Australia: Purchaser versus tenant's unregistered lease

Ideal Business Centres Pty Ltd v Violin Holdings Pty Ltd [2018] NSWSC 1249 (9 August 2018)

The Vendor of a commercial property, part of which was leased to a Tenant, entered into a sale agreement with the Purchaser. The lease term was for 10 years but it was not registered. On completion of the sale, the Purchaser required the Tenant to vacate on the basis that:

"As the unregistered lease was not registered on the title of the land and is for a term in excess of 3 years, the owner is not bound by the terms of unregistered lease pursuant to s42(1)(d) of the Real Property Act 1900 (NSW)."

They argued that failure to register the lease meant the Tenant did not have indefeasible title and therefore the Purchaser was not bound by the lease. The Purchaser suggested that the Tenant was merely in occupation as a tenant at will.

The Supreme Court held that the Tenant had the benefit of an in personam equity against the Purchaser which overcomes what would otherwise be the Purchaser's indefeasible title to the property under Section 42 Real Property Act. The Tenant won.

Lease terms

The Tenant signed the unregistered lease in January 2016 for 10 years commencing in September 2015 with an option to renew for a further 5 years. Clause 7 of the lease states:

"The lease will apply to the landlords and tenants, executors, administrators and assigns or, in the case of a corporation, to its successors and assigns, as if they were parties to it."

If the Tenant's claim against the Purchaser failed, the Tenant noted clauses 5 (Grant of Lease and terms) and clause 48 (Quiet enjoyment) as its reasons for bringing a claim against the Vendor.  These two clauses related to the Tenant's rights to possess and use the lease premises, common areas, fittings and accessories etc and the Tenant's right to the leased premises without any interference from the landlord.

Sale agreement terms

In May 2017, the Vendor sold the premises to the Purchaser. The relevant clauses of that Sale Contract were clauses 10 and 49:

  • Clause 10 stated:

"10.1    The purchaser cannot share a claim or requisition or rescind or terminate in respect of

           10.1.9    anything the substance of which is disclosed in this Contract (...)"

  • Clause 49.1 stated:

"The purchaser acknowledges that the purchaser takes title to the property subject to the unregistered lease(s) (Leases) attached to this contract."

  • Clause 49.17 deleted clause 24 of the Sale Contract.

The Sale Contract noted on the front page the box beside "subject to existing tenancies" was marked with an "X" and the box beside "vacant possession" was not marked.

The Sale Contract was negotiated between the parties and clause 49 of the Sale Contract, which was drafted by the Purchaser, was agreed to by the Vendor and the Sale Contract was exchanged with a 12 week completion period. On 22 June 2017, the Purchaser had formed the intention to terminate the Tenant's lease and to require vacant possession immediately upon completion of the Sale Contract. The Purchaser did not disclose this intention to the Vendor nor the Tenant before completing the Sale Contract.

On 18 August 2017, the Purchaser's solicitor requested various documents relating to the Tenant's lease. At this time, the lease needed to be re-executed due to the originally executed lease not being located.  On 24 August 2017, settlement of the Sale Contract occurred.

Contractual interpretation

His Honour discussed two principles in particular, which he found he was bound to consider from a previous case (Cherry v Steele-Park (2017) 351 ALR 521; [2017] NSWCA 295):

  1. "the task of identifying the legal meaning of provisions in a commercial contract is the task of identifying the imputed intention of the parties, by reference to the contractual text construed in light of its context and purpose (Cherry [at 46]); and
  2. whether a provision in a commercial contract is ambiguous (that is to say, permitting a construction choice to be made between two different legal meanings) is "a conclusion, which can only be assessed after regard has been had to context" (Cherry at 540 [85]).

The argument: Clause 49

The Purchaser submitted that clause 49.1 was only an expression of its recognition or awareness of the existence of the Tenant's lease. Whereas, the Tenant and the Vendor contended that it was a promise by the Purchaser to be bound by the Tenant's lease or, as per the Vendor's counsel, "acknowledges" meant "agrees to observe and give effect to".  The Court held there were six reasons to accept the Tenant's and the Vendor's submission and finds that, on its proper construction, clause 49.1 is an agreement by the Purchaser to observe and give effect to the Tenant's rights under its lease:

  1. the language taking title to something, subject to another interest, bespeaks a significant legal consequence. In this case, the Sale Contract was negotiated through lawyers using language which lawyers would readily understand. Therefore, the use of the words to which the Court has drawn attention points decisively to the conclusion that "acknowledges" is to be understood as a recognition or promise by the Purchaser to be bound by the unregistered leases;
  2. as clauses 10.1.9 and 33 of the Sale Contract deal with tenancies, what was the purpose of clause 49.1? when read in the context of clause 49 as a whole, clause 49 can only be read as a obligation which binds the Purchaser to observe the Tenant's lease;
  3. an elaborate set of provisions such as those set out in clause 49 would only be required if the intention of the parties was that the unregistered lease would continue to have an ongoing legal effect after completion of the Sale Contract that could only be achieved by the Purchaser agreeing to be bound by them;
  4. by applying the High Court's analysis in Bahr v Nicolay ((No2) [1988] HCA 16; [1988] 164 CLR 604) to the facts in the present case, it follows that clause 49.1 should be construed as obliging the Purchaser to honour or adhere to the Tenant's lease;
  5. the continuation of the unregistered lease, in effect, the Purchaser substituted as the lessor, is consistent with the commercial background to the transaction, namely the purchase of an asset which generated income; and
  6. the decision of White J in Ryan v Starr (2005) (12 BPR 22 803; [2005] NSWSC 170) in which White J construed a clause that the relevant contract was "subject to the purchasers' acknowledgment of a right of carriageway" to be of similar effect to clause 49.1 in the present case.

The Purchaser placed considerable reliance on the fact that clause 24 of the Sale Contract was deleted in favour of clause 49.  Specifically mentioned was the deletion of clause 24.4.5 which provided that "the purchaser must comply with any obligation to the tenant under the lease, to the extent that the obligation is disclosed in this contract, and is to be complied with after completion".  The Purchaser submitted that its deletion was to be taken into account as a clear indication of the parties' mutual intention that clause 49 was not to have the effect of binding the Purchaser to the Tenant's lease.

In The Interpretation of Contracts in Australia by Sir K Lewison and D Hughes (2012 Thomson Reuters), the learned authors summarised the position in relation to the use which may be made of deleted words (at page 62):

"Despite older authority to the contrary, the court will nowadays often look at words which the parties have deleted from their contract in order to resolve an ambiguity in the words which remain, although they are often an unsafe guide to meaning."

In the present case, there was no evidence as to why the Purchaser's solicitors did not accept the Vendor's original version of clause 49 and proposed deletion of clause 24 from the Sale Contract to replace it with their version of clause 49. Nor is there any evidence as to why the Vendor accepted the amendment proposed by the Purchaser.  His Honour found, to use the expression by Lewison and Hughes, the change from deleted clause 24 to clause 49 is not simply an amendment but a recasting of the Sale Contract provision in relation to tenancies.  In some respects clause 49 repeats the effect of part of the deleted clause 24 however, in other respects, clause 49 is quite different.

The Purchaser submitted, on the issue of contractual interpretation, that the mechanisms set out in clause 49 were equally consistent with the possibility that the Purchaser would treat the unregistered lease as tenancies at will.  At a very high level of generality, His Honour thought that proposition may be true however, when the particular words, their context and the overall circumstances are taken into account, the Court does not accept that submission for the reasons set out in the "six reasons" above.

Conclusion

His Honour found in favour of the Tenant.  In accordance with clause 49.1, the Purchaser was bound to the Tenant's lease.  As the Tenant's claim against the Purchaser succeeded, the Tenant had no claim in damages against the Vendor.

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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Authors
Paul Carroll
 
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