In the third and final instalment of our series on Queensland’s Property Law Bill 2023 (the Bill), we look at some significant changes coming in the leasing space.
Landlords to act reasonably to tenant requests![1]
Until now, in Queensland, dealings with commercial leases were a matter entirely for agreement between the parties. This position is consistent with the approach taken in other States. So, if a commercial lease included a requirement that the landlord could consent to a tenant request in its absolute discretion, a landlord’s power to consent to that was effectively unrestricted.
This position is to be contrasted with retail leases in Queensland and other States where there are obligations for a landlord to act reasonably in certain circumstances.
In a major change, the Bill proposes that where a tenant is required under a lease to obtain the landlord’s consent to:
- assign the lease;
- sublease or part with or share possession of the premises;
- a proposal to change the use of the premises from that permitted under the lease;
- grant a mortgage; or
- make an alteration,
the landlord must not unreasonably withhold consent.
The provision cannot be excluded by contract and takes away the landlord’s right to provide consent to the tenant’s request, ‘in its absolute discretion’.
While leases often include an obligation on landlords to act reasonably when considering tenant assignment requests, dealings such as changing the permitted use or tenant alterations would be regarded as matters over which a landlord should have complete discretion. Requiring a landlord to act reasonably in these circumstances would be considered unusual and onerous on a landlord.
As a result, only two options will be available for commercial leases:
- an outright ban on one or more of those dealings; or
- an obligation on the landlord to be reasonable when considering requests.
A new deadline for the landlord’s response to a tenant’s request for a dealing listed above will also be imposed: if a tenant seeks the landlord’s consent to a dealing, the landlord has 1 month from receipt of all relevant information to notify the tenant of its decision. However, this timeframe can be extended by agreement (and we expect that some commercial leases may look to extend this period in the assignment and subletting provisions).
The landlord must also provide the tenant with reasons for refusal of consent or imposition of conditions on the dealing.
Leases – assignment of ALL covenants
In another big change which represents a major change to the existing law on the assignment of leases, the assignee will take the benefit and burden of all lease terms whether those terms ‘touch and concern the land’. This change will remove the need for the landlord and tenant to enter into a separate deed of novation or assumption of those particular lease terms.[2]
There are some exceptions to this position:
- if the lease expressly provides that the term is personal to the named tenant; or
- if the lease expressly excludes the relevant term from assignment or transfer; or
- where the outgoing tenant and incoming tenant agree that the benefit of a particular lease term remains with the outgoing tenant (so long as the landlord also consents to that arrangement); or
- where an outgoing landlord and an incoming landlord agree that the benefit of a particular lease term remains with the outgoing landlord.
Commercial leases – release on assignment
The proposal is a two-assignment arrangement, that is, if a tenant (original tenant) assigns its lease to tenant 2 (assignee), the original tenant and its guarantor are not automatically released.
However, if tenant 2 assigns the lease to tenant 3 (subsequent assignee), the liability of the original tenant and its guarantor falls away and they are no longer on the hook if tenant 3 breaches the lease.[3] This is to be contrasted with the position for retail leases[4], where the statutory release applies to the original tenant and its guarantor after the first assignment, that is, to tenant 2.
The provisions regarding release on assignment cannot be excluded by contract.
As a result, in major leases where the identity of the tenant is critical, the wording of the landlord’s consent clause and the suitability of any proposed assignees will become even more important.
New hurdles for landlords – relief against refusal to renew or sell[5]
Under the current Property Law Act, in certain limited circumstances, a tenant could apply to the court for ‘relief against forfeiture’ of its lease. Relief against forfeiture is effectively a court order overturning or blocking a landlord’s right to terminate a lease or evict a tenant.
The Bill introduces new provisions providing relief against forfeiture to tenants where:
- a tenant had a right to renew or extend the lease term or acquire the land on which the premises is located; AND
- the landlord has refused to grant this right due to a failure of the tenant to comply with an obligation or condition in the lease or a notice requirement.
In these circumstances, if the landlord does not intend to grant the tenant’s option or other right, the landlord must first give the tenant a breach notice (Landlord Notice). The Landlord Notice must be given within 10 business days of the earlier of the landlord receiving an option exercise notice or becoming aware of a relevant breach occurring.
On receipt of a Landlord Notice, the tenant has one month to apply to the court for relief.
If the tenant does not make an application to the court, the landlord can refuse the tenant’s option to renew or purchase.
In deciding whether to give relief to the tenant, the court may take into account relevant factors which may include the nature of the breaches, the conduct of the parties and the extent to which the landlord has been prejudiced by the breaches being relied on by the landlord.
As you will be aware, there is a long history of courts requiring strict compliance with notice requirements for the exercise of an option – no matter what the mitigating circumstances. With this new provision,
Prepare for a deep dive
There are a large number of changes to the previously long settled property law regime in Queensland which will come into effect when the Bill is passed.
As well as the changes effecting leases outlined above, we have highlighted some of the other major changes over recent weeks. Our first instalment in this series outlined major changes to the rule against perpetuities as well as signing requirements for deeds and agreements, while our second instalment discussed the changes proposed for land sale contracts and disclosure statements. But there are many more changes as well. While some changes just ‘modernise’ the language, there are also big changes to property law as well as changes to processes and time frames.
Given the impending introduction of this Bill, it is time for property practitioners to take a deep dive so they will be well positioned to advise clients on the new laws.
For further information, please contact:
Julie Jankowski, Partner, Herbert Smith Freehills
julie.jankowski@hsf.com
[1] Clause 142 of the Bill.
[2] Clauses 144 and 140 of the Bill.
[3] Clause 143 of the Bill.
[4] Refer to section 50A of the Retail Shop Leases Act 1994 (Qld).
[5] The Bill, Subdivision 3, clauses 163 to 167.
