Property & Leasing Disputes provides a bimonthly analysis and some commentary on a handful of selected issues which may be of interest to those whose professional lives involve dealing with property, leasing, development or conveyancing. The focus is upon matters that have found their way into the upper reaches of the court system, and some guidance is offered on dealing with similar issues as they may arise.
This edition - the very first edition - looks at:
- The interaction between incentive deeds and penalties;
- An interesting mitigation of loss scenario under a lease;
- Issues that arise where a sale of land involves fraud; and
- Who is considered an 'interested person' for the purposes of being heard in respect of a development application?
Commercial Leasing – Incentives and penalties
The Queensland Supreme Court's decision of GWC Property Group Pty Ltd1 has become well known, quickly.
A leasing arrangement involved entry into both a lease and an incentive deed. Under the incentive deed, the landlord provided a fit out contribution and some rent abatement. The deed stated that if the lease ended early due to the tenant's default, then the tenant became obliged to pay back to the landlord the value of some of the provided incentives. Nothing about this type of arrangement is, of course, new.
As it happened, the lease was terminated for the tenant's default and the landlord claimed under the incentive deed. The tenant argued that any payment under the incentive deed was an unenforceable 'contractual penalty'. This was because such payment placed an additional detriment upon the tenant (ie paying an amount under the incentive deed) which only applied if the tenant failed to perform its main obligation(ie paying rent etc), which is often sufficient to constitute a 'penalty'.
The landlord's view - that payment under the incentive deed was only to compensate the landlord for the incentives, which the landlord said were only given on condition that the tenant complied with the lease – was rejected as being artificial. The court considered the provision of incentives as being the price of obtaining a tenant in the prevailing market.
Depending upon the way that this case comes to be applied, attention will need to be given to revising(or perhaps simply jettisoning) incentive repayment clauses in an effort to tryand avoid the above analysis. It may be premature to make changes to precedent documents at this time.
Retail leasing – an unusual mitigation of damage situation
Following termination for breach, a landlord is entitled to recover its losses from the former tenant. The main loss is the rent that the landlord would have received had the lease run its course. However, the landlord will rarely be awarded such an amount. Instead, damages are given for the period of time the court expects it will take the landlord to find a new tenant. If at termination there were 3 years left on the lease, but a court thinks a new tenant will be found in 6 months, then the loss is only 6 months rent.
In practice, landlords sensibly try and find new tenants swiftly. This process is known as 'mitigating a loss'.
But what would occur in the following situation? Say a lease had 3 years to run, and the original tenant's lease ends due to its breach. The landlord finds a new tenant, who enters into a new lease, but the new tenant goes broke in a matter of weeks, and the landlord again has to terminate and try and find a new tenant. Can the landlord seek to recover from the original tenant or has entry into the new lease deprived the landlord of that right? This issue has come up a few times in practice, and is particularly important if the original tenant (or its guarantors) has deeper pockets than the new tenant.
The question is complex, and does not seem to have featured in judgments. However, there may be good reasons to consider that a landlord is stillable to recover against the original tenant. This is because the law recognises that reasonable attempts at mitigation may be unsuccessful, and this should not deprive a party of the right to claim compensation from the originally defaulting party. On this basis, entering into a new lease (that then failed)could be characterised as a reasonable but unsuccessful attempt to mitigate.
One practice point in this regard is to take care that in granting a new lease the landlord does not give away rights it has against a former tenant, for instance by granting a surrender. Some consideration may also be given to making the right to recovery against the original tenant,where a replacement tenant fails, clear under the original lease.
As with many procedures in the art of leasing and contracting,a particular clause may not be legally necessary (as the legal right may exist independently of the proposed clause), but be practically useful - if the landlord's right is there in print, the other party being cognisant of it may effectively concede defeat, and unnecessary litigation would be conveniently avoided.
Sale of land - Indefeasibility, joint tenants and fraud
The High Court recently considered when a transfer of land could be unwound due to fraud (this is known as an exception to 'indefeasibility' under Torrens system land)2.
The concept of indefeasibility is that the owner of the land(the registered proprietor) holds the land ahead of any non-registered interest (or registered interests that came onto the title after theirs), no matter how good the other person's claim to the land might be, and even where the other person's claim existed prior to the registered proprietor's. The classic exception to this mainstay, however, is where the registered proprietor obtains the land by fraud. The law is kind enough to assist in this case.
In the High Court matter, a director caused a company to improperly transfer its land to himself and his wife as 'joint tenants'. He then transferred his interest to his wife for no real consideration, so she became the sole registered proprietor. The shareholders were the (now adult) kids,and they complained and wanted the fraudulent transfers rolled back, so the company was once again the land's only owner. The issue was that the wife knew nothing about the fraud, and the court had to work out if she should lose her indefeasible status given her ignorance.
The result was interesting. The original transfer to the wife,as one joint tenant, could not be undone since the wife did not know of thefraud. Her husband's knowledge could not be brought home to her. When it came to the transfer from the husband to her (making her the sole proprietor), the court could set this transfer aside, because where a person receives land (ie the wife) from another person who only has their interest in the land by their fraud (ie the husband), then if the person who receives the land pays nothing for it, it can be recovered.
However, all that could be recovered was the portion of the land the wife received from the husband, not the 50% interest in it that she received from the company when the husband committed the original fraud. The result – the wife owned 50% of the land and the company owned 50% of the land -seems a bit odd, but it is the application of the legislative scheme that creates indefeasibility.
Property development – who is an interested person?
An interesting question, albeit unique to the ACT, recently arose in some litigation that ended up in the High Court3. A landlord and tenant of a supermarket in one suburb sought to complain about a planning decision to allow a supermarket to be built in a neighbouring suburb.Their standing to complain was on the basis that the development could adversely affect their businesses.
The question under relevant ACT planning law was whether the landlord and tenant had the right to be heard on the basis that they were'aggrieved persons'. The answer, at least for the tenant who operated the supermarket business (as opposed to the landlord who only owned the land) was 'yes'.
ACT planning laws require a planning authority, when considering a development application for a commercial development (in this case for shops and a supermarket), to consider whether the development may have a significant adverse economic impact on other commercially viable local shopping centres. Since the tenant was located in a nearby shopping centre, the tenant was someone who could be aggrieved by the decision in the sense of its profitability being adversely affected.
The landlord, however, had no such right since it could not show how a less profitable tenant (caused by the proposed competing development)would affect the value of either its land or the future letting of the land.The connection was not direct enough.
Contractual and other interesting matters
Unfortunately, none this time around!
1GWCProperty Group Pty Ltd v Higginson & Ors  QSC 264
2Cassegrainv Cassegrain & Co Pty Ltd  HCA 2
3Argos Pty Ltd v Minister for the Environment& Sustainable Development  HCA 50
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.