By Partners, Edwina Reynolds, Tony Butler, and Heath Gleig-Scott

Further to our article on the key changes to the Property Law Act 2023 (new PLA) we have outlined in more detail the changes made to the new PLA regarding leases.

Leases

As previously highlighted the new PLA makes several changes to the common law position regarding leasing. These changes will impact:

• the liability of a transferor with respect to lease covenants after transfer and leaseback;
• the enforceability of lease covenants against an assignee;
• the liability of the original assignor and any guarantor upon further assignment of lease; and
• lessor consent requirements.

Leasebacks and enforceability of lease covenants

The common law concept of covenants that touch and concern the land will no longer be relevant to determining the enforceability of a covenant after a transfer and leaseback has occurred. Under section 140 of the new PLA, the benefit and burden of all covenants in a registered lease will run with the land unless:

• the term of the lease is expressly stated to be personal to the parties;
• a term of the lease excludes the operation of s 140; or
• a lessor and the transferee agree in writing that the benefit of the term is to remain with the lessor, i.e., enabling parties to agree that the transferor is to retain the right to recoup rent in arrears.

The transferor will remain liable for past breaches and a notice directing rent to be paid to the new lessor is required.

Enforcing lease covenants against assignor

Under s 143 of the new PLA, the assignee of a lease will be bound by all lease terms and entitled to the benefit of all terms unless:

• a covenant expressly provides that the term is personal to the parties;
• a term of the lease excludes the operation of s 143;
• the lessee and assignee agree in writing that the benefit of a term is to remain with the lessee and either:
  • the benefit of the term accrued to the lessee prior to assignment; or
  • the lessor consents to the benefit of the term remaining with the lessee.

Practically, at the point of assignment, the terms of the lease should be considered to identify if the benefit/burden of a term is intended to remain with the assignor (original lessee). If a term is intended to stay with the assignor, a tripartite Deed of Covenant should be entered into.

Assignor liability for further lease assignment

The new PLA will not release an assignor (original lessee) from liability under a lease upon assignment. However, where an assignee of a lease effects a further assignment of a lease to a subsequent lessee, s 144 of the new PLA will release the original lessee and their guarantor/s from liability under the lease for any breach by the subsequent lessee. Section 144 cannot be altered by the terms of the lease or the guarantee.

This section will only apply to lease assignments entered into after the commencement of the new PLA. This release will only apply as a limited release in relation to breaches of the lease by the subsequent lessee. Where there is an accrued breach of the lease by the original assignee, the original lessee will remain liable.

Lessor’s consent requirements

Section 142 of the new PLA will require the lessee to obtain the lessor’s consent for any assignment of lease, sublease, change of use or alterations, to which consent must not be unreasonably withheld. This is the same position under the old Act. However, the process for obtaining consent differs under s 142, which outlines the:

• lessee is to give the lessor a proposal notice with all information required by the lease;
• lessor can request further information necessary for the decision (by giving a notice);
• lessor is required to give a decision notice within one month of the lessor receiving all necessary information, however, the parties may also agree to an extension of the date for the decision notice, during this one-month period;
• decision notice must state:
  • if consent on conditions – the conditions of approval;
  • if consent is refused – the reasons for refusal.

If consent is withheld or no decision notice is given, the lessee can apply to the Supreme Court for an order.

This section will apply notwithstanding any contrary agreement from commencement of the new PLA. Practically, a lessor can prevent application of this section by prohibiting assignment, sublease, alteration in use or building works in all cases. If consent is later sought by a lessee to any of these activities, the lessor is free to refuse on any grounds.

Relief against forfeiture – Renewals and Rights to Purchase

Under the new PLA if a lease contains an option or a right to purchase the land and the lessor does not intend to give the lessee that right because the lessee failed to comply with a condition in the lease then the lessor is required to first give the lessee a breach notice.  The notice is required to be given within 10 Business Days of the earlier of the lessor receiving an option exercise notice or becoming aware of the breach occurring. On receipt of the notice the lessee has one month to apply to the court for relief.