Services

HG Alert: Land Appeals Court Rules Lessee May Seek Compensation - Feb 2009

The Land Appeals Court has decided that a lessee may have enough of an interest in the common areas related to its lease, to support a claim for compensation from a resuming authority if parts of those common areas are resumed; this should be kept in mind by parties entering into a lease.

Decision

In LGM Enterprises Pty Ltd v Brisbane City Council [2008] QLAC 214, the decision turned on the provisions of the lease, the operation of the Retail Shop Leases Act 1994, and evidence of the lessor's apparent consent to the lessee's use of the common areas. The area resumed was an area of garden through which customers of the lessee were in the habit of accessing the lessee's business; it was not the sole means of access to the business.

The lease did not specifically identify common areas, so the Court looked at the Retail Shop Leases Act 1994, which defines common areas to include walkways and gardens. The Court held that although the garden was not originally designed to include walkways, the lessor allowed the lessee's customers to walk through the garden and had even laid pavers to create walkways. By the time the lessee took the lease, the walkways were intended to be used for access and the court held that the lessee had an interest in those common areas.

The Court also held that the lessee had "a right or privilege in respect of the land resumed" and that as a result of the reduction of access to its shop, its "business had suffered in a way which can be measured monetarily".

What does this mean?

If all or part of the common areas are resumed, a lessee may be entitled to compensation where it can show that it has a right, power or privilege over those common areas, and that it has suffered loss as a result of the resumption. Depending on the facts of the particular case and the wording of the lease, it appears that an entitlement, even a de facto one, for a lessee's customers to access the leased premises via the common areas may be sufficient to show that right.

Termination of interest

It is common for leases to insert a break clause enabling a lessor to terminate a lease where the premises are resumed. If its lease is terminated, a lessee ceases to have an interest in land and may not be able to claim compensation from the resuming authority. Such clauses usually exclude any right of compensation against the lessor.

Although the lease in LGM Enterprises Pty Ltd v Brisbane City Council provided that the lessor could change the direction or flow of pedestrian access, it also provided that the lessor could only close common areas as reasonably necessary, and provided that it took reasonable steps to minimise interference with the lessee's business. The Court does not appear to have considered whether, if the lessor had exercised its rights under these clauses, the lessee would still be able to claim compensation.

Lessees should note that if a right to terminate arises before the actual taking occurs (marked by the Taking of Land Notice appearing in the Queensland Government Gazette), then a lessee is likely to be without remedy under the Acquisition of Land Act 1967. If the right to terminate arises on the actual resumption, then the lessee is likely to still have rights in accordance with the Act, because it is at that point in time that the right to claim compensation arises. However, it is likely that the quantum of compensation to be paid by the resuming authority will be in dispute, as the loss sustained by the lessee flows not only from the acquisition, but also from the act of the lessor exercising its contractual right to terminate the lease.

It is therefore necessary that such a clause is present in a lease, as it is in the lessee’s interests to have the clause drafted so that the entitlement to terminate arises after the actual taking has occurred. If the right to terminate arises before the actual acquisition occurs, then the tenant may be without remedy.

Amendments to the Acquisition of Land Act 1967

The Acquisition of Land and Other Legislation Amendment Bill 2008, passed on 12 February 2009, has made a number of amendments to the Acquisition of Land Act 1967. These include a provision that an interest under a services contract for land (e.g. for provision of services on, to or in relation to land) is not sufficient to give a right to claim compensation and time limits of three years for making claims for compensation.

Tips

  • From a management perspective, lessors may want to consider a break clause enabling the lessor to terminate a lease not only when the premises are resumed, but when resumption of other parts of the land in the lessor's reasonable opinion, affects the premises (e.g. where access is restricted or interrupted).
  • Where there is a break clause, lessees should seek to have the lessor's right to terminate take effect after the actual resumption of the land occurs. If the right to terminate takes effect before, the lessee may be without remedy from the resuming authority.
  • Leases should clearly set out what is to occur if any part of the land is resumed, and what rights the lessor has. Normally, any obligation upon the lessor to pay compensation to the lessee would be excluded.
  • Lessees should ensure their leases expressly provide what will happen in the event of resumption and what compensation, if any, they will be entitled to seek from the resuming authority, (lessors would rarely contractually agree to pay compensation to the lessee in this situation).