The recent WA Supreme Court of Appeal decision in Primewest (Mandurah) Pty Ltd v Ryom Pty Ltd and Kedo (Aust) Pty Ltd  WASCA 28 (Primewest) has a number of ramifications for sellers, buyers, tenants and financiers of commercial property. It is a stark reminder that registration of a lease where the term is longer than 5 years is the most prudent means of ensuring the lease remains valid on a transfer of a property.
In Primewest, the Court held that the buyer of a commercial property validly terminated a contract of sale following the seller's failure to produce evidence of the registration of a transfer of a registered lease and a deed of affirmation and assignment of an unregistered lease.
The Primewest decision should alert sellers and landlords to attend to registration of any leases for terms longer than 5 years. It can be expected that buyers and their financiers will require this to have been undertaken to ensure the benefit and burden of leases are passed as part of any purchase. Correspondingly, the decision serves as a reminder to tenants to secure certainty of tenure on a transfer of property by registering their lease.
Summary of the Primewest Appeal
The Primewest decision draws further attention to the uncertainty in WA that has been prevalent since Lighting by Design (Aust) Pty Ltd v Cannington Nominees (Lighting by Design), which held that the effect of section 68 of the Transfer of Land Act 1893 (WA)(TLA) destroyed unregistered leases for terms longer than 5 years upon a transfer of land.
In Primewest, the seller sold commercial retail premises to Ryom and Kedo (the Buyers) which included two tenancies, one leased to Rick Hart and the other to Avanti, for terms longer than 5 years. The Rick Hart lease was registered, but had since been assigned to Harvey Norman without the assignment being registered. The Avanti lease was unregistered.
The Buyers were concerned that both leases would be destroyed on transfer to them of the property having regard to section 68 of the TLA and the decision in Lighting by Design. The Buyers requested that consistent with its obligations under the sale contract, Primewest provide evidence of registration of the transfer of the Rick Hart lease to Harvey Norman, and a deed of affirmation and assignment executed by the Avanti tenants. Primewest denied the Buyers were entitled to documents requested.
After the settlement date passed, both parties issued default notices; Primewest following the Buyers' failure to provide the transfer of land and settle; and the Buyers following Primewest's failure to provide the documents requested.
The Buyers terminated the sale contract and Primewest sued for specific performance. The Buyers counterclaimed that they validly terminated the sale contract following Primewest's default.
The Court at first instance held that the Buyers lawfully terminated the sale contract. Primewest appealed on a number of grounds, including:
- the sale contract did not require Primewest to register the transfer of the lease to Harvey Norman, or provide evidence of registration; and
- the Court at first instance did not properly characterise the document the Buyers requested in respect of the Avanti Lease.
The Court of Appeal dismissed Primewest's appeal and held that the Buyers validly terminated the sale contract. As to the separate grounds of appeal, the Court held:
- the terms of the sale contract, properly construed in light of the commercial objectives of the parties, were broad enough to capture the registration of the transfer of the Rick Hart lease to Harvey Norman and to require Primewest to provide evidence of registration. The court found that these requirements were not unreasonable in the circumstances; and
- the Buyers were entitled to request the deed of affirmation and assignment in relation to the Avanti lease, and this document was not beyond the scope of the documents the Buyers were entitled to request under the sale contract.
The Court pointed to various provisions of the sale contract, holding that the implication arising from its terms as a whole were that the effective transfer of the benefit and burden of the leases was a vital component of the transaction. This clear, commercial objective of the parties was a significant factor in the court's consideration of the ambit of documents and evidence that might reasonably be required by Buyers as part of settlement.
Implications for commercial parties
Following the decisions in Primewest and Lighting by Design, it is reasonable to expect that buyers of property in WA will require leases for terms longer than 5 years to be registered.
Sellers are at risk of buyers seeking to terminate sales contracts on the same basis as in Primewest if leases for terms longer than 5 years are unregistered at the time of contract, or at least well in advance of settlement. Failure to effect registration exposes the seller to the usual resale risks, including a reduction in asset value, continued holding costs, increased reselling costs and delays in returning debt to financiers.
A financier to a landlord may also be concerned to ensure that the landlord registers any unregistered leases of more than 5 years so that similar issues do not arise for the financier if it is required to appoint receivers or exercise a mortgagee power of sale over the property in the future.
Buyers are also at risk of tenants seeking to rely upon Lighting by Design and Primewest to terminate unregistered leases of more than 5 years after the property is transferred. This is also problematic from the perspective of a buyer's financier, given the commercial alignment of the financier's interests with the buyer's in ensuring the lease income stream is protected following settlement.
Buyers and their financiers should therefore ensure as part of any property acquisition:
- proper due diligence on all leases and certificates of title is undertaken to verify that any leases for terms longer than 5 years (including any which have been assigned) are properly registered; and
- that any unregistered leases for terms longer than 5 years are registered as a condition of settlement and that the sale contract contains a clear entitlement for the buyer to issue a default notice and terminate if this does not occur.
A tenant and its financier also have a vested interest in registering a lease of more than 5 years to ensure security of tenure following a change in ownership. The same also applies to any option terms contained within leases of less than 5 years (although the initial lease term itself has some protection under the TLA).
Although the grounds of appeal in Primewest did not require the court to revisit the Lighting by Design decision, it is clear that based on current case law the failure to register a lease in WA of more than 5 years, or a lease of less than 5 years containing an option term, may well cause issues down the track for a seller, buyer, financier or tenant. To avoid questions about the enforceability of such leases, the prudent course of action is to register them. While it may be possible for a buyer to take the benefit and be subject to the burdens of an unregistered lease from settlement, lease registration remains the most effective means of ensuring the benefits and burdens of a lease pass on transfer.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.