There is no room in property related transactions for a lack of care and thought in drafting. This applies in particular to the preparation of leases where the rights and obligations of parties to the lease are to be governed by its terms over extended periods of time.
Parties must ensure that their leases are properly prepared so that they not only cover the law but also genuinely reflect all parties’ proposed commercial outcomes. A wish to cut or minimise legal costs by using “standard” leases and just filling in the blanks can result in one party being significantly out of pocket and commercially disadvantaged. Near enough in drafting, should never be good enough.
A prime example of this is illustrated in the relatively recent case of Miwa Pty Ltd v Siantan Properties Pty Ltd [2011] NSWCA 297. In this case the lease required the landlord to pay the tenant a $45,000 general fitout contribution. The lease also contained an option to renew for a further term “on the same terms as herein” ie. on exactly the same terms as the original lease.
The tenant exercised its option to renew the lease and, as the renewed lease was to be on the same terms as the original lease and the incentive provision had not been specifically excluded from any renewed lease, the tenant claimed that it was entitled to another payment of $45,000. The landlord refused to pay. The tenant then sought to set off the sum against the monthly rent payable during the balance of the renewed term. The landlord in turn sought to claim the “unpaid rent” by calling on the bank guarantee. The tenant brought an action seeking to restrain the landlord from doing so.
The Court of Appeal ultimately decided in favour of the tenant. There were various elements that made up that decision. Critically though, the Court spent some time considering whether reading clause 16 (the renewal clause) so as to require the landlord to make a second payment of the fit-out contribution would lead to an “absurd” result.
The Court said that, in this context, “absurd” meant “as opposed to reason” or “irrational” and therefore requiring an interpretation of clause 16 so that it made commercial sense and gave it meaning from a practical perspective.
The Court essentially found that clause 16 was clear on its face ie. the lease was to be renewed on the same terms as previously and there was nothing actually “absurd” about incorporating the fitout contribution clause into the new lease. The Court recognised that, whilst the result requiring the landlord to pay the $45,000 to the tenant a second time may have been commercially disadvantageous, it was not absurd in the legal sense.
The obvious point to take from this case is that every clause in a lease, even “standard” renewal provisions, needs to be considered on a case by case basis to, for example, exclude incentives from future terms.
By Kristina McGeehan-Hall.
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