Australia: Converting to strata title may not amount to repudiatory conduct

Last Updated: 7 January 2015
Article by Gary Newton and Jackie Cheung

In brief - Landlords and tenants should be aware of their lease obligations

The NSW Civil and Administrative Tribunal recently found that a landlord converting Torrens title to strata title over leased premises did not amount to repudiatory conduct which prevented it from complying with its obligations under the lease.

Landlord registers strata title and alters annual rent

In the case Pozetu Pty Ltd v Alexander James Pty Ltd [2014] NSWCATCD 183, the applicant, Pozetu Pty Ltd, is the owner of a building at 82 Queen Street, Woollahra in Sydney. Pozetu leased shop 1 to the respondent tenant, Alexander James Pty Ltd, for a term of five years commencing on 1 September 2003, with an option to renew for a further five year term.

The lease was based on the NSW Law Society standard form lease. It provided for rent review and was executed by all parties including the guarantors of Alexander James.

On 1 March 2005 and during the original term of the lease, Pozetu registered a strata plan over the leased premises. On 6 March 2008, Alexander James exercised its option to renew on the following terms:

Alexander James Pty Ltd, the tenant from Pozetu Pty Ltd under the lease commencing on 1 September 2003 of the premises known as shop 1, 80-82 Queen Street, Woollahra (lease) being part Folio Identifier 1/109260 gives you notice of its exercise of its option of renewal of lease.

The solicitors for Pozetu submitted the draft leases to the solicitors for Alexander James pursuant to the exercise of the option. The option lease referred to the strata title and altered the percentage of outgoings and annual rent payable by Alexander James.

Tenant alleges wrongful termination and cancels lease

Subsequently, the solicitors for Alexander James alleged that Pozetu had wrongfully terminated the lease by registering the strata plan over the leased premises without their consent, which meant that Alexander James had the benefit of a tenancy at will which was terminable on one month's notice.

On 31 March 2009, Alexander James delivered possession of the premises to Pozetu, which from 1 August 2009 re-leased the premises to a new tenant.

Tribunal considers title change, non-registration and rent review

The main issue the tribunal had to decide was whether the change in title and nature of the property from Torrens title to strata title was a fundamental change that could cause the lease to end or otherwise prevent Pozetu from providing an option lease in conformity with the original lease.

In addition, the tribunal also considered the effect of non-registration of the lease and the rent review clause of the lease, which was inconsistent with the Retail Leases Act 1994 (NSW).

Non-registration of lease does not vitiate its terms

In New South Wales, section 53 of the Real Property Act 1900 (NSW) provides that leases which have a term of over three years must be registered. This means that if a lease of such a term is not registered, the lease operates as a lease in equity and at law and will become a monthly tenancy determinable at the will of either party by one month's notice.

The original lease between Pozetu and Alexander James was for a term of five years but was not registered. Although the original lease was never registered, the tribunal found that non-registration did not have the effect of vitiating any terms of the lease, as the lease expressly provided that it was a "deed even if it is not registered".

Therefore, as the lease operated as a deed between the parties, the terms, agreements and covenants, including the exercise of the option of the lease, were operative as enforceable obligations.

Converting to strata title does not prevent performance of obligations

In determining the effect of registration of the strata plan on Pozetu's obligation under the lease, Senior Judicial Member Bluth referred to numerous decisions, including Young J's judgment in Ashington Holdings Pty Ltd v Wilpema Services Pty Limited No. 1 [1998] NSWSC 143, No. 2 [1998] NSWSC 414 and its Court of Appeal decision of Ashington Holdings Pty Ltd v Wipema Services Pty Limited [1999] NSWCA 456 to examine the change in relationship between a landlord and tenant under the lease as a consequence of registration of the strata plan.

The tribunal found that registering the strata plan did not amount to repudiatory conduct on behalf of Pozetu on the following grounds:

  • There is no fundamental change of the physical aspect of the leased area. Further, even though there was an alteration through the definition of cubic space in strata title legislation, the actual leased area did not change after the registration of the strata plan.
  • While there is a change to title reference and the Torrens title reference was used in the notice of exercise of the option, it was not of significance in substance, as the physical aspect of the premises remained the same and did not disentitle Pozetu from providing the option lease.
  • As Pozetu owned all the units in the strata plan at the time of exercise of the option, it had control of the building through the owners corporation. This meant that Pozetu was able to comply with its obligations and could continue to deliver services to Alexander James in accordance with the lease.

On this reasoning, the tribunal held that the conversion of the title of the building to strata title did not effect a fundamental change in a manner which could prevent Pozetu from performing its obligations under the lease to deliver the option lease. Therefore, Alexander James repudiated its obligations under the option lease through its abandonment of the premises on 31 March 2009.

Retail rent review provisions may be void

Section 18(3)(c) of the Retail Leases Act provides that a provision of a retail shop lease is void to the extent that it provides for base rent to change on a particular occasion in accordance with whichever of two or more methods of calculating the change would result in the higher or highest rent.

Further, where a lease contains provisions which are inconsistent with the terms of the Retail Leases Act, section 7 provides that such provisions of the lease are void to the extent of the inconsistencies.

The lease between Pozetu and Alexander James provided that rent for the first year of the option lease was to be the greater of the current market rent and 105% of the rent in the last year of the previous term.

Notwithstanding the fact that the methodology for determining rent review is void, as it contravenes section 18(3)(c) of the Retail Leases Act, the tribunal looked to the remaining terms of the lease and the option lease to determine the new rent.

Tribunal finds lease to be valid and enforceable

The tribunal determined that it was not necessary to ascertain the new rent pursuant to market rent review, as the entitlement to review the market rent on the exercise of the option was based on the void provision of the original lease.

In addition, as the parties had never agreed to the appointment of a specialist retail valuer and the tribunal has never appointed one, there was no basis on which Pozetu can contend that rent should be the current market rent. Consequently, the tribunal determined that the relevant rent that was to be payable by Alexander James in the first year of the option is the annual rent increased annually by 5% from the period of the exercise of the option.

Therefore, as the tribunal found that the lease was valid and enforceable, Alexander James breached its obligations as tenant upon vacating the premises and its guarantors are liable to Pozetu for damages for breach of the lease.

Consider lease obligations and be aware that non-registration may not invalidate a lease

This case shows that parties to leases should be aware of their obligations, whether as landlord or tenant. In particular, where a landlord converts leased premises from Torrens title to strata title, tenants should ensure that they do not breach their obligations under the lease, as courts may not find that such conduct amounts to repudiation on the part of the landlord.

Further, landlords and tenants should be aware that non-registration of a lease does not automatically invalidate a lease at law and that where there are lease provisions that contravene legislation, the courts may be able to sever clauses which are void and consider the remaining terms of the lease to ascertain the relevant intention of the parties.

Gary Newton Jackie Cheung
Leasing - commercial and retail
CBP Lawyers

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.

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Gary Newton
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