Potential issues when buying or selling leased real estate

In the case 1110 Hay Pty Ltd as trustee for The Hay Street Trust v Metso Minerals (Australia) Ltd 1  the Supreme Court of Western Australia dealt with a number of issues that can commonly arise during a lease and when selling or buying leased real estate being:

  • the distinction between personal rights and proprietary rights and the manner in which such rights may be transferred when land is sold;
  • when a landlord is entitled to make a profit by marking up the cost of electricity charged to a tenant; and
  • when an expert determination will be binding on the parties to a lease.

Background

A dispute arose between 1110 Hay Pty Ltd as trustee for The Hay Street Trust (1110 Hay) and Metso Minerals (Australia) Ltd (Metso) regarding amounts payable pursuant to a lease and a settlement agreement relating to a previous dispute.2

Metso entered into an agreement with the owners of 1110 Hay Street, West Perth (Property) to lease part of the Property (Premises) for a term of 5 years.

1110 Hay then purchased the Property and became the landlord under the lease

A dispute arose between 1110 Hay and Metso in respect of Metso’s right to exercise an option under the lease. Metso commenced proceedings against 1110 Hay seeking a declaration that it had exercised its option and 1110 Hay filed a counterclaim.

The parties engaged in settlement discussions following which 1110 Hay tried to enforce an alleged settlement agreement. A further dispute arose when Metso denied that the parties had reached an agreement as contended by 1110 Hay.

The parties agreed to compromise the claim and counterclaim (Agreement) and acknowledged a lease for the Premises was in place from 1 November 2008 (Lease).

1110 Hay then sold the Property to Castilo Pty Ltd (Castilo). 

After settlement, 1110 Hay’s solicitors sent a letter to Metso stating “General Condition 6.9(b) was not excluded or modified. Consequently, all arrears of rent… was assigned by Castilo to our client”.

Assignment of proprietary rights on the transfer of land

The parties were in dispute as to whether the right to receive the shortfall amount pursuant to the Agreement, and an amount under a casual car bay agreement (Car Bay Agreement) transferred to Castilo on it becoming registered proprietor of the Property.

Clause 6 of the Agreement provided that as at 18 May 2010, Metso owed 1110 Hay the shortfall between rent paid since 1 November 2008 and the rent payable pursuant to the Lease (Shortfall Amount).

1110 Hay submitted that these amounts were not amounts that Metso was obliged to pay under the Lease and therefore the right to receive these amounts did not vest in Castilo.3

Metso argued the amounts arose for payment under the Lease and therefore vested in Castilo on becoming registered proprietor of the Property under the combined operation of the Transfer of Land Act 1893 (WA) and the Property Law Act 1969 (WA).4  

Derrick J held the Shortfall Amount was a liability arising under the Lease and Metso’s use of additional car bays under the Car Bay Agreement was a “right, power or privilege appertaining to the plaintiff’s interest in the Land as registered proprietor” which pursuant to section 82(1A) of the Transfer of Land Act 1893 (WA) vested in Castilo at the time Castilo became registered proprietor of the Property. This is particularly noteworthy as car bay agreements are considered a form of licence and a licence is typically only enforceable against the original parties to the licence and does not run with the land.5

Clause 6.9(b)(1) of the General Conditions – the assignment of unpaid rent

Ambiguity has existed around clause 6.9(b)(1) of the General Conditions as to whether unpaid rent was automatically assigned on settlement, or if a deed of assignment was required.

Derrick J clarified this in his decision stating that the clause did “validly effect an assignment from Castilo to the plaintiff of rent and other money that was payable by the defendant under the Lease as at the settlement date of the sale of the Land…”6

When a landlord is entitled to make a profit by marking up the cost of electricity charged

The Court considered if 1110 Hay was able to charge Metso a mark-up on the cost of electricity pursuant to clause 5.10 of the Lease which provided that:

…the Landlord shall, upon supply to the Tenant of such utilities, be entitled to charge the Tenant for the supply of the utilities at the rate which would have been charged by the authority for the supply of the same quantity of the utilities…7>

1110 Hay submitted that this clause entitled it to the benefit of the difference between the actual charges it incurred in respect of Metso’s electricity usage and what would have been charged to an ordinary tenant utilising electricity solely for the purpose of the Premises.8

Metso argued 1110 Hay was entitled to the benefit of the difference between the actual charges it incurred in respect of Metso’s electricity usage and what would have been charged to Metso.9

Derrick J held the clause did not enable 1110 Hay to charge an amount that would have been charged to “an ordinary tenant” and to be entitled to the difference, 1110 Hay needed to establish “the amount it charged to the defendant inclusive of the profit component is the amount that would have been charged by the electricity supplier to the defendant if the defendant had purchased electricity for the Premises directly from the supplier”.10

1110 Hay could not produce sufficient evidence and Derrick J held it was not entitled to the profit component and had overcharged Metso for electricity consumption.11

When an expert determination will be binding on the parties to a lease

Provided the determination is made in accordance with the terms of the respective clause, an expert determination will be binding on parties even if there is an error in the determination.12

Clause 7 of the Agreement provided the Shortfall Amount was to be determined by 1110 Hay’s auditor “in accordance with the terms of the Lease and applicable Australian accounting standards.”

The accounting expert (Expert) determined the Shortfall Amount was $724,359.22 including GST and interest (Determination).

Metso disputed the Determination and 1110 Hay argued because the Determination was an expert determination it was binding.13

Metso said even if the Determination was an expert determination, it was not binding because the Expert did not perform the task required by clause 7 of the Agreement in that they did not:

  1. undertake any form of audit of the information provided by 1110 Hay; or
  2. calculate the Shortfall Amount in accordance with the Lease.14

Derrick J agreed with Metso and held because the Determination was not made in accordance with clause 7 of the Agreement, it was not binding on the parties.15

Lavan comment

This case considers a number of potential issues that can give rise to disputes when leasing real estate or buying or selling leased real estate.

When dealing with the sale or purchase of leased real estate, consideration should be given to rights existing in respect of underlying property contracts and whether these rights are intended to remain with the seller or be transferred to the buyer.

Lavan regularly deals with acquisitions and disposals of leased real estate and the leasing of real estate.  Please contact us if you have any queries on these matters.

10 September 2018
Property Updates
AUTHOR
Peter Beekink
Partner
AUTHOR
Tim Morgan
Partner
SERVICES
Property and Leasing


FOOTNOTES

[1] [No 3] [2018] WASC 230

[2] 1110 Hay Pty Ltd as trustee for The Hay Street Trust v Metso Minerals (Australia) Ltd [No 3] [2018] WASC 230.

[3]  Ibid [29].

[4] Ibid [29].

[5] Ibid [32].

[6] Ibid [60].

[7] Ibid [91].

[8] Ibid [92].

[9] Ibid [92].

[10] Ibid [93]–[101].

[11] Ibid [102].

[12] Ibid [139].

[13] Ibid [121].

[14] Ibid [121].

[15] Ibid [157].