August 2006

Beware - Unintended Retail Leases

A recent decision of the Administrative Decisions Tribunal found that an application-for-lease letter, which was expressed to be not legally enforceable, could still give rise to a 5 year lease despite the clear intention of the parties that this should not be the case (Helou & Ors -v- Bong Bong Pty Limited & Anor trading as Regional Retail Properties [2006] NSW ADT128).

A lessee was holding over as a monthly tenant under a shop lease which had expired in October 2003. The lessee sold the shop business to the applicant in these proceedings (tenant) in September 2004.

In February 2005 the landlord arranged for the tenant to sign an application-for-lease letter which was in the form of an offer by the tenant to the landlord, which contained reasonable details of a proposed new lease and which included wording such as:

"acceptance of this offer by the lessor will not in any circumstances create a legally enforceable lease between the parties."

There was further wording to the same effect. The parties had some negotiations as to the terms in the letter and reached agreement on those terms.

The landlord subsequently decided not to proceed with the lease as it wished to redevelop the building, and issued a notice to quit to the tenant. The tenant then applied to the Tribunal claiming amongst other things that the application letter constituted a binding lease.

The Tribunal relied on section 8 of the Retail Leases Act which provides, in part:

"For the purposes of this Act, a retail shop lease is considered to have been entered into when a person enters into possession of the retail shop as lessee under the lease or begins to pay rent as lessee under the lease (whichever happens first)."

The Tribunal concluded:

"First, a person who is already in possession of a 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 a new lease falling within the Act is concluded. Secondly, the commencement of a lease by virtue of entry into possession or payment of rent may occur under section 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. 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."

The Tribunal held that the application letter showed a sufficient consensus to attract the operation of section 8(1) of the Act and that the tenant notionally entered into possession of the premises on reaching that consensus, even though it had previously been in possession as a monthly tenant holding over under the previous lease.

Conclusion

Where there is some form of letter of intent or other document which records the terms of a proposed retail lease in reasonable detail, that document may give rise to a lease (even if the document includes express wording to avoid that outcome) in 2 situations:

(1) The document may give rise to a lease if the tenant is already in occupation of the premises, for example because it is holding over under a previous lease or because it has been allowed into possession before the signing of formal lease documents.

(2) The document may give rise to a lease if the tenant has commenced paying rent in accordance with the terms of the document. Normally, payment of a deposit will not be regarded as payment of rent under the new lease, particularly if the deposit is described as a deposit and is refundable if the lease does not proceed. However, if the tenant pays some rent in advance at or after the signing of the document, there is a risk that that payment will be sufficient to convert the document into a lease even if the tenant is not yet in possession of the premises.

Not only may the landlord find that it is committed to a lease when it thought that it was not committed, but there may be further complications. If the proposed lease was for a term of less than 5 years, section 16 of the Act will increase the term to 5 years (because the tenant will almost certainly not have provided a solicitor's certificate) and the tenant may have a right to terminate the lease at any time within the first 6 months of its term (because the landlord will almost certainly not have issued a disclosure statement).

Landlords should take particular care in relation to any letters or other documents where the tenant is already in possession of the premises, whether it is holding over under an expired lease or has been allowed into possession early. The usual advice that a tenant should not be allowed into possession until it has signed the proposed lease document and satisfied any other requirements that the landlord may have is even more important in the case of retail leases.