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The consequences of not understanding the terms of your lease

Property Law News | July 2016

Retail and commercial leasing have their own distinct rules and retail leasing has unique legislation governing the process. There may be serious consequences for tenants and landlords if the terms of a lease are not understood and agreed, and in other cases where surrounding circumstances are not sufficiently acknowledged.

Verbal terms: not worth the paper they're written on

In the case of Crown Melbourne Limited v Cosmopolitan Hotel (Vic) Pty Ltd the Victorian Civil and Administrative Tribunal [“VCAT”] found that Crown as landlord had made verbal statements to the tenants [“Cosmopolitan Hotel”] in negotiations leading up to the leases, that they would be ‘looked after at renewal time’. The tenant claimed they relied on the statements to enter into the leases presuming they would be offered renewals of the leases and VCAT ruled the statements constitutes a “collateral contract” obliging Crown to offer renewals to the tenant.

The Court of Appeal dismissed this finding and decided no such collateral contract arose out of verbal statements by Crown. The High Court supported this finding and related matters to the same effect. The lesson to be learned here is that all terms must be articulated in writing between the parties and verbal promises or representations by parties, or their agents cannot be relied upon in entering a lease.

Other written representations can also constitute terms of a lease

In the case of Caringbah Investments Pty Ltd v Caringbah Business and Sports Club Ltd (in liq) the Court of Appeal investigated the effect of representations in writing which were communicated before a lease was entered into, in particular the representations in a “Disclosure Statement” given to the tenant Club by the landlord’s agent before the lease. That Disclosure Statement included representations of a lower rent amount and no liability for electricity as an outgoing, and the tenant was able to show the court it relied on these representations to enter into the lease. The landlord’s claim that there had been a “mistake” in the differences between the amounts in the lease and the Disclosure Statement were dismissed.

Guarantors: the buck stops here, no matter what

The status and rights of guarantors under a lease of land to a company were explored in the case of Duncan v Big Country Developments Pty Ltd where the owner of land granted a lease to a company (Chili’s Penrith), whose obligations were guaranteed by 5 guarantors. The owner sued the 5 guarantors for unpaid rent, when the company tenant abandoned the leased property. Two of the guarantors defended the claims against them by the owner and lost their case. They appealed the decision on numerous grounds, all of which failed.

Where a company is a tenant it is usual practice to include the directors of the company as guarantors for the obligations of the tenant company and those obligations are not transferrable or able to be diluted. The owner landlord is able to usually “attack” any, or all of the guarantors to ensure the owner is compensated for the breach of the lease by the tenant company. The guarantors who bear a disproportionate part of the burden may then pursue the other guarantors for their share.

Therefore guarantors must ensure they fully understand their rights and obligations when they sign a lease and they should be aware of the financial status of the tenant company at all times to minimise their own liability as guarantor.

If you wish to discuss any matters relating to property or leasing please contact us at Forum Law Solicitors for a free 30 minute discussion on (02) 9560 3388 or in our friendly and professional office in Leichhardt where parking for clients is free.

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