Landlords have received a sharp reminder that any agreement to extend the period of a lease can dilute their security position by releasing the responsibility of former lessees for rental arrears and other defaults sustained by their successors.
Rent recovery proceedings* were filed in relation to a seven year lease of a newsagency in the Paradise Centre at Surfers Paradise that began in August 2001.
The lease had been assigned three times and extended twice. When the third assignee (the current lessee) defaulted, the landlord sued to recover the debt against the defaulting tenant and the preceding lessees.
Unless specifically excused from future liability, the general rule is that lessees who assign their interests – for example when they sell their business – remain liable to the landlord for their assignee’s defaults during the term.
In the Paradise Centre case, the first assignees defended the landlord’s debt recovery proceedings on the basis that an extension of the term agreed to after they had assigned their interest was, by operation of law, a surrender that had the effect of releasing them of any further obligation.
They applied to the District Court for summary judgment under UCPR rule 293 to strike out the landlord’s claim before it could get to a trial.
There were no factual disputes and all parties accepted the common law position that an extension of a lease operated as a surrender and the creation of a new lease.
At issue was the extent to which section 67 of the Land Titles Act 1994 – which allows the extension of a registered lease by the registration of an amendment – alters the common law position.
The former tenants argued that there was nothing in the language of section 67 that should be taken as anything other than a machinery provision and that the common law principle of surrender by operation of law, still applied.
If the contrary were the case, argued the tenants, lessors and lessees could extend the term of a lease indefinitely to the obvious prejudice of former lessees who would on that construction, be bound to effectively underwrite that all future lessee’s performance indefinitely. “Such a result would in my view the quite extraordinary and counter intuitive”, said His Honour accepting the former tenants’ contention.
The District Court noted that courts were required under UCPR 292 and/or 293 to address summary judgment where the facts were settled if the parties’ rights turned only on questions of law “even where the point may be difficult”.
The strike out was allowed and judgment was entered in favour of the former tenants against the landlord.
Commercial retail and industrial landlords should therefore carefully consider the security aspects before agreeing to ad hoc extensions to the period of a lease term.
* CPT Custodian Pty Ltd v Ironbarkhills Pty Ltd & Ors  QDC 004 Reid DCJ, 7 February 2011if