Property sold, and the leases are not registered. Is the Purchaser bound? And by what Terms?
In ACT a sublease (and all of its terms) will be binding on an incoming purchaser in each of the following situations:
The lease was entered into between a prior owner and the tenant, but is for a term not exceeding 3 years (by virtue of section 58 of the Land Titles Act 1925).
The lease was entered into between the purchaser and tenant (creating a binding relationship between those parties, i.e. privity of contract).
The purchaser, seller and tenant enter into a deed of covenant as part of the sale, which creates a binding contractual relationship between the parties (i.e. privity of contract).
The lease is registered on title (again, by virtue of the Land Titles Act 1925).
However, what happens if a commercial property is sold, and there is a sublease that is not registered and is for a term greater than 3 years and a deed of covenant was not entered into by the parties as part of the sale process?
There is no privity of contract (i.e. binding and direct contractual relationship) as between the tenant in question and the new owner of the property (as that lease was entered into between the prior owner, and the tenant, and the purchaser was not a party to that lease document).
The common law then comes into play with the doctrine of “privity of estate”. Privity of estate applies to a purchaser who succeeds a property owner that previously entered into a sublease with the tenant. However, there is a key and substantial implication of this doctrine compared to those circumstances listed above, being that only the terms of the lease that “touch and concern the land” are enforceable between the tenant and new owner of the property.
The question then becomes, what covenant “touch and concern the land”? These are not all of the covenants and terms of a sublease, which needs to be a consideration for any purchaser when deciding how to proceed when such an issue is raised during due diligence for the acquisition of the property. Whether this is a substantive issue will depend on the terms of the sublease/s in question and whether any terms that may not “touch and concern the land” are essential or important to the purchaser. If a term affects the land directly (ie the way it is used or enjoyed) it will touch and concern the land.
As for tenant obligations, those that have been clearly established as falling into this category are paying rent, obligations to repair, obligations to insure and a restriction against assignment without landlord consent. Covenants that are personal to a tenant are generally often not those that will touch and concern the land.
As for landlord obligations, those that have been established as touching and concerning the land include supplying some utilities, some capital maintenance obligations, tenant early termination rights, a tenant option (for a further term, but not necessarily an option to purchase at the end of the term of the lease).
Interestingly, a guarantor’s guarantee may also continue to be enforceable by the purchaser against the guarantor, in the event that the covenant breached is one that touches and concerns the land.
When purchasing, it is usually the best course of action to ensure that all subleases concerning the commercial property are registered or otherwise fall within one of the four categories listed above. However, we do see many instances where this has not happened, and an astute property manager or property owner should be aware of the implications of this.
Terracon Legal is well versed in providing advice on complex commercial acquisitions, disposals and leasing matters. Please reach out to us if you wish to discuss this further.
Note: this is not legal advice and should not be relied upon (as it is general in nature, and will differ depending on factual circumstances). Legal advice should only be relied upon if Terracon Legal have been formally engaged via a cost agreement to provide such advice, and it is given with specific facts and context provided.
