Australia: Oral Leases And Agreements To Lease: The ADT Sidelines The Statute Of Frauds

Last Updated: 14 January 2008

It is almost trite to say that contracts disposing of an interest in land, including leases and agreements to lease, are required to be in writing and if not, without acts of "part performance", they are unenforceable. This principle, embodied in section 54A of the Conveyancing Act 1919 (Conveyancing Act), is over three centuries old. It stems from the Statute of Frauds 1677 and is generally referred to by reference to that Act.

So, can a binding agreement for the lease of a retail shop premises be concluded by word of mouth alone? If no written agreement, is part performance (such as the occupation of the premises or payment of rent) needed at all? The Administrative Decisions Tribunal's (Tribunal) decision in Perhauz1 sidelined the Statute of Frauds by enforcing a wholly oral agreement to lease where there had been no part performance. The recent decision in Thai Star2 has cemented the Tribunal's view that the Retail Leases Act 1994 (Act) overrides conflicting provisions of the Conveyancing Act.

Facts Of Perhauz

Mr Perhauz and Ms Taylor (Applicants) alleged that an agreement to lease for a restaurant known as "Poets Corner" (Premises) had been concluded orally with Mr Felsch, a real estate agent (Agent) acting for the owners of the Premises (Respondents), and sought among other things, a declaration that an enforceable agreement existed.

The Applicants had leased other restaurant premises from the Respondents and had been approached by an agent of the Respondents in 2005 as potential purchasers of the restaurant business then operating from the Premises. The Applicants had declined, as the lease of the Premises was for too short a term. The conversations alleged to have given rise to the agreement to lease took place almost a year later, in June 2006. In summary:

  • the Agent had informed the Applicants that the tenants of the Premises would soon be leaving and that the Premises would be available for lease and then asked if the Applicants would be interested in leasing the Premises
  • the parties discussed terms of the lease being offered for the Premises, being the rental, the term of the lease, a demolition clause, the use of the Premises (as a café) and a possible rent free period
  • Mr Perhauz had said that he would "take the lease"
  • the Agent said he would have a lease drawn up and sent to the Applicants.
Decision

The main issue for the Tribunal was whether, at law, a binding agreement for the lease of a retail shop premises can be concluded by word of mouth only. The Tribunal had, in a handful of earlier decisions3, suggested that purely oral leases and agreements to lease may be valid, but these decisions had all dealt with agreements or leases which were outside the ambit of the Act as it then applied because they were for terms of less than six months.

The Tribunal determined that a binding agreement for the lease of a retail shop premises can be concluded by word of mouth only on the basis that:

  • section 3 of the Act (which sets out the definition of a "retail shop lease") creates a statutory legal interest irrespective of the requirement under section 23B of the Conveyancing Act that interests in land are not to be passed otherwise than by a written deed
  • the definition of a "retail shop lease" in section 3 of the Act includes agreements under which a person grants or agrees to grant to another person for value a right of occupation of premises for the purpose of the use of the premises as a retail shop, whether the agreement is oral or in writing, or partly both
  • section 8 of the Act (which provides that a retail shop lease is "entered into" when a person either enters possession, pays rent or upon both parties "executing" the lease) does not operate to render wholly oral agreements to lease (as opposed to oral leases) unenforceable because:
  • the words "entered into" indicate that the real function of section 8 is defining when an agreement to lease "ripens into a fully established lease transferring a legal interest in the land to the lessee"


  • the concept of "executing" the lease refers to the act of signing a lease rather than a written agreement for a future lease, which in practice are often unsigned, but still potentially enforceable under section 54A of the Conveyancing Act .
  • it was consistent with the Tribunal's function of protecting "the legitimate interests and expectations of lessees and would-be lessees".
Thai Star

In Thai Star, the Tribunal determined that an oral lease was enforceable in circumstances where there had been part performance (ie the tenant occupied the premises and paid rent. The question arose whether the oral lease could be terminated immediately under section 23D of the Conveyancing Act. Section 23D provides that all interests in land not put in writing and signed can be terminated at will, excepting oral leases for the 'best rent' reasonably obtainable with terms less than three years4. The Tribunal referred to and approved its reasoning in Perhauz in determining that the lease could not be terminated under section 23D, because the Act creates a "statutory legal interest" in land "irrespective" of the bar against oral leases set by section 23D.

Lessons For Retail Landlords And Their Agents

The Perhauz and Thai Star decisions as significant in that they confirm that, in the Tribunal at least, the bars to enforcing oral leases and agreements to lease in the Conveyancing Act do not operate in respect of retail shop leases. They are also perhaps further examples of the quantum shift in the landlord/tenant relationship brought about by the Act as applied by the Tribunal that has resulted in the scuttling of undertakings as to damages, implied leases and many of the other devices once available to answer or discourage claims by retail tenants.

There is little doubt that the pendulum is swinging in the retail tenant's favour. That said, it is not all gloom for retail landlords, as the Tribunal did confirm that a note to the effect that any set of terms to which the parties or their agents give their provisional consent to is not binding until a formal lease is prepared and executed is enough to refute any claim for a wholly oral agreement to lease. Making such notes is a simple practice which all agents and retail landlords should adopt.

As a final note, the importance of contemporaneous notes was again emphasised in Perhauz. The Agent had not kept contemporaneous notes, and the Applicants' evidence was preferred to his for the reason that the Applicants' recall would be better as the deal was presumed to be of greater importance to them and because the Agent was presumed to have been involved in a large number of similar deals at the time. Retail landlords and their agents must take the warning that without contemporaneous notes supporting their version of critical discussions they will be exposed to a significant risk that the Tribunal will prefer the tenant's evidence as to what was said.

Footnotes

1 Perhauz & Anor v SAF Properties Pty Ltd & Ors [2007] NSWADT 122

2 Thai Star Video Pty Limited v Walpole [2007] NSWADT 193

3 eg Four Seasons International Agriculture Pty Ltd v Iacullo [2002] NSWADT 91, Rolet v Baron [2002] NSWADT 316

4 Section 23D(2) Conveyancing Act 1919 [NSW]

Sydney

Robert Riddell

t (02) 9931 4940

e rriddell@nsw.gadens.com.au

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