HG News: Commercial Property - 08 July 2009

The dangers of pre-commitment in leasing in today’s economy

By Alison Wilckens

Over the last few years, Brisbane has seen the development industry’s activity increased by speculative developments. In light of the current financial crisis, substantial pre-commitments have now become necessary before projects begin.  Extensive measures can be used to get developments pre-committed, as pre-commitments are often necessary to obtain finance.

Prospective tenants looking for larger amounts of space are encouraged to carefully undertake technical, commercial and legal due diligence to ensure that there are no hidden obligations and costs associated with pre-committing to developments that are still on the drawing board.

Be aware of the risks

Usual evaluation criteria and development fundamentals such as location, design, critical requirements, key lease conditions and commercial terms are key determinants in deciding whether to pre-commit to leasing new premises. During the legal due diligence process, it is important that potential tenants have a solid understanding of the legal implications before committing to the proposed development. Carefully analysing the Offer to Lease, Agreement for Lease and the Lease itself is strongly recommended.

Pre-commitment leases for new developments are often more complicated and uncertain than relocation to new premises. Before pre-committing to a new development, prospective tenants should make sure they know exactly what they are getting for their money. By considering all aspects of the deal, you will have all the knowledge you need in the event that you are misled about some aspect in the initial stages of negotiations.

Some potential risks associated with developments include problems with the site, such as adverse title conditions and site contamination. Even existing leases and agreements have been known to cause significant delays. Potential tenants should carefully read through the original documentation for the development approval.

The guarantee of design quality, building specifications and performance is another risk to consider. Too often tenants pre-commit to a development, only to be disappointed with the final outcome or discover substantial construction variation costs. Knowledge of the design, quality and performance of the building to be constructed is key, as is careful analysis of the project’s ability to meet performance standards. It’s also important to examine the Works Schedules in Lease documents in detail. Once the building is completed and occupied, rectification for non-performance of the building and services can be difficult to achieve.

Developers are finding it increasingly difficult to obtain finance in light of current economic conditions. If you are a potential tenant thinking about pre-committing, it is advisable that you carefully check all documents from your lender and understand all obligations associated with the deal.  If not, you could find yourself unable to get out of the pre-commitment and you may suffer financially as a result.

You must ensure that the project time given is going to be met so that you are able to leave your existing premises and perform any make-good obligations that are necessary under your current lease.  Another important issue to consider is whether harmony will exist between the tenant and the landlord once the premises are occupied. Tenants are encouraged to find out whether the landlord has had previous experience with major tenants. This will be important in determining whether you’ll enjoy the tenancy throughout its term.

Tips for lessees to consider

  • Make sure that you read all the original documentation such as the Offer to Lease, Agreement for Lease and Lease carefully, obtain expert legal and construction advice, and consider whether the lease meets your commercial needs for the future.
  • Ensure that you test all representations made by those who are involved in the deal. Don’t push the deal too far without first covering all bases.
  • Beware of choosing a development that is not bankable.
  • Do not assume that the initial presentations of the development, which may appear to meet your needs and specifications, will be finalised without changes.

Residential tenancy law changes

By Amity Anderson

On 1 July 2009, the Residential Tenancies and Rooming Accommodation Act came into effect.  It replaces the Residential Tenancies Act 1994 and the Residential Services (Accommodation) Act 2002, consolidating these two pieces of legislation into one Act.

The most significant changes to the previous residential tenancies laws are as follows:

  • Advertising fixed rental amounts and abolishment of auction style bidding for rental properties
    It is now a requirement that the rent to be paid by a prospective tenant is specifically stated as a fixed amount in advertisements for rental properties. It is no longer acceptable for a lessor or agent to disclose a ‘rent range’ (for example, from $250 to $275 per week). ‘Auction-style bidding’ is no longer acceptable. In the event that a fixed amount is not stated in advertising, the tenant will not be required to pay a bond.
  • Restrictions on rent increases 
    Rent may no longer be increased unless at least six months has passed since the last rent increase. This applies to both periodic agreements and fixed term agreements, whether or not the lessor is the same person, and applies from one agreement to the next if at least one of the tenants responsible for the existing rent will be subject to the increase in rent. Lessors and agents are also required to give tenants at least two months written notice of a rent increase.
  • Notice to leave provisions 
    Lessors will be required to provide a tenant with at least two months notice to leave without grounds, regardless of whether it is a fixed term or a periodic tenancy.
  • Rights of entry
    The new Act imposes restrictions on the times in which a lessor and/or agent can enter the premises. The lessor or agent will only be permitted to enter the premises on a Sunday, a public holiday or between 6.00pm and 8.00am on any other day with the tenant’s agreement.  Generally, the lessor or agent will have to specify a maximum two hour time frame during which they intend to enter the premises. However, this time frame does not apply if the lessor or agent is to be accompanied by another person (such as a tradesperson).
  • Sale of residential tenanted premises
    In an attempt to provide tenants with a greater amount of privacy, the new legislation also states that where the premises are to be sold or rerented, the lessor/agent can only hold an open house or onsite auction with the tenant’s agreement. Further, photos showing the tenant’s possessions can only be used in the advertising for the property with the tenant’s agreement.
  • New RTA forms
    New tenancy agreement forms should be used for tenancies starting after 1 July 2009. The General Tenancy Agreement (form 18a) is the new form for houses and units, and the Moveable Dwelling Tenancy Agreement (form 18b) is the new form for caravans and other moveable dwellings.

The new legislation includes other significant changes to the current rules about residential tenancies and rooming accommodation. If you have any questions about the new Act or any of the other amendments to the law in this area, please contact us.

Amendments to the Body Corporate and Community Management Act 1997 -  Bossichix decision

By Angie Coleman

The Body Corporate and Community Management Act Amendment Bill 2009, which came into effect on 22 June 2009, essentially deletes section 212 of the Body Corporate and Community Management Act 1997 and replaces it with a new section 212.

Before the amendments, section 212 of the Body Corporate and Community Management Act (BCCM Act) required that an off-the-plan contract for the sale of a proposed lot in a community titles scheme include a provision stating that settlement must not take place earlier than 14 days after the date that the seller gives advice to the buyer that the scheme has been established or changed. Failure to include such a provision would have allowed a buyer to terminate the contract at any time up until settlement.

Recently, the Queensland Court of Appeal in Bossichix Pty Ltd v Martinek Holdings Pty Ltd decided that a settlement clause does not have to use the precise words of the old section 212, but must have the effect prescribed by old section 212. In that case, the court held that the settlement clause in the contract did not comply with old section 212 and the buyer was entitled to terminate the contract.

Following the Court of Appeal decision, the Queensland Government moved quickly to amend section 212. The amendment addresses the consequences of buyers being able to avoid contracts purely on a technical breach of the provisions of the BCCM Act, in circumstances where those buyers had not experienced any material detriment.

The new section 212 has the effect of deeming, into off-the-plan contracts for the sale of a lot in a community title scheme, a term which requires that settlement must not take place earlier than 14 days after the seller gives advice to the buyer that the scheme has been established or changed. This applies despite any other provision of the contract.  Essentially, this means that any right of termination a buyer may have had under the old section 212 is removed, and the new section 212 will apply despite any provision in the contract to the contrary.

The amendments have retrospective operation to all off-the-plan contracts, whether the contracts were entered into before or after 22 June 2009. However, the amendments will not apply to:

  • any contract settled before 5 June 2009;
  • a contract which has been lawfully cancelled before 5 June 2009 because the contract failed to comply with the old section 212 or to legal proceedings relating to the lawfulness of the cancellation;
  • a legal proceeding decided before 22 June 2009.

Moffatt Property Development Group Pty Ltd v Hebron Park Pty Ltd - intention to be bound by informal documentation

By Anthony Boge

Parties negotiating for the sale and purchase of land will often assume, quite wrongly, that they cannot be bound to a transaction until a formal contract has been executed. It is not uncommon for parties to sign a document in the course of negotiations that encapsulates the basic terms of their agreement, while still intending to execute a formal agreement at some later point.

Generally speaking, there is an expectation when negotiating the sale of land that the parties do not intend to be bound until a formal contract is executed.  However, whether or not that expectation applies in a particular case depends on the consideration of all relevant facts. In some cases, parties will use the words “subject to contract” or similar words to avoid any inference that they intend to be bound by an informal agreement, although employing these words alone does not necessarily produce a certain result.

In Moffatt Property Development Group Pty Ltd v Hebron Park Pty Ltd, the Queensland Court of Appeal was concerned with the effect of a letter signed by a prospective purchaser of land in which the terms of its offer (which it described as “unconditional”) to the land owner were stated for the purchase of the land.  In particular, in its letter of offer the purchaser stated the purchase price it was prepared to pay for the land, the amount of deposit it was prepared to pay and the time frame for settlement of the transaction.

An interesting aspect of the purchaser’s offer was that it proposed that the contract would take the form of a put and call option, the precise terms of which were not dealt with in any way in the letter. The letter was given to the land owner’s agent and included a request that “if the vendor accepts this offer, please have him sign off the letter of offer as accepted and we will instruct our lawyer to prepare the contract documentation”. The land owner signed the letter but subsequently sought to be released from any obligation to the purchaser.

The court was required to consider two issues.  First, the court had to consider whether the letter manifested an intention by the parties to be legally bound to a sale and purchase of the land. Second, the court had to consider whether the terms of the letter were sufficiently certain to be enforced. There was some necessary overlap in the court’s consideration of these two issues. The court commented that a failure to agree on terms material to a sale of land may tend to demonstrate the absence of an intention to be finally bound to the terms that have been the subject of consensus between the parties.

Ultimately, the court found that the express words of  the correspondence, in the context of the negotiations between the parties, indicated an intention to be bound immediately to a sale of the property. It was not a case where the agreement between the parties was subject to the execution of a formal contract.

When considering the second issue, the court found that the terms of the agreement were sufficiently certain that they could be enforced against the land owner. The court was prepared to find that facilitating the mechanical details of the agreement’s implementation could be supplied by implied terms and considerations of reasonableness.

Importantly, the court found that the agreement passed the exercise of drafting the put and call option document to the purchaser’s lawyer. What was to be included in that document was not dependent on further agreement between the parties. The purchaser’s lawyer had authority to include in the document terms which were reasonable and were consistent with the letter signed by the parties. If there was a dispute between the parties as to whether terms included in the document were reasonable, the court could decide the matter.

The decision of the Court of Appeal in this case is an important reminder to prospective buyers and sellers to think very carefully before signing what may appear to be a non-binding or informal agreement.

Reminder about new PAMD forms

By Angie Coleman

The Property Agents and Motor Dealers Act approved forms have been updated by the Department of Education, Economic Development and Innovation.  The new versions of the forms may be used from 1 July 2009. However, the old versions may still be used up until 1 October 2009.

The following PAMD real estate forms have been updated: 20a (version 5 replaces version 4), 21a (version 5 replaces version 4), 22a (version 5 replaces version 4), 23 (version 6 replaces version 5), 24a (version 3 replaces version 2), 25 (version 4 replaces version 3), 26 (version 6 replaces version 5), 27c (version 4 replaces version 3), 28 (version 5 replaces version 4), 30c (version 5 replaces version 4) and 32a (version 6 replaces version 5).

The Motor Dealers and Auctioneers forms have also been updated.

For more information about any of the topics discussed in this newsletter, please contact HopgoodGanim’s Commercial Property team.