When can a lessor continue to enforce covenants in its favour after the transfer of the leased property to a third party buyer has been registered?
Consider the case of the Queensland Branch of the RSL which until 2020, owned the Southport building that it leased to the Southport RSL Club for the operation of a licensed entertainment venue.
The lease which runs to August 2024 contains a provision which obliges the lessee Club to allow the lessor (the RSL Branch) to use two offices and other spaces within the building to display its memorabilia and “carry on its traditions and functions with the concurrence and assistance of the Club.
The Club is not related to the Branch but rather, merely has a licence to use the RSL name.
Following the sale of the building by the Branch in December 2019 to an unrelated party, the Club continued to observe the lease but considered itself no longer bound by the obligation to allow its former lessor the use of its space.
In March 2020 it changed the locks to the doors and moved the RSL Branch’s equipment, records and memorabilia into a storage facility.
It notified RSL Branch that by selling the building, it had – in its view – extinguished its right to continue its occupancy.
The Branch took up much larger premises at the nearby Southport Bowls Club and filed a lawsuit for the rent it had incurred and will incur up to the end of the lease term against the Club for what it claimed was a lessee’s breach of the lease.
Before Judge Ken Barlow QC the Club – a nominee for the 2021 best Queensland community club – contended in the Brisbane District Court that all the benefits under the lease passed to the new lessor upon registration of the transfer of title.
Further, the right to occupy at most comprised “bare licence” that could be terminated at any time on reasonable notice.
On the other hand, it was the Branch’s argument that the relevant lease provision created personal rights in its favour and that because they did not “touch and concern the land”, such rights did not transfer upon the change of ownership and nor were they extinguished.
His Honour noted that a lease of land creates to relationships – one contractual and the other property – between the parties to it.
As much is evident in the assignment of a lease, where – although the assignor ceases to be a lessee – the assignment does not affect the existence and enforceability of the contractual obligations as between the lessor and assignor.
Some covenants in a lease are however so closely connected with a leasehold estate that they are said to be attached to and form part of that estate. In that case the assignee is entitled to enforce the benefit of such covenants and is bound to perform the obligations imposed by them.
Covenants only attain such status if they “in some way affect the nature, value or quality of the leased land or the way in which it is used or enjoyed”. A covenant that does not do so per se but collaterally, doesn’t make the cut.
The Branch’s entitlement to occupy the rooms made available to it by the Club did not, in Judge Barlow’s view, “touch and concern the land” because they were of no benefit to an owner per se, only the Branch while it happened to be the owner.
That being the case, the benefits and obligations of clause 29 did not transfer to the new owner upon the sale of the building.
Importantly too, “they were not extinguished by that transfer and remain obligations of the Club to the RSL Branch”.
In His Honour was of the view that the RSL Branch’s right was – more than a mere licence – a contractual obligation to require the club to cooperate and assist the Branch carry out its functions and to provide part of the premises to it for that purpose.
Such obligation persisted, so held the court, until the end of the term of the lease.
One of the issues His Honour had to deal with was whether the terms contained in the Schedule Form 20 to a Form 7 registered lease are collateral to the registered lease because they are contained in a separate document.
This contention was answered in the negative on the reasoning that by referring to the Schedule, the Form 7 incorporates all its terms into the registered lease. This is evident from the pagination, e.g. the Form7 being described as “Page 1 of 36”.
All of the pages in the Schedule Form 20 are therefore clearly part of the lease.
As a result, the Club was held to be in breach of its contractual obligations under the lease and liable to the RSL Branch for the rent it was required to pay at the Bowls Club notwithstanding the premises the were four times the size that it occupied originally.
Total damages were awarded in its favour of $193k.