Landlords and tenants must “uphold the fidelity of the bargain”

In brief – Implied term may circumvent inadvertent error or omission in lease

In the case of Toga v Perpetual Nominees, the lease did not correctly reflect what the parties had agreed. According to the judgment, by refusing to allow rectification – that is, correction of the lease – the tenant denied the landlord the benefit of the bargain that was intended.

Ten year lease with rent-free period of one year

On 30 April 2012, the Administrative Decisions Tribunal, Retail Leases Division, handed down a decision in the case of Toga Pty Ltd v Perpetual Nominees Limited (2012) NSW ADT, concerning a ten year retail lease of premises near Sydney Central Railway Station. The lease commenced on 30 November 2000 and terminated on 12 November 2010, with an option to renew for a further term of 10 years.

There is a covenant in the original sublease which provided for the tenant not having to pay the first year's annual rent or the tenant's contribution to outgoings for the period "up to the first anniversary of the commencing date". This was contained in a special covenant to the sublease.

Tenant exercises option to renew the lease

The tenant asserted that on exercise of option that special covenant was included in the new term and so the tenant refused to pay the first year's annual rent and refused to pay the first year's contribution to outgoings.

Findings of the Administrative Decisions Tribunal

The Tribunal found that there was no ambiguity in the original lease and that this clause must be included in the renewal lease.

The Tribunal also found that under section 72(1)(e) of the Retail Leases Act, the Tribunal cannot order rectification without the consent of the parties.

However, the Tribunal found that under the Retail Leases Act, the Tribunal has a mandate to resolve disputes before it.

Landlord denied the benefit of the bargain that was intended

Accordingly the Tribunal found that under section 72(1)(f)(iii) that the Tribunal can declare the rights and liabilities of the parties to the retail shop lease under law. As a consequence of this, the tenant, by not consenting to the rectification of the sublease, denied the landlord the benefit of the bargain that was intended.

The Tribunal found that the tenant was obliged to pay to the landlord the annual rent and the outgoings for the first year under the option to renew.

The Tribunal went on to say that "there is an implied term in leases for each party to uphold the fidelity of the bargain for the benefit of the other party". "[The lessee] is in breach of this implied term by not consenting to the rectification of the sublease".

Each party must uphold the fidelity to the bargain

The lesson from this decision of the Tribunal is that if solicitors and licensed conveyancers when reviewing a lease find that there is a clause which appears to be entitled to be brought through to the new lease because of an option to renew and there is clear and unequivocal evidence that such was the case, then practitioners and licensed conveyancers may be able to argue there is an implied term in leases for each party to uphold the fidelity of the bargain for the benefit of the other party.

If that is the case, then whenever practitioners find that an important agreed provision has been inadvertently left out of the lease or inadvertently expressed to be part of the lease, they should be able to argue this implied term, that each party must uphold the fidelity to the bargain for the benefit of the other party.