Why leases should be registered in Western Australia

 

The decision in the case Primewest (Mandurah) Pty Ltd v Ryom Pty Ltd as trustee for Golden Asset Pty Ltd [2012] WASC 443 supports a previous view of the Western Australian Supreme Court that an unregistered lease for a term in excess of five years is destroyed on transfer of the freehold of the land to a third party. 

This case concerned the proposed sale of a commercial property by Primewest to Ryom Pty Ltd for $12 million.  The property was subject to six leases and it was a requirement of the contract of sale that the seller provide to the buyer deeds of affirmation or “other documentation” relating to the leases and the continuation of leases after settlement as reasonably required by the buyer.

The parties were unable to agree on the “other documentation” required in relation to the leases.  The seller was ultimately unable to produce that “other documentation” to the seller.  Settlement did not occur and the purchaser terminated the contract of sale.  The court held the termination to be valid.

Relevant legislation

In formulating its decision, the court had to consider the provisions of section 68 of the Transfer of Land Act 1893 (WA) and sections 77 and 78 of the Property Law Act 1969 (WA) and the way in which those sections relate to each other. 

The court was required to decide whether pursuant to clause 68 of the Transfer of Land Act the tenant’s interest in the land pursuant to its lease (which was not protected by a caveat) was destroyed by the transfer of the land or whether due to the combined effects of clauses 77 and 78 of the Property Law Act all of the covenants under a lease go with the reversion of the sale of the property.

Section 68 of the Transfer of Land Act refers to the paramountcy of the estate of the registered proprietor.  There is an exception in section 68(1) for leases but the exception applies only to “any prior unregistered lease or agreement for lease or for letting for a term not exceeding 5 years to a tenant in actual possession” and in instances when those leases are protected by a caveat.

The court upheld the previous decision of Master Sanderson in Lighting by Design (Aust) Pty Ltd v Cannington Nominees Pty Ltd [2007] WASC 88 in which he found that section 68 of the Transfer of Land Act ultimately prevails.

In his decision in that case Master Sanderson followed the decision of the High Court in the case of Leros Pty Ltd v Terara Pty Ltd [1992] HCA 22.  In that case the majority of the High Court said the following about the operation of section 68 of the Transfer of Land Act:

“It is an incident of the indefeasibility of the title of the registered proprietor not only that he or she holds free from prior unregistered interests, except those specified in s.68, but also that he or she has the capacity to transfer a title to the interest of which he or she is proprietor to a successor, free from such unregistered interests.  In this respect, the operation of the Act is similar to the operation under the general law of the doctrine of the bona fide purchaser for value who acquires the legal estate without notice of a prior equitable interest.  The acquisition of the legal title by such a purchaser in those circumstances defeats the prior equitable interest in the sense that the interest is destroyed.  Thus a subsequent purchaser with notice of the equitable interest, who purchases from the first purchaser, is not bound by the interest.  If it were otherwise, a bona fide purchaser might be unable to deal with his or her property.  The sale of the property would be clogged.”

Who has the obligation to register a lease?

It is possible to register a lease at Landgate when the term of the lease, excluding any options to extend the lease, exceeds three years. 

The lease document may have a provision in it which sets out the obligations of the parties in relation to registration and which requires the parties to do all things necessary to effect the registration of the lease on the landlord’s certificate of title.

If the lease document is silent on this issue, there is currently no law which requires either the landlord or the tenant to register a lease.

The process required to register a lease at Landgate and the requirement that any mortgagee the subject of a prior encumbrance to the lease consents to the registration of the lease means that in many instances it is practically difficult for a tenant to register a lease in the absence of the co-operation of the landlord.

It is often a condition of the landlord’s finance for the property that any lease entered into by the landlord is consented to by the mortgagee and that the lease is (or at least the key leases are) registered in circumstances in which registration is achievable.

Is registering a caveat adequate protection?

It is possible for a tenant to register a subject to claim caveat to protect its interest pursuant to the lease.  The legislation provides that the registration of a caveat to protect the lease will be an exception to the position that any unregistered lease of five years or more is destroyed on the transfer of the land to a new owner.

The registration of a subject to claim caveat rather than the registration of the lease is often favoured by tenants as in order to register a caveat it is only necessary to provide a copy of the fully executed lease document. 

The registration of a subject to claim caveat does not require the consent of any parties with a prior encumbrance on the title to the land.  However, in the absence of specific agreement, the prior encumbrance holder is not bound by the tenant’s leasehold interest in the land.  Registration of the caveat can be completed by the tenant acting independently of the landlord provided that the tenant has a fully executed copy of the lease document.

Registration of the lease document remains the best form of security for both the landlord and the tenant.  This is primarily because in order to register a lease all holders of relevant interests in the land must consent to the lease.  As a result, on registration, the lease will confer a valid leasehold interest in the property on the tenant. 

Practical implications of this case for landlords

Any landlord intending to sell a property, and seeking to ensure continuity of occupancy of that property, should:

  • ensure that all of the leases for the property which are able to be registered are registered on the title;

  • ensure that leases which cannot be registered are protected by registration of a caveat on the title; or

  • require that the tenants pursuant to the existing leases enter into a deed with the prospective purchaser in which they affirm that the lease will remain on foot following the transfer of the land.  (We suggest that leases contain this obligation on the tenant if required by the landlord).

The registration of the lease prior to the transfer of the land will ensure that the tenant is unable to terminate its lease on the settlement of the sale leaving the purchaser with a devalued asset – and also vice versa.

Prospective purchasers of commercial property that wish to rely on the benefit of existing lease documents remaining in force following the transfer of the land should ensure that:

  • there is a condition in the contract of sale providing that the seller procure that all leases that can be registered are registered on the title prior to settlement of the sale; or

  • each tenant enters into a deed with the purchaser in which they affirm the status of the lease following the transfer of the land.

Prospective purchasers should not rely on a caveat as adequate protection to ensure the lease remains on foot.

Practical implications of this case for tenants

Tenants that have been granted a lease for a term of more than five years should ensure that it is a condition of the lease that the lease be registered on the title to the property. 

If the landlord will not agree to this provision, the tenant should register a caveat on the title to the property.  This will serve to alert all prospective purchasers of the property to their existing lease.  However, it does not provide the same security as registration, as the prior interest holders in the land are not required to give their consent.  Consequently, the leasehold interest can be subject to the rights of the holders of prior interests in the land.

Practical implications of this case for financiers

The registration of leases will assist owners when they come to sell their assets as there is certainty about the enforceability of the leases (which underpin the value of the freehold asset). 

In our experience, it is becoming increasingly common for financiers to require the registration of any leases (or at least the key leases) granted in relation to the property as a condition precedent of the provision of finance. 

Alternatively, some financiers may require that tenants enter into deeds affirming their lease documents with the incoming landlord to prevent the termination of the leases by either party following the transfer of the property.

This decision effectively means that, in relation to an unregistered lease exceeding five years,  either the landlord or the tenant could give notice and terminate the lease following a sale of the property to a third party. 

It may be that, in practice, both the incoming landlord and the tenant intend that the unregistered lease will continue on foot following the sale of the property.  It would be open for the parties to continue to perform their obligations pursuant to the lease and affirm that lease by way of a deed between them.  However, this does not deal with the holders of interests ranking ahead of the lease.

Removing expired leases from certificates of title

Some landlords have been reluctant to permit the registration of leases on their certificates of title.  One reason for this is the concern that a tenant will fail to remove the lease as an encumbrance on the expiration of the lease.

The easiest way to remove the lease as an encumbrance is for the parties to execute a surrender document and register that surrender at Landgate.  This is often neglected by the parties on termination or expiration of the lease.  Issues can also arise when the tenant entity becomes deregistered or the relevant signatories cannot be contacted to execute the surrender document. 

Landgate does provide some guidelines on the removal of expired leases in circumstances when a surrender document cannot be executed by the parties.  The method depends on the circumstances in which the lease has ended and will often include an application being made by the landlord with supporting evidence which may include a statutory declaration.

Whilst this process is often required to be done at the landlord’s cost due to the circumstances in which the lease was terminated the landlord should weigh up the cost of the removal with the benefits of registering the lease document. 

Another alternative may be for a surrender of lease to be signed by the tenant when the lease is signed.  The landlord can then hold this surrender of lease in escrow pending the ending of the lease.  The lease should contain terms governing this arrangement.  This approach is often adopted in respect of licence arrangements.  However, we would expect tenants to be wary of this.