Many landlords assume that if they validly terminate their tenant’s lease, that any sub-lease will also be automatically terminated and that the landlord will be free to re-lease or sell the land with vacant possession.
The recent Supreme Court decision in Queensland, Leahy v Austwin Management Services Pty Ltd [2011] QCA 186, serves as a reminder that this will not always be the case and that landlords need to more carefully consider the ramifications of allowing a sub-lease to come into existence.
Whilst this decision is based on section 125 of the Property Law Act 1974 (Qld), the Western Australian equivalent in section 81(4) of the Property Law Act 1969 (WA) is largely similar and therefore, the case is still very relevant to WA.
Background
In this case, Mrs Leahy, the landlord, was the registered proprietor of a service station and mechanics workshop. Mrs Leahy leased both premises separately. The service station was leased to CQ Petroleum Pty Ltd and the mechanics workshop was leased to Fimiston Investments Pty Ltd (Fimiston). Fimiston entered into a sub-lease of the workshop with Austwin Management Services Pty Ltd. Fimiston failed to pay its rent and became insolvent and subsequently its lease with Mrs Leahy was terminated.
The sub-lease was terminated and Austwin sought relief against forfeiture under s 125 of the Property Law Act 1974 (Qld). Relief was initially granted by the Primary Judge allowing Austwin to enter into a new lease with Mrs Leahy on the same terms as the initial sub-lease.
Austwin was awarded relief because the Primary Judge found that the prejudice suffered by Austwin outweighed that suffered by Mrs Leahy. The factors that the Primary Judge took into account when weighing up the hardship suffered by Austwin was the period of pre-occupation of the land (25 years), a perfect record of payment of rent, a solid financial position, the tenure left (18 months) and there were no suitable alternative premises available. Mrs Leahy’s solicitors argued that she would suffer hardship by not being able to rent the premises, the workshop and the petrol station to one entity under a commercial lease.
Findings
On appeal, the Supreme Court found that the Primary Judge had not erred when comparing the prejudice suffered by both parties. The main issue for debate was whether the prejudice suffered by Austwin outweighed that suffered by Mrs Leahy. The Supreme Court found that the Primary Judge had not erred and that the main basis for the decision was based on, amongst the other factors above, the hardship that would have been suffered by Austwin if it was forced to vacate the premises at which it had conducted its business for over 25 years.
What is relief against forfeiture?
Forfeiture normally occurs where a breach has occurred in the agreement and one party, normally the dominant party, can automatically enforce their rights in the contract. In a leasing environment, this would mean that the landlord can automatically cancel the lease with the tenant and demand vacant possession.
In Western Australia, section 81 of the Property Law Act 1969 (WA) provides the rules for when relief against forfeiture of leases and sub-leases will be granted. Section 81(4) provides that where the landlord is enforcing a right of forfeiture, then the sub-tenant may make an application for relief to the Court to have a new lease entered into with the landlord for terms no more favourable than those that were already agreed under the sub-lease. Whilst the Court will have regard to the circumstances of each case on a case by case basis, it would seem that this recent Queensland decision will provide some guidance for the courts in WA.
What does this mean for you?
This decision should make landlords consider the terms of their leases insofar as they relate to the grant of sub-tenants and whether they become parties to the sub-leases themselves.
For example, if a landlord leases premises to a tenant who then sub-lets those premises, the landlord should ensure they have the ability to withhold their consent to that sub-tenant. This is because they may very well end up being ‘stuck’ with that sub-tenant as their new tenant in circumstances such as those that arose in the Leahy case, where, incidentally, the relationship between the landlord and sub-tenant was particularly acrimonious, making the ultimate judgment even more grating on the landlord. Ultimately, landlords should scrutinise any potential sub-tenants in the same way they would consider a potential tenant.
Whether a separate deed of consent is entered into or the consent contained in the sub-lease, all landlords should ensure that the sub-tenant clearly acknowledges and agrees that termination of the lease will result in automatic termination of the sub-lease. Having the landlord as a party to any contract with the sub-tenant ensures privity of contract and ensures the landlord can enforce the terms. Therefore, being a party to the contract is of paramount importance to the landlord.
As a side issue but one which was relevant to some extent in the Leahy case, landlords should also consider inserting provisions in their leases that if a sub-lease is consented to, that the landlord should also benefit from any higher sub-rent charged by the tenant to the sub-tenant. In the current office market, some tenants are reaping the benefits of well negotiated fixed or CPI rent review provisions for long term leases, or simply power rents, then sub-leasing to new sub-tenants at current market rents, often much higher than what they’re paying.
If a case such as Leahy arose in WA today, with the current WA office rent market, a landlord may reasonably claim prejudice and hardship from not being able to re-let the premises at a market rent where the lease has been terminated but the sub-tenant has obtained relief against forfeiture. However, this factor alone may not be enough to sway the Court in the favour. Generally speaking, courts are more inclined to grant relief against forfeiture, much to the dismay of many landlords dealing with tenants constantly in breach.
Ultimately, whilst the premises remain vacant and the prejudice to the sub-tenant outweighs that to the landlord, it will always be open to a sub-tenant to claim relief against forfeiture where the head lease has been terminated. Well drafted leases and sub-leases, as well as strategic timing and planning of the termination may assist a landlord in avoiding the costly court proceedings and negative result the landlord experienced in the Leahy case.
If you have any queries about this article or leases generally, please contact:
| Patrick Thaung |
| Partner |
| (08) 9288 6784 |
| patrick.thaung@lavanlegal.com.au |
