Why You Should Have Your Commercial Lease Prepared by Professionals

QUITE OFTEN THE QUESTION will arise, as to whether you need incur the cost of having a lawyer to prepare your commercial lease. And perhaps the answer is best found in this case study.

In Perpetual Ltd v Myer Pty Ltd [2018] VSC 2, the Supreme Court of Victoria rejected a claim by Perpetual Ltd, Bridgehead Ltd and Vicinity Funds Re Ltd – the owners and landlord of Chadstone Shopping Centre (the Landlord) – that retailer Myer Pty Ltd (Myer) owed almost $20 million in unpaid outgoings under a lease that had been on foot for almost 30 years.

The Basis of the Claim

The Landlord claimed that the words ‘the immediately preceding Account Period’ in the variable outgoings provision of the lease were intended by the parties to mean “the Base Accounting Period” (the mistake), which warranted rectification of the lease.

The Landlord further claimed that Myer was liable to pay $19.14 million in unpaid outgoings as a result.

Could the Lease be rectified because of the Mistake?

For the Landlord’s claim to succeed, it needed to show that the parties shared a common intention to have outgoings calculated by reference to ‘the Base Accounting Period’ rather than the ‘immediately preceding Account Period’.

The Landlord failed in this claim for three reasons.

Firstly, the variable outgoings arrangements were not included in the Heads of Agreement.

Accordingly, the parties’ intentions could only be ascertained by referring to the lease and agreement for lease, and the negotiation of those documents (which was difficult because those negotiations occurred in 1997).

Secondly, it took the Landlord almost 20 years to consider that Myer’s outgoings payments were inconsistent with the lease.

Thirdly, the same method was used to calculate Myer’s variable outgoings since the lease commenced. Indeed, this calculation method was derived from the terms of the lease (including the mistake), without anyone considering it inconsistent with the parties’ intentions.

What this means for Landlords

Ultimately, the conduct of the parties in applying the lease according to the terms indicated a common intention to be bound by the lease in its executed form.

There is a clear need for property investors to engage professionals to assist in lease negotiations, and to draft the lease and supporting documentation.

It is imperative that lease documents clearly and expressly reflect the intention of the parties.

Further, landlords must communicate their needs and goals to these professionals to ensure their commercial expectations (such as the amount of outgoings they will receive from tenants) are reflected in the lease documents and met throughout the tenant’s term.

Bottom Line: In addition to the documentation … commercial properties must be properly and proactively managed by experienced professionals who can monitor a tenant’s compliance with the lease.

Where these precautions are taken, landlords and property investors minimise the risks of being short changed on the funds they believe they will be owed, over the duration of a lease.

Disclaimer: If you think a similar situation may apply to you, then you should contact us for detailed legal advice relating to the particular facts and circumstances of your property or lease agreement. This article is not intended to provide such detailed and specific advice. And, you should not act on the basis of any matter contained in this article without first obtaining more comprehensive professional advice.

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