In commercial lease transactions a lessee will usually, before taking possession of the premises, sign and return the lease to the lessor who then countersigns, registers (if necessary) and returns the signed and registered lease to the lessee. Because of this, it can sometimes be difficult to ascertain when a lease becomes binding, as demonstrated by the following recent decisions.

Case study lessee fails to establish a binding lease

In the recent case of Darzi Group Pty Ltd v Nolde Pty Ltd [2019] NSWSC 335, the lessee had failed to establish that a binding lease had come into effect after signing and returning it to the lessor. The parties had signed a heads of agreement, the lessee took possession of the premises and started to fit out of the premises before a formal lease had been signed. The lessee was expecting the formal lease to reflect the heads of agreement, however the terms of the lease provided by the lessor varied substantially.

As a result, the parties negotiated the lease terms through their solicitors for 2 years, which resulted in the lessee executing the lease and returning it to the lessor. However, despite the passing of another 2 years, the lessor never signed the lease and attempted to renegotiate the terms. The lessee then commenced legal proceedings to enforce the lease it had signed. The Court found in favour of the lessor and held that the parties did not intend to be bound by the lease as it was reasonable to presume that where parties are acting through legal advice, no binding agreement arises until formal execution and exchange.

Case study contrast Court finds lease to be binding

However, this is to be contrasted with another recent case of Realm Resources Ltd v Aurora Place Investments Pty Ltd [2019] NSWSC 379, where a dispute arose as to whether the sublessee was bound after signing and returning the sublease to the sublessor. After returning the sublease, the sublessee attempted to withdraw from the transaction, before the sublessor’s countersignature. The sublessee then commenced proceedings, contending that the sublease was not intended to be binding before both parties had signed and that it had been validly withdrawn. The Court found in favour of the sublessor and held that:

• the sublease was intended to take effect as a deed as evidenced by a clause in the sublease which stated that it was “a deed, even if it is not registered”;
• the sublessee had properly executed the deed in accordance with section 127 of the Corporations Act 2001 (Cth);
• the sublessee delivered the deed with the intention to be bound immediately, subject only to the sublessor’s execution, and once the deed is delivered it cannot be withdrawn.

The above cases illustrate that when it comes to ascertaining when a lease is binding, the court will consider the conduct between both parties in detail. Where parties do not wish to be bound by the terms of an agreement until such agreement has been executed and exchanged, this should be expressly stated.

If you have any questions about drafting and negotiating your commercial lease or need assistance in ascertaining whether a binding lease is in place, please contact our Property and Commercial Litigation Teams and we will be happy to assist.

Signed an option to buy a property? Make sure you exercise it on time and in the correct manner or risk losing it!

It is commonplace for a property purchase to be commenced with an option to purchase the land for various reasons, such as to allow time for a due diligence, to secure finance or a joint venture partner.

An option is usually formally exercised in accordance with its terms by the grantee giving a formal notice and the parties executing a formal document and signing a formal contract to purchase. In many instances, the terms of the option permit the assignment or novation of the right to exercise the option to a third party. For such a novation of the option to be valid, the option needs to be properly exercised.

Recent Decision

In Kai Ling (Australia) Pty Ltd v Rosengreen [2019] NSWCA 3, the court examined the requirements for effective novation of contract by the substitution of party, and whether on the facts of that matter, an option to purchase land was properly novated in favour of the substituted grantee.

On 30 April 2015, Mr Rosengreen granted to Saadie Group Pty Ltd (“Saadie Group”), by deed, an option to purchase certain land.

On 3 May 2015, Mr Michael Saadie presented to Mr Rosengreen a single sheet of paper in the same form as the execution page of the deed of option, save that the grantee was named as Kai Ling (Australia) Pty Ltd (“Kai Ling”) instead of Saadie Group. The sheet already bore the signatures of two persons on behalf of Kai Ling. Mr Michael Saadie (who was the father of the sole director of Saadie Group and was not an officer of Kai Ling) asked Mr Rosengreen to sign the sheet, saying that “we may need to change the name of the grantee but it does not change anything”. Mr Rosengreen signed as requested and gave the sheet back to Mr Michael Saadie. Kai Ling contended that the events of 3 May 2015 had brought about a novation of the option contract so that Kai Ling was the holder of the option in the place of Saadie Group. The primary judge dismissed the proceedings. Kai Ling appealed.

The Court held, dismissing the appeal with costs that:

(1)   The evidence did not establish that Mr Michael Saadie acted with the authority of Kai Ling in dealing with Mr Rosengreen on 3 May 2015.

(2)   There was no basis for a finding that there had been created among Mr Rosengreen, Saadie Group and Kai Ling the tripartite agreement necessary to effect novation.

(3)   Mr Rosengreen and Saadie Group had, in any event, conducted themselves subsequently on the basis that they remained the parties to the option contract.

The Court approved the description of the nature of novation and of the elements that constitute it as found in  ALH Group Property Holdings Pty Ltd v Chief Commissioner of State Revenue (2012) 245 CLR 338; [2012] HCA 6:

“A novation, in its simplest sense, refers to a circumstance where a new contract takes the place of the old. It is not correct to describe novation as involving the succession of a third party to the rights of the purchaser under the original contract. Under the common law such a description comes closer to the effect of a transfer of rights by way of assignment. Nor is it correct to describe a third party undertaking the obligations of the purchaser under the original contract as a novation. The effect of a novation is upon the obligations of both parties to the original, executory, contract. The enquiry in determining whether there has been a novation is whether it has been agreed that a new contract is to be substituted for the old and the obligations of the parties under the old agreement are to be discharged.”

Further, the element of intention was important: In Vickery v Woods (1952) 85 CLR 336; [1952] HCA 7, Dixon J said that “the crux of novation is intention” in the form of consent by way of tripartite agreement; and that the intention may be express or, importantly for a case such as the present, may be implied from conduct and circumstances.

Kai Ling’s case was that the events of 3 May 2015 gave rise to a tripartite agreement among Mr Rosengreen, Saadie Group and Kai Ling by which Mr Rosengreen accepted undertakings from Kai Ling in place of those originally given to him by Saadie Group and released Saadie Group; Kai Ling gave those undertakings to Mr Rosengreen who in turn renewed in favour of Kai Ling the undertakings he had originally given to Saadie Group; and Saadie Group consented to its release by Mr Rosengreen and in turn released him from the original contract. Kai Ling maintained that all those elements, in immediately operative contractual form, can and should be found to have resulted from the events of 3 May 2015.

The appeal was dismissed as the Court agreed with the primary judge who held that Kai Ling had not established that, on 3 May 2015, all of Mr Rosengreen, Saadie Group and Kai Ling agreed that a new contract between Mr Rosengreen and Kai Ling was substituted for the old contract between Mr Rosengreen and Saadie Group and that the obligations of Mr Rosengreen and Saadie Group created on 30 April 2015 were discharged. His Honour’s’ conclusion was correct for three basic reasons:

1.     In the absence of proof that Mr Michael Saadie had acted on 3 May 2015 with the authority of Kai Ling, it was not shown that Mr Rosengreen and Kai Ling had engaged in any conduct of a contractual kind towards one another on that day.

2.     Even if there had been contractual conduct as between Mr Rosengreen and Kai Ling on 3 May 2015, the purpose of the contractual conduct was to deal with an apparently foreseen possible future need to “change the name” of the grantee of the option, as distinct from immediately substituting a new grantee.

3.     As at 27 November 2015, two of the three relevant parties (Mr Rosengreen and Saadie Group) acted on a clear footing that they alone remained the parties to the option agreement made between them on 30 April 2015.

Key Point

The case illustrates that the exercise of options where an interest is to be novated is a technical and a formal process that should be treated with care to ensure it is effective to novate the rights granted.

Getting this process and documentation wrong can be costly.

We are experts in property transactions. If you wish to discuss or seek advice on any aspects of options to buy property, or matters arising from this article, please contact us.

 

In recent years, there has been a significant upward trend in the demand for service station businesses and fuel re-selling operations across New South Wales. This demand by investors has, amongst a host of reasons, been driven by attractive yields and long-term lease covenants.

However, those looking to invest in service station and fuel re-selling operations in New South Wales must not overlook the complex legal considerations involved in this niche and intricate area.

In addition to the usual considerations involved in the purchase of any business, there exist a number of matters which must be taken into account when investing in service stations or fuel re-selling businesses, including:

Environmental Site Assessment and Tank / Line Testing

Whilst landowners and lessors of service station sites are generally responsible for site contamination, lessees are usually required to remediate any contamination beyond that which existed at the commencement of a lease.

Given that there are significant costs associated which the remediation of contamination, an Environmental Site Assessment (‘ESA’) Report should be obtained prior to any acquisition to ascertain the extent of contamination (if any) in the soil and groundwater of a service station freehold. An ESA Report will not only provide a baseline for any future remediation but will also ensure investors are not forced to remediate contamination they have not themselves caused.

Whilst an ESA Report will indicate the extent of any contamination, it will not pinpoint a cause. As such, the integrity of the fuel tanks, pumps and lines at or under a service station site should also be investigated prior to any acquisition, either with a vendor directly or by obtaining an independent tank and line test.

Potential for development within proximity of the Business

Traffic flow, visibility and site accessibility are key components of the profitability of a service station business. Accordingly, investors should make enquiries with local council and particularly Roads and Maritime Services to ascertain whether there are any road or development proposals in the vicinity of a site which may affect these components and profitability as a result.

Notwithstanding that such enquiries may not reveal any proposals for development, careful consideration must be given to the terms and provisions of leases to protect investors against future developments and ensure adequate rent abatement rights are available.

Lease responsibilities

Those looking to acquire a service station business or fuel re-selling operation should ensure the terms and provisions of any lease are carefully reviewed by a legal professional with a solid understanding of service station leases. A matter of particular significance for such businesses are the maintenance and repair responsibilities for above and below ground equipment and property, as this will include fuel tanks, pumps and lines and accordingly carry a heavy financial burden in terms of ongoing maintenance, upkeep and even replacement.

Operational Considerations

Some of the key operational considerations for service station and fuel re-selling operations include:

Branding / Supply / Fuel Re-Selling Agreements

In order to assist with competition, brand exposure, and know-how, many service station operators elect to enter into contractual arrangements with larger and notable independent and nationally branded oil companies as part of their business operations. Having the benefit of this brand exposure is intended to assist the operator with marketing of their business generally. However, as part of these contractual arrangements, careful consideration must be given to the terms and conditions of such branding / supply / fuel re-selling agreements, as often operators will be imposed with various key performance indicators, restraints in terms of trade as well as for supply of stock, as well as potentially royalty style payments dependent upon the oil company contracted with.

Licences and permits

In many cases, service station and fuel re-selling businesses do not operate in isolation, and it is not uncommon for a restaurant or café to run in conjunction with a fuel re-selling operation. As such, investors should make enquiries as to what, if any, licenses affect a business premises which is the subject of a proposed acquisition that will require transfer or assignment, such liquor, food, cigarette and dangerous goods licences.

Rostron Carlyle Rojas Lawyers are experts in service station and fuel re-selling transactions, including fuel re-selling franchise and commission agency arrangements. For further information or assistance in this regard, please contact Commercial and Property Partner James Hatzopoulos on (02) 9307 8900 or by email at [email protected]

In the recent decision of Central Highlands Regional Council v Geju Pty Ltd [2018] QCA 38, the Queensland Court of Appeal considered whether a regional council could be liable in negligence to a buyer relying on an incorrect town planning certificate issued by the council but supplied to the buyer by a third party, namely, the seller’s real estate agent.

The case involved an appeal by Central Highlands Regional Council (“Council”) against a judgment requiring Council to pay the respondent, Geju Pty Ltd (“Geju”), the sum of $852,205.50 for loss sustained by Geju when it purchased vacant land in Capella in Central Queensland (“Lot 70”) in reliance upon a negligent misrepresentation in Council’s limited planning and development certificate (“Certificate”).

Facts of the case

In March 2007, the then owners of a lot of land, Ford Property, contracted to sell that lot to Mayfair Group. The lot was in the rural zone but Ford Property had applied to subdivide the lot and for a material change of use from rural to industrial which was approved in August 2007 with conditions. Lot 70 was created upon registration of the survey plan and the material change of use would lapse if the change of use did not occur within 4 years of the approval taking effect.

Ford Property sold Lot 70 to Mayfair Group in December 2007.  On the same day, Mayfair Group’s solicitors wrote to Council stating that they acted for the buyer and requested for a limited planning and development certificate. The Certificate was issued to Mayfair Group’s solicitors which incorrectly stated that Lot 70 was in the industrial zone when it should have stated that it was in the rural zone. The Certificate also contained an incorrect lot description.

If the Certificate was accurate and Lot 70 was zoned industrial, there would be greater scope to reconfigure the land into smaller lots and the ability to use the land for industrial purposes would not be limited to the 4 year timeframe under the material change of use approval.

Mayfair Group sold Lot 70 to Geju in June 2008. During the sale process before the contract was entered into, the real estate agent provided the Certificate obtained by Mayfair Group to Geju. Finance was approved based on the incorrect zoning, the lot was worth significantly less than the purchase price on application of the correct zoning.

The main issue for the court to determine was whether Council owed a duty of care to Geju, the court noted that while it was foreseeable that the Certificate would be passed to a broader class of people, there was no evidence that Council knew that the Certificate would be passed on or that a person would buy Lot 70 relying on the information in the Certificate.

Under the statutory framework any person who suffers financial loss because of an error or omission in the certificate may claim reasonable compensation from Council. However, the claim the subject of the proceedings was not made under the statutory provisions but under the common law. The Court of Appeal also noted that Geju was not the requestor of the Certificate.

Geju was not the requestor of the Certificate, nor was it a member of a limited class of people that the Council should have known would likely receive, and rely on, the Certificate. There was insufficient evidence to conclude that the Council owed Geju a duty of care and the Court of Appeal set aside the judgement against Council.

Key implications

In the course of a property transaction, this case demonstrates the importance for the buyer to obtain a planning and development certificate itself or by its advisors before the contract is entered into. In this case, Geju should not have relied on the Certificate provided by the seller and should have conducted its own due diligence. Further, if a buyer was going to rely on information given to it by the seller, then the relevant warranty about its accuracy should be included.

Please do not hesitate to contact us if you would like us to assist you with your legal due diligence in a property transaction or if you would like us to review the contract before it is entered into.