'Buyer beware' has long been a catch cry in the real estate industry.
The old saying still rings true and has been reinforced by a recent decision of the Supreme Court of Western Australia to the extent that, in the sale of commercial property, the phrase should be 'buyer and tenant beware.'
In essence, the court has endorsed the view that any unregistered lease of more than 5 years is 'destroyed' upon the new owner becoming the registered proprietor of the land.
The implication is that either the tenant or the new owner could give notice and walk away once the transfer of land has occurred.
In Primewest (Mandurah) Pty Ltd v Ryom Pty Ltd as Trustee for Golden Asset Pty Ltd a contract was entered into for the sale of a commercial centre in Mandurah south of Perth.
The case was essentially about the enforceability of a clause in the contract for sale requiring Ryom (the seller) to supply to Primewest (the buyer) certain documentation 'relating to the Leases and their continuation after Settlement as the Buyer may reasonably require'.
The buyer requested a deed from a franchisee of Avanti confirming that its lease would continue to be valid after settlement.
The buyer also requested a document required to cause the registration of a transfer of lease from a previous tenant (Clive Peeters) to a Rick Hart entity (now Harvey Norman).
The dispute arose when the seller was effectively unable to procure these documents and the buyer terminated the contract for sale. The court had to consider whether it was reasonable for the buyer to request these documents, ultimately finding that it was.
As part of typical due diligence investigations by a purchaser of retail, commercial or industrial property, the current tenants' lease terms will often be considered at great length, including rent reviews, obligations on termination and incentives. The Primewest decision highlights the importance of buyers also considering the potential impact that the transfer of the property may have on the very existence of these leases.
The Primewest decision has provided further support for a prior decision of the Supreme Court of Western Australia which found that any unregistered lease of more than 5 years is 'destroyed' upon the new owner becoming the registered proprietor of the land.
This arises from the operation of section 68 of the Transfer of Land Act 1893 (WA), which states that a transferee of land acquires its interest 'subject to such encumbrances as may be notified on the registered certificate of title for the land; but absolutely free from all other encumbrances whatsoever…'.
The legislation provides some exceptions to this, including leases with a term of no more than 5 years where the tenant is in actual possession and also where leases are protected by caveat.
An alternative interpretation (though not endorsed by the courts at the date of this article), is that the effect of section 68 of the Transfer of Land Act is to render an unregistered lease that does not fall within an exception to section 68 voidable at the option of the new owner as transferee, rather than destroying the lease.
This view stems from an attempt to reconcile section 68 of the Transfer of Land Act with sections 77 and 78 of the Property Law Act 1969 (WA). These sections of the Property Law Act (broadly) state that covenants go with the reversionary estate in the land irrespective of the 'severance' of the reversionary estate (i.e. that the covenants in leases continue to apply as between the tenant and new owner notwithstanding the transfer of the land).
We have some difficulty with this alternative interpretation.
Although section 6 of the Property Law Act states that the Transfer of Land Act prevails over the Property Law Act to the extent of any inconsistency, sections 77 and 78 of the Property Law Act are not entirely displaced by section 68 of the Transfer of Land Act.
The provisions remain relevant when the exceptions stated in section 68 of the Transfer of Land Act apply and can therefore co-exist with section 68 of the Transfer of Land Act without displacing the interpretation that an unregistered lease of more than 5 years is 'destroyed' upon the new owner becoming the registered proprietor of the land.
Implications and conclusions
The Primewest decision is relatively recent and is currently subject to an appeal listed for hearing in August 2013.
Nonetheless, the law as it stands requires tenants and landlords to take care to protect their respective interests in the lease if they want to ensure their relevant interest survives the transfer of the property to a new owner.
A potential buyer who wishes to retain a particular tenant will need to ensure the issue is addressed so that the lease survives the transfer. The best way to achieve this is to ensure that the relevant lease is registered.
While it is common practice for tenants to lodge a caveat to protect their leasehold interest, a caveat can only be lodged by a tenant and may be unilaterally withdrawn by the tenant at any time (potentially before the transfer of the land to the new owner).
A purchaser should therefore not rely on caveats lodged by existing tenants to save leases from the prospect of destruction upon transfer and registration would be the preferred option.
Leases can be (although are not required to be) registered with the Western Australian titles office (Landgate) when the term, excluding options to renew, exceeds 3 years.
If registration is not achievable prior to the transfer of the land to the proposed purchaser, an alternative solution may be to require the seller to procure a deed from each tenant affirming that the lease will continue after the transfer is registered - as was done by the buyer in the Primewest case.
It should be noted that a further advantage of registration is that it ensures the issue will not arise again if the buyer wishes to on-sell the land at a later stage.
It could therefore be said that registration of leases increases the value of the owner's asset.