It’s almost Christmas. Need some humour, some light but challenging reading? One would think that the farthest material for such would be in the Retail Leases Act. Not if the commentator is Robert Speirs!
Practitioners in the black art of retail lease law have long wondered whether a Heads of Agreement (HOA) to lease really is a legally binding lease. (I am speaking to the law in NSW here).
Logic says this must be so (subject to the requirements of section 8 discussed below), despite the dazzling consequences. So it is a relief that the issue has now been kicked into touch by the decision of the Court of Appealin Darzi Group Pty Ltd v Nolde Pty Ltd [2019] NSWCA 210.
Before going to that decision, we need to look at the applicable legislation.
Section 3 of the RLA says that a retail shop lease is “any agreement under which a person grants to another person for value a right of occupation of premises for the purpose of the use of the premises as a retail shop” (emphasis added). The right of occupation does not have to be exclusive, the agreement can be express or implied, and it can be oral, in writing, or a bit of both.
Pausing here, it is evident even to a meathead like me that an HOA for a retail shop lease satisfies this description.
But the section 3 definition travels with section 8, which tells us when that agreement is entered into.
According to section 8, a retail shop lease is entered into when a person enters into possession of the shop or begins to pay rent, as lessee “under the lease” (emphasis added). It is also entered into if both parties execute the lease.
There is a lot not to like about section 8. Under what lease? Is it the lease constituted by the HOA, deficient as that may be in many of the details you would expect to see in a lease? Or is it the standard detailed lease used by the lessor for the centre?
It is also evident from section 8 that, despite the definition in section 3, it should be impossible to enter into an oral Agreement for Lease under the Act (ie. an immediately legally binding agreement by which the parties agree to the lease commencing in the future).
This is because the lessee does not take possession or pay rent under an agreement by which those things happen in the future. Therefore, the agreement can only be “entered into” if both parties “execute it”. And it is impossible to execute (as in “sign”) an oral agreement.
But I digress. In Darzi, the parties entered into an HOA with a clear intention that a subsequent, more detailed lease (incorporating the provisions of the HOA) would be entered into.
A dispute arose as to those detailed terms, and therefore the more detailed lease was not signed.
The Court of Appeal had no hesitation in unanimously holding that the HOA was a lease for the purposes of the RLA and, “being executed [as in signed] before the lessee entered into possession, commenced on the date it was executed” (per Basten JA at 34).
I respectfully agree with this approach, although with reservations about use of the word “commenced”. It is possible for a “lease” to be “entered into” before the term “commences”. This is the usual position with an Agreement for Lease. The agreement is executed (signed) by the parties, and is therefore “entered into” per section 8(2), but the lease does not “commence”, in that the term does not begin to run, until the conditions precedent in the Agreement for Lease are satisfied.
So we now know without any doubt that an HOA (if executed by both parties) is a legally binding retail shop lease. This is where the fun starts.
Section 11 says that at least seven days before a lease is entered into, the lessor must give the lessee a disclosure statement that accurately reflects the terms of the lease.
If the lessor does not comply with this request, the lessee can terminate the lease within six months.
This is where the RLA operates in a parallel universe. A lessor will often issue an HOA containing its proposed terms. A lessee might negotiate for six months, with updated HOAs repeatedly issued.
At any stage during that timeline, the lessee might accept the terms, sign the HOA and return it to the lessor.
If the lessor has politely signed the draft HOA before issue, as soon as the lessee signs and returns it, a lease has been “entered into” (because both parties have executed the agreement).
The lessor has not issued a disclosure statement at that stage, because until the terms are agreed, the lessor does not know what to disclose.
It is evident from the terms of section 11 that the intention is to require the lessor to make timely, and accurate, disclosure of the prescribed information. And it is equally evident that the lessor cannot make accurate disclosure, until the terms requiring disclosure are agreed.
And so we arrive at the destination where a landlord must issue an accurate disclosure statement at least seven days before he knows what to disclose.
Imagine a dog chasing its own tail. You now have in mind an accurate picture of a lessor trying to manage the disclosure requirements of the RLA.
Fortunately, it is often the case that nothing turns on this, because the HOA is expressed to be subject to conditions precedent such as lessor board approval; thus a landlord who unwittingly “enters into” an HOA lease can back out, according to its terms, if the condition precedent is not satisfied.
It is obviously also a good idea for lessors to think long and hard about whether to “execute” an HOA before issuing it to the lessee.
(There is, of course, a larger and more fundamental question. Why is it necessary for a lessor to disclose to the lessee something to which the lessee has already agreed?)
I am sure that all this disclosure voodoo seemed like a good idea to someone when the RLA was launched.
But experience has shown that it really is a waste of time, and creates choppy water on an otherwise calm sea.
