Legal Update – Tenants Beware: Promises Must Be Outlined In Contract

18 JULY 2016

It is all too common for landlords (or managing agents) to make promises to prospective tenants in the hope of encouraging them to enter into a lease, without those promises ever making it into the signed lease. One such case was recently heard by the High Court of Australia which is expected to hand down its decision very shortly. The promise which the High Court was asked to consider was essentially this: where the tenant had no right of renewal under its lease, if the tenant agreed to carry out substantial refurbishments to its premises the Landlord would ensure the tenant is “looked after at renewal time”.

Facts:

Cosmopolitan Hotel rented premises from Crown Melbourne at the Melbourne Casino and Entertainment Complex in Southbank, Melbourne. The lease was for five years during which time Cosmopolitan Hotel undertook substantial renovations to two of the premises. The five year term with no right of renewal was not long enough for Cosmopolitan Hotel to recover the cost of renovating the premises, however they renovated because Crown Melbourne told them that they would be “looked after at renewal time”.

As it turned out, Crown Melbourne did not renew the lease despite the substantial renovations carried out by Cosmopolitan Hotel.

Legal proceedings:

The claim started in the Victorian Civil and Administrative Tribunal (Tribunal) being appealed to the Victorian Court of Appeal. Both the Tribunal and the Court of Appeal found that Crown Melbourne was required to abide by its promise, even though it did not form part of the lease. But whereas the Tribunal found in the tenant’s favour on several grounds, the Court of Appeal only found in the tenant’s favour on one solitary ground. In addition to that, even though the Court of Appeal sided with the tenant on that ground, it considered the tenant was not entitled to a renewal of the lease.

The Court of Appeal said that if there is a “grey area” in the terms of a promise, the law would only hold the person who made the promise to “the lower limit” of that “grey area”. But in this case, what is the “lower limit” of the promise to be “looked after at renewal time” if it’s not a renewal of the lease? Also, if the tenant thought the promise meant one thing, but the law says it meant another thing, can the tenant rely on its own mistaken belief? These questions were the subject of considerable legal argument before the High Court.

The Court of Appeal suggested that the lower limit of the “grey area” could be the profits that might be earned under a renewed lease but stopped short of making any final decision. It considered the question should be sent back to the Tribunal for analysis and determination.

Take home messages:

Regardless of what the High Court has to say when it hands down its decision, the following take home messages apply:

  1. It is prudent for tenants to be wary of relying on casual promises made by a landlord. If any promises are made, make sure they make their way into the lease and the terms of the promise including your legal entitlements are sufficiently clear.
  2. Tenants should be cautious about accepting an obligation to do something (e.g. substantial renovations) that will only be viable if a further term is granted. Tenants should ensure there are clear rights of renewal which are not forfeited if there has been an advert breach which has since been corrected.
  3. While the tenant in the above case has been successful so far, it has no doubt incurred significant legal costs defending its position and there remains uncertainty about what the High Court will decide, including what the tenant will receive (if anything) out of the whole process. Clearly drafted lease terms can minimise the risk of exposure to years of litigation with an uncertain outcome.

We will keep you updated on the outcome of the High Court appeal. In the meantime, we would be pleased to advise you in relation to your legal rights under commercial leases, including where promises may have been made which are not recorded in the lease.

Contact Partner: Francesca Petroccitto
Direct Telephone : 07 3210 5771
Mobile Telephone : 0402 293 644
francesca.petroccitto@kinneallymiley.com.au

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