ever executed, so long as the parties have reached ‘consensus’ as to the terms of the lease”;
3. “Thirdly, in order to reach this ‘consensus’, so as to give rise to the requisite ‘lease relationship’, it is not necessary that the parties reach agreement on all the terms of the right of occupation. This is an implicit consequence of the broad definition of ‘lease’ in s 3, embracing ‘any agreement’, express or implied, and whether oral, in writing, or partly oral or partly in writing, ‘under which a person grants or agrees to grant to another person for value a right of occupation of premises for the purposes of the use of the premises as a retail shop’.
The complexity of legal negotiations between parties to a lease often creates many problems. It might be worthwhile notifying your lessor and lessee clients of the potentially far-reaching effects that the Tribunal’s decision may have.
