Many people believe that a variation to their commercial lease or the ending of the lease can be done without the added expense of a lawyer to prepare the necessary documents, however there are a number of potential pitfalls of attempting to vary or surrender a lease without legal advice from a lawyer experienced in the area of commercial leases.
A deed of surrender of a lease, the document required in such a situation, is a legal document with specific wording and execution requirements which, if followed correctly, give it greater enforceability than a normal agreement between two parties. Without going into a long winded explanation of Contract Law the major difference is that an agreement where one party receives no benefit is unenforceable however a Deed between two parties where one receives no benefit is enforceable.
So say Tenant and Landlord wanted to agree that the Tenant no longer has to reimburse the Landlord for the Council Rates for the rest of the term of the lease. If this was an agreement and not a Deed this may be unenforceable against the Landlord, which is a position I’m sure the Tenant would want to avoid if the Landlord changes their mind about the ever increasing Council Rates.
As section 52 of the Property Law Act provides that the creation of an interest in Land must be by Deed therefore the transfer or surrender must be by Deed as well. If a surrender is not by Deed it is void.
This means that a verbal or written agreement to surrender the lease which is not a Deed may be ineffective and not release either the Tenant or the Landlord from their obligations under the Lease. Again this is not an ideal situation if the Landlord is unable to find a new Tenant or the Tenants new property isn’t what they hoped it to be and one of them seeks to enforce the remainder of the term of the Lease.
In addition to being a Deed, a variation must also contain a clause to express it to be supplemental to the original lease which effectively means that other than the variations the old lease remains in force on the old terms. Failure to include this clause may result in the old lease terms becoming unenforceable or the old lease being surrendered and a new lease on only the varied terms being granted inadvertently.
There are a number of other ways that an incorrectly prepared variation of a lease may inadvertently surrender the lease and create a new lease including but not limited to adding to the lettable area, varying the term of the lease or granting another option to renew.
An example of where this went horribly wrong is in the case of Richmond Football Club Limited v Verraty Pty Ltd (2011) where the lease was entered into prior to the introduction of the Act however the lease was varied in 2004 and inadvertently this variation was a surrender and new lease, with the new lease being subject to the Retail Leases Act.
That resulted in the Landlord in this case, because of the different obligations, being ordered to repay Richmond FC $125,320 in Land Tax which they had paid to the Landlord since the variation.
When varying or transferring a Lease it is also vitally important to obtain the consent of any Guarantors of the Lease and the Landlord’s mortgagee and in my next blog I will explain why the consent of these third parties is so important in Leases.
Hopefully these examples have been enough to convince you to tread carefully when thinking of varying or surrendering a lease, only do so with advice from OFRM. Call us on 03 5445 1000.