Recent case provides a warning to landlords of retail premises to be careful when negotiating with tenants who are holding over.
This recent decision in the Administrative Decisions Tribunal held that a five year lease was created after a landlord sent a letter to a tenant offering to lease a shop, even though:
the letter expressly stated that no lease would be created until the parties signed a formal lease;
no formal lease was entered into; and
the landlord subsequently withdrew the offer.
The decision interpreted the Retail Leases Act (NSW) to hold that a lease can be created from a letter of offer sent to a tenant on a month to month lease. Once the terms in the letter of offer are agreed by the tenant, a landlord will not be entitled to withdraw that offer.
Advice To Landlords
Owners of shopping centres and their managers should take care when negotiating new leases with retail tenants who are already physically in occupation (under an expired lease or on a licence). We recommend:
written letters of offer should be carefully drafted and not issued if there are potentially conflicting plans (such as redeveloping the premises or seeking another tenant); and
monthly tenants who are offered new leases should be required to acknowledge in writing that until a new lease is signed, they remain in occupation as monthly tenants.
We note that having the tenant sign an acknowledgment may not be enough to put the matter beyond doubt, but will provide the landlord with additional evidence in the event of a dispute.
Facts Of The Case
The landlord purchased a Bowral shopping centre in June 2004 and lodged a development application to redevelop the centre in August 2004. The DA provided for part of the centre to be demolished, including shops 2, 3 and 4.
The tenant purchased the fruit and vegetable business which was operating from shops 2, 3 and 4 in the centre in September 2004. As part of its purchase, the tenant took a transfer of the existing lease, which was only a monthly tenancy, as the original lease had expired in October 2003.
On 25 November 2004 the council approved the DA. The landlord believed that the success of the redevelopment depended on the satisfactory leasing of the central part of the building to the tenant, a deli/café and a coffee roasting facility.
One 22 February 2005, the landlord sent a letter to the tenant offering to lease shops 2, 3 and 4 for a higher rent, a term of 5 years with an option to renew of 5 years. The letter stated that a security deposit of $5000 was required.
The letter stated that no legally enforceable lease would be created until a lease prepared by the landlord's solicitor had been signed by both parties. The letter also stated that occupation of the premises would not be granted until the tenant had provided a signed lease, bank guarantee, evidence of insurance, fees etc.
The tenant signed the letter and paid the security deposit of $5000.
The landlord received a negative response from the other prospective tenants who declined to lease any space in the building. Accordingly the proposed redevelopment would have to be postponed or abandoned. The landlord refunded the $5000 in March 2005 and eventually terminated the tenant's lease on 31 August 2005. No lease was ever signed by the tenant and the tenant did not at any time pay the higher rent under the proposed new lease
The Tribunal examined section 8(1) of the Retail Leases Act (NSW) which provides:
"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 held that:
a tenant already in possession of a retail shop lease may be deemed to have notionally entered into possession without actually vacating and re-entering the premises once an agreement for a new lease is concluded;
a lease may be held to have commenced without formal documentation so long as parties have reached a 'consensus' as to the terms of the lease; and
in order to reach this consensus it is not necessary that the parties reach agreement on all the terms of the right of occupation.
This decision applies only to retail leases in NSW.
t (02) 9931 4725
t (02) 9931 4772
t (08) 8233 0698
t (08) 8233 0648
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
The Council announced planning policies to encourage more inner suburban retirement village and aged care development.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).