Australia: Leases of Managed Investment Scheme premises: Who can bring proceedings on behalf of the landlord?

There are many legal complexities associated with the ownership of property by Custodians on behalf of Responsible Entities for Managed Investment Schemes. One example from a Landlord's perspective is the enforcement of leases against tenants. Taking action where breaches of a lease remain outstanding is a necessary step to ensure profitability of investments, performance of the Scheme for investors and compliance with statutory obligations.

A recent Queensland Court of Appeal case identifies potential issues in circumstances where the respective rights and obligations of the Responsible Entity and Custodian are not clearly understood when it comes to lease enforcement.

Kern Consulting Group Pty Ltd & Anor v Opus Capital Ltd [2014] QCA 111

In this case, a Responsible Entity and a Custodian entered into a Custody Agreement under which the Custodian agreed, among other things, to take legal ownership of real property acquired with the funds supplied by the Responsible Entity.

Under the Custody Agreement, the Custodian became the registered owner of an office building. It has previously been stated that a Custodian is effectively a trustee, holding the legal title to the property for the benefit of the members of the Managed Investment Scheme.

The Custody Agreement outlined certain rights and obligations of the parties, including the obligation of the Responsible Entity to manage the Scheme property as though it were the owner. The argument in this matter centred on whether the Responsible Entity or the Custodian was the trustee for the purpose of commencing proceedings.

On the basis that the Responsible Entity understood that it was given the requisite authority under the Custody Agreement, it commenced proceedings against a tenant who had failed to pay significant amounts of rent and outgoings. The Responsible Entity also relied upon Chapter 5 of the Corporations Act 2001, which provides that a Responsible Entity holds property on trust for members of the Managed Investment Scheme, inferring that the Custodian consequentially holds legal title to the property on trust for the Responsible Entity.

The Court decided that the Custodian held legal title to the property and, accordingly, the interest as landlord. Therefore the Custodian enjoyed a contractual right to receive rent and payments under leases from its tenants. Furthermore, and contrary to the view of the Responsible Entity, the Court determined that there was nothing in the Corporations Act or the Custody Agreement that vested ownership of the right to recover outstanding amounts under the leases in the Responsible Entity.

Accordingly, the Court held that the Custodian, rather than the Responsible Entity, was the proper party to bring proceedings.

While the Court consented to the Custodian being joined as a party to the proceedings upon further application by the Responsible Entity, costs were awarded against the Responsible Entity for the original application and the appeal.

Key considerations

In light of the Court's decision in this matter, Responsible Entities operating under Custody Agreements should consider:

1. Reviewing Custody Agreements to make sure that the Custodian expressly assigns all choses in action in favour of the Responsible Entity and authorises the Responsible Entity to do all things necessary to enforce those rights, including commencing proceedings in the name of the Responsible Entity to recover amounts owing to the Custodian by tenants and guarantors.
2. Including similar provisions and acknowledgements in lease documents.
3. Serving notices and commencing proceedings in the name of the Custodian, or joining the Custodian in proceedings with the Responsible Entity.

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.