In brief - Damages awarded for portion of time that premises were vacant
In a recent case in NSW, it was determined that a tenant under an unregistered five year lease was liable to the landlord in damages for early termination of the lease. However, the damages awarded were only a portion of the sum being claimed, because the landlord had failed to act reasonably in re-letting the premises.
Tribunal considers validity of lease and reasonable steps to take in re-letting premises
In Loretta Suiwen Shen, Sarah Bonita, Joshua Lie, Timothy Go  NSWCATCD 49, Senior Member Dennis Bluth of the Consumer and Commercial pision of the NSW Civil and Administrative Tribunal considered whether a five year lease was void or of no effect on the grounds that it was not registered and the premises had been sold during the lease term.
The Tribunal also considered what reasonable steps a landlord had to take in reletting premises should the landlord want damages for loss of rent.
Lease not registered when premises sold to new owner
Abou Ghaida Company Pty Limited was the owner of Shop 155, The Quadrant Broadway, Ultimo ("the premises") and entered into a lease ("the first lease") with the first respondent, Sarah Bonita. The first lease was for a term of five years, contained an option to renew for five years and terminated on 10 June 2009.
On expiry of the first lease, Abou Ghaida and Ms Bonita entered into a new lease ("the second lease") for a further term of five years from 11 June 2009 to 10 June 2014. The second lease set out a commencement rent of about $84,000.00 per annum plus GST and was to increase by 4% annually.
The guarantor named in the second lease was Joshua Lie, the second respondent. The lease was the standard form Law Society commercial lease and despite being signed by all relevant parties, was never registered.
On or about 7 July 2011, the premises were sold to the applicant, Loretta Shen, and the transfer was registered at the office of Land and Property Information.
Tenant experiences financial difficulties and vacates premises
In the latter part of 2012, Ms Bonita's business experienced financial difficulties and fell into arrears of rent. Mr Lie indicated to Ms Shen's agent, Joe Menggolo, that they intended to vacate and return the premises to Ms Shen. The monthly rent at this point was $8,304.30 inclusive of GST.
It is also important to note that whilst Ms Bonita was named as the tenant on both leases, the evidence indicates that the business at the premises was conducted by her father, Mr Lie. On 25 January 2013, Mr Lie advised that they could not continue to trade and keys were returned to Mr Menggolo by 11 March 2013. The premises were not re-let until 10 July 2014.
Ms Shen commenced proceedings in the Tribunal and sought damages from Ms Bonita and Mr Lie for loss of rent for the early termination of the second lease.
Is the lease valid and enforceable?
In order to claim damages, Ms Shen had the onus to prove that the lease was valid and enforceable. This required the Tribunal to consider the effect of:
- an unregistered five year lease
- the transfer of premises
Could the lease be enforceable after the applicant became the registered proprietor of the premises?
Section 42(1)(d) of the Real Property Act 1900 (NSW) provides that a lease which exceeds a term of three years needs to be registered on the title of the land in order to pass with the land. Where land is transferred, the purchaser who becomes the registered proprietor is only bound by registered leases. One exception to that is a lease for a term of three years or less.
The primary submission of Ms Bonita and Mr Lie is that on registration of the transfer to Ms Shen, the unregistered lease was destroyed and their occupation of the premises became a tenancy at will under section 127 of the Conveyancing Act 1919 (NSW). If this submission is accepted, the second lease would have operated as a monthly tenancy that was terminable with one month's notice.
Although the Tribunal observed that registration of a transfer "destroys" an unregistered lease, it held that an equitable lease can still survive and determine the relationship between the parties.
On this construction, the second lease operated as an equitable lease after registration of the transfer to Ms Shen and accordingly, the parties' rights and obligations as landlord and tenant continued pursuant to section 117 and section 118 of the Conveyancing Act 1919 (NSW), entitling the landlord to claim damages for the rent which was due to be paid until the end of the second lease.
What is the national position on the issue of unregistered leases?
As acknowledged previously, in New South Wales, section 42(1)(d) of the Real Property Act provides exceptions to indefeasibility and gives protection to leases of no more than three years. The concept of an exception to indefeasibility for unregistered leases is carried through in the Torrens Title legislation of other states and varies from state to state.
In South Australia, the home of Torrens Title, section 119 of the Real Property Act 1886 (SA) only gives protection to an unregistered lease "for a term not exceeding one year to a tenant in actual possession thereunder". In Western Australia protection is given to an unregistered lease of up to five years. In Victoria the convention is that leases are not registered at all.
Tenant argues that lease void for uncertainty about true tenant
Counsel for Ms Bonita submitted that the lease was void for uncertainty as it was not clear who the true tenant was, on the basis that Ms Bonita did not take any active role in the business that was conducted from the premises.
While the evidence indicated that Mr Lie conducted and controlled the activities from the premises, the Tribunal found that Ms Shen was entitled to rely upon the signed lease to reflect the true nature of the relationship between the parties. Further, the Tribunal held that it would be inappropriate to allow Ms Bonita and Mr Lie to raise the issue regarding the true status of the tenant, given that Ms Bonita presented herself as the tenant and had signed both the first and second lease.
Damages for loss of rent reduced as landlord acted unreasonably
The prima facie position is that a landlord is entitled to recover damages for a breach of lease, including for loss of rent. In this case, Ms Shen sought damages for loss of rent from the terminating date of the lease to the date at which the premises were relet. The period of time in which the premises were vacant was about sixteen months.
The Tribunal determined that four months' rent at $8,304.30, being the rent under the second lease at the time Ms Bonita vacated, was the appropriate measure of compensation for Ms Shen, as Ms Shen had acted unreasonably in advertising the premises for a rent of $100,000.00 per annum for a significant period of time after Ms Bonita had vacated.
In particular, the Tribunal observed that Ms Shen was obliged to try to lease the premises on "reasonable terms" as required under the terms of the lease and that it was unreasonable for her to hold out for the maximum rent possible.
Commercial leases should be registered
This case provides useful guidance on the effect of an unregistered commercial lease and the implications it has for landlords and their tenants in circumstances where the premises are transferred to a third party during the term of the lease.
While the case suggests that an unregistered lease for a term of more than three years can be valid and enforceable, landlords should be aware that it remains common practice to register such leases to ensure that they are afforded protection under the Real Property Act 1900 (NSW).
Landlords should act reasonably in re-letting vacated premises
The reasoning adopted in the Tribunal also indicates that landlords must act reasonably in re-letting the vacated premises so that they adequately mitigate their loss, as the Tribunal will not be in a position to award compensation for the entire period for which the premises are not tenanted if the landlord had not acted reasonably.