Assisted by Kristina Tato
When a tenant decides to exercise an option, the lease usually contains a mechanism for how their rent is to be determined, and once this is determined, would be payable from the start of the option lease...But what happens in situations where the rent review provisions are deemed void under the Retail Leases Act?
This occurred in a recent case where the NSW Court of Appeal overturned a Tribunal decision, rendering a rent review clause under an option lease void. Where an essential term, such as rental determination, is invalid, the entire lease is rendered unenforceable.
What is an essential term?
An essential term is ultimately a vital condition of the contract. Essential terms would include the parties to the lease, the term of the contract and the rent due to be paid by the tenant. A lease cannot legally operate without the essential terms, and any breach of essential terms gives the innocent party a right to terminate the contract.
Recent Decision: Pozetu Pty Ltd v Alexander James Pty Ltd [2016] NSW 208
Facts:
The Lessor, Pozetu Pty Ltd and the Lessee, Alexander James Pty
Ltd had both entered into a 5 year retail lease for a shop located
in Woollahra. The lease contained a provision providing the Lessee
an option to renew for a further 5 years. As the initial lease came
to an end, the Lessee decided to exercise its option to renew. An
option lease was then formed for the renewal to take effect.
As the parties had not yet come to an agreement about the market
rent under the option lease, the Lessee paid rent month to month.
The Lessee subsequently provided a notice to the Lessor of their
intentions to leave the premises and thus end the lease. The Lessor
sought for damages in the Court for repudiation on the part of the
Lessee.
Issues:
The court examined whether the option lease was legally valid. Clause 4.2 of the option lease provided that the rent was to be determined through two methods; of which the highest amount produced would constitute the rent.
The clause is contrary to section 18(3)(c) of the Retail Leases Act 1994, which states that a provision is void where it "provides for base rent to change on a particular occasion in accordance with whichever of 2 or more methods of calculating the change would result in the higher or highest rent".
Under the Act, the market rent review clause was rendered void. Importantly, as the rent is an essential term, there was consequently no existing lease binding the parties after the initial lease had terminated. Under these circumstances, the Lessee had the right to leave the premises after giving one month's notice to the landlord.
Conclusion & Implications: What does this mean for you?
This case demonstrates the importance of the parties agreeing to
an essential term under a retail lease. The lease must be
consistent with the Act in that it cannot give the landlord the
right to choose the greatest return from a range of rent types at
any one review. It may specify only one method of rent review at a
time.
Where either the rent amount or the method to determine the rent
payable is not agreed to by both parties and contravenes the Act,
the clause is rendered void. As rent is an essential term, its
absence meant that there could be no lease at all.
Key lessons from this case:
As has been made clear by Pozetu Pty Ltd v Alexander James Pty Ltd [2016] NSW 208, when entering into a tenancy agreement - it is extremely important to:
- ensure that all essential terms such as rent are clearly agreed upon by both parties; and,
- be careful and make sure that clauses do not contravene the Retail Leases Act.
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.
