Forum Law Newsletter - September 2006

PROPERTY & CONVEYANCING

Smoke Alarms

Recent NSW legislation has made the installation of smoke alarms compulsory as from 1 November 2006. Fines will be imposed for failure to comply with this requirement. All Forum Law Contracts for sale of land will include a special condition which is a warranty by the vendor that the smoke alarms have been installed. Landlords of residential property with bedrooms also need to ensure that smoke alarms have been installed to their rented premises.

Confused by the GST margin scheme?

Many clients are confronted by the term "the margin scheme" when purchasing a home unit "off the plan" or if a developer client wants to develop and sell a property, or transfer a long term lease. The margin scheme is an alternative way the vendor may comply with its GST obligations at minimal expense for the purchaser. The margin scheme can only apply where the vendor IS registered for GST and the purchaser is NOT registered for GST, so the purchaser cannot claim an input tax credit for the GST paid. There must be agreement in writing to use the margin scheme.

The GST payable is calculated on the "margin" only. So instead of paying GST on the whole of the purchase price, the payer only pays on the margin. Where property was acquired before 1 July 2000, the margin is the difference between the value of the property when the vendor became registered for GST, and the sale price. This time point of reference assists vendors who purchased property before 1 July 2000, and became registered for GST on or after 1 July 2000. Where property was acquired after 1 July 2000, the margin is the difference between the value of the property when the vendor acquired the property, and the sale price. Of course this is an over simplified explanation of the legislation which is outlined in Div 75 of A New Tax System (Goods and Services Tax) Act 1999 as amended.

Retail leases can be created without a formal document

In the case of Helou & Ors –v– Bong Bong Pty. Ltd. & anor [2006] NSWADT 128

the Administrative Decisions Tribunal decided that a retail lease for a minimum 5 year term had been created by a letter of offer prepared by the landlord and offered to the tenant . The letter in question contained a commonly adopted "disclaimer" in words to the effect : "Acceptance of this offer does not in any circumstances create a legally enforceable lease between the parties. The lease will be prepared by the lessor's solicitors incorporating the terms and conditions contained in this letter and no agreement will be legally enforceable unless executed by both parties." The facts were that the tenants had purchased a green grocers business in Bowral, where the vendor of the business was on a holding over monthly lease as his 5 year registered lease had expired. The landlord had intended to redevelop the site and the landlord and tenant had a number of meetings to discuss the proposed redevelopment. In September 2004. The tenant entered possession and operated the business from September 2004. In February 2005 the landlord gave the letter of offer to the tenant with the "disclaimer." After negotiations on terms, the tenant accepted the offer. In August 2005 the landlord served a Notice to Quit on the tenant, with the intention of redeveloping the site. The tenant applied to the Tribunal to enforce the lease. The Tribunal decided that the letter of February 2005 contained a disclaimer, but that the effect of the disclaimer was overridden by ss7 and 8 of the Retail Leases Act. The effect of these sections is that a lease is created when a tenant enters into possession or when the tenant begins to pay rent [other than as a payment to secure a prospective lease]. The Tribunal confirmed the provisions of s.8 which state that if either of these events occurs, then a lease is created [for the minimum 5 year period] notwithstanding that a document has not been executed PROVIDED that the parties have agreed that the landlord grants to the tenant the right to occupy the premises, for value[rent], as a retail shop.

Rent Review clauses in leases

Landlords and tenants should be aware of the 2006 changes to the Retail Leases Act regarding the option to appoint an expert valuer to ascertain the market rent where a market rent review is to be determined.

In both commercial and retails leases, parties should consider whether CPI and market reviews are the desired methods of review as both may result in a rent decrease. Landlords may wish to consider a percentage increase. Retail Leases cannot contain a "Ratchet clause" namely a provision which allows either a CPI/Market review OR percentage increase "whichever is the greater".

As a tenant you may not wish to have a market review of rent take into account improvements you have made to the premises. In retail leases, the landlord must NOT take into account the goodwill the tenant has created on the premises in determining the new market rent.

In the recent case of Callaghan v Merivale CBD Pty Ltd (2005) NSWSC 985, Justice Burchett found that the failure of a landlord to provide notice of the rent review within the time specified in the lease, rendered the notice invalid, as the relevant lease provided that time was of the essence in respect of that timing. However the fact that the tenant did not respond to the rent review notice until after the period stipulated in the Lease, did not invalidate the tenant's objection to the rent review because the lease did NOT provide that the timing of a tenant's objection was NOT an essential term of the lease. Therefore is important to ensure that each party's intention regarding the timetabling of rent reviews is clearly provided in a lease.