The risks associated with unregistered leases and the sale of property

Posted on Sep 13, 2018 by Jason Dunn   |   Categories: Commercial & Business Law

Is the purchaser of a commercial property legally bound to honour the terms of an unregistered lease for part of those premises? This was the issue being considered by the Supreme Court in the recent case of Ideal Business Centres Pty Ltd v Violin Holdings Pty Ltd as trustee for The Violin Investment Trust [2018] NSWSC 1249.

The plaintiff, Ideal Business Centres Pty Ltd (“IBC”) was one of several tenants of commercial premises owned by the second defendant, Jordana Pty Ltd (“Jordana”) which had agreed to sell the property to the first defendant, Violin Holdings Pty Ltd as trustee for The Violin Investment Trust (“Violin”).

IBC’s lease was for a period of 10 years with an option to renew for a further 5 years and was unregistered.

The Court found that there was no doubt that Violin was on notice of the terms of IBC’s lease. A contract for the sale of the premises included a special condition which provided that the purchaser acknowledged that it was taking title of the property subject to the unregistered lease, a copy of which was also attached to the contract.

On the second business day after completion of the sale, Violin gave IBC notice to vacate the premises on the basis that Violin was not bound by IBC’s lease because it was unregistered, with the consequence that IBC was in occupation as a tenant at will only.

IBC commenced proceedings claiming that Violin was bound to honour the lease. In the alternative, IBC also claimed damages from Jordana for breach of IBC’s lease by reason of the sale of the premises to Violin.

The Court concluded that Violin was bound to honour the terms of IBC’s lease for two reasons. Firstly, because that was the effect of the special condition in the contract regarding the existing lease. The “acknowledgement” in that clause was not merely a recognition of the existence of IBC’s lease, it was an agreement to observe and give effect to IBC’s rights under IBC’s lease. Secondly, IBC has the benefit of an in personam equity claim against Violin which overcomes what would otherwise be Violin’s indefeasible title to the premises pursuant to section 42 of the Real Property Act. This second element of the decision is a topic for another day, but basically involves an implied or actual understanding that Violin would respect IBC’s equitable interest in the property.

While this case resulted in a favourable outcome for the tenant, the outcome may well have been very different if it wasn’t for certain clauses in the contract for sale, so it should serve as a stark reminder of the risks for both tenants and landlord’s when commercial leases are not registered.