A recent decision by the Supreme Court of Western Australia in Taboref Pty Ltd as trustee for the Penn Family Trust v Acquest Property Pty Ltd (In Liquidation) as trustee for the RPIT Development Trust No. 2[1] has considered indefeasibility principles in the context of a long-term chain of what are sometimes called “reversionary” leases.
What is a reversionary lease?
Although the term is sometimes used in other senses, a reversionary lease is a lease that takes effect in the future, often after the expiry of a lease that is already on foot.[2]
Background facts
Taboref involved competing claims for possession of premises between a registered mortgagee and elderly residential tenants.
The premises in question formed part of the failed Sterling New Life Lease scheme.
As part of the scheme, the tenants entered into a residential tenancy agreement for an initial term of five years, which also included seven separate options to lease the premises for consecutive five-year terms. Almost immediately, the tenants exercised all seven options, giving rise to a series of reversionary leases. The rent for the entire duration of the tenants’ intended 40-year tenure was effectively paid up-front.
The tenants failed to take any steps to protect their rights by registration or caveat.
About six months after the tenants signed up for the scheme, the landlord granted a registered mortgage over the premises by way of security for a loan.
Unfortunately, the landlord defaulted under the loan, and midway through the initial five-year term of the residential tenancy agreement the mortgagee took steps to sell the premises with vacant possession. The tenants resisted the sale on various grounds.
Indefeasibility and exceptions
In determining the competing claims, the court was required to consider the extent to which the parties’ rights were impacted by the doctrine of indefeasibility of title.
The basic effect of this doctrine in Western Australia is that, subject to certain statutory and other exceptions, a person who acquires a registered estate or interest in land (including as registered mortgagee) does so subject only to those interests and estates that are noted on the certificate of title for the land.[3]
One important exception to indefeasibility of title is where there is a “prior unregistered lease or agreement for lease or for letting for a term not exceeding 5 years to a tenant in actual possession … but no option of … renewal in any such lease or agreement shall be valid as against a subsequent registered interest unless such lease or agreement is registered or protected by caveat”.[4]
This means that, generally,[5] a lease with a term of over five years will only bind the holder of a subsequent registered estate or interest if that lease is registered or protected by caveat. Further, an option of renewal under a lease will only be binding if the option is protected by registration (of the lease) or by caveat.
In Taboref, the tenants effectively argued that each of the consecutive five-year leases fell within the exception to indefeasibility, and therefore bound the mortgagee.
However, although the court accepted that the exercise of each of the seven five-year options involved “not an extension of the existing lease but the creation of a new lease of the same property on similar or identical terms”,[6] it disagreed that the five-year option terms fell within the exception to indefeasibility, concluding that:
“In my view, on the exercise of each Option, the offer by the [landlord] to lease Unit 4B to [the tenants] for each subsequent term was accepted. Nothing else was required to be done to create a valid and enforceable agreement between these parties. That is, as from 15 February 2017, [the tenants] entered into the Lease and seven separate agreements to lease Unit 4B (which were enforceable against the [landlord]) for a period totalling 40 years. In these circumstances, it is my view that, on the proper construction of the Lease and the Options, [the tenants] had an agreement for lease of Unit 4B for a total of 40 years.
The consequence of this conclusion is that the exception to indefeasibility of title … does not apply. In order for the Lease and the Options to have priority over the subsequent registered interest of [the mortgagee] in the Property, it was necessary for the Lease (and the Options and the Notices) to be registered as an encumbrance on the title of the Property, prior to the registration of the Mortgage (or otherwise protected by caveat). This did not occur.”[7]
Comment
Although the Supreme Court’s decision in Taboref involved a residential tenancy,[8] it serves as a reminder to all tenants, including those under commercial leases, to seek legal advice on how best to protect their interests against indefeasibility concerns.
In particular, the court’s approach of aggregating the initial and option terms of the tenants’ lease (based on the exercise of the options) when applying the indefeasibility exception for five-year leases may present an indefeasibility risk in some scenarios.[9]
For example, a tenant may have a commercial lease for an initial term of five years, with a five-year option of renewal. Prior to the exercise of the option, the initial term will fall within the five-year exception to indefeasibility, and the option can be protected by an appropriate caveat. The tenant then exercises its option sometime before the expiry of the initial term. At that point, arguably the tenant’s entire tenure (including both the balance of the initial term and the option term) is exposed to an indefeasibility risk if it fails to promptly lodge a caveat, on the basis that (adopting the Supreme Court’s approach in Taboref) the aggregate of that tenure has now expanded to 10 years. Further, it is not clear from Taboref whether such a lease would conceptually remain a 10-year lease even following commencement of the five-year option term (if so, the tenant would continue to be exposed to indefeasibility risks after that date).
We predict that more caveats will be lodged by commercial tenants out of caution.
Taboref is also a reminder to commercial tenants of the potential risk of a mortgagee sale. To guard against that risk, a commercial tenant should insist that the landlord procure the written consent of the mortgagee to the lease. Failing that, a mortgagee may be entitled to sell the premises with vacant possession following landlord default.[10]
Finally, one point not considered in Taboref is the prohibition against a reversionary lease term taking effect more than 21 years from the date of the document purporting to create it. Any document that purports to create such a term is void, as is “any contract made after that date to create such a term”.[11] Since the case involved a residential tenancy agreement that purported to create future lease terms commencing more than 21 years after execution, it is not clear why the mortgagee declined to take that point.
Disclaimer
This post has been prepared as a general summary only. It is not, and is not intended to be, legal advice with respect to any particular matter. This post should not be relied on with respect to any particular matter without taking legal advice. Stork Davies Legal Advisors disclaims liability to any person who relies on this post without taking legal advice from the firm.
[1] Taboref Pty Ltd as trustee for the Penn Family Trust v Acquest Property Pty Ltd (In Liquidation) as trustee for the RPIT Development Trust No. 2 [2024] WASC 313.
[2] Derek Cassidy QC and Brian Ralston, LexisNexis, Australian Tenancy Law and Practice (online at 3 September 2024) [5.3.010].
[3] Section 68(1) of the Transfer of Land Act 1893 (WA) (“Transfer of Land Act”).
[4] Section 68(1A) of the Transfer of Land Act.
[5] There are a number of other possible exceptions to the doctrine of indefeasibility of title as it relates to leases and options of renewal. For an example of an important statutory exception that applies in a commercial lease context, see sections 13(9) and 13(10) of the Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA).
[6] Taboref at [49].
[7] Taboref at [73] to [74].
[8] The laws relating to leases are heavily modified by the Residential Tenancies Act 1987 (WA).
[9] The court might have achieved the same result if it had concluded that the requirement for a tenant to be “in actual possession” to fall within the scope of the indefeasibility exception for five-year leases required the tenant be in actual possession under the current lease term. The aggregation approach also raises questions around, for example, the application of the threshold for registration of a lease under section 91 of the Transfer of Land Act.
[10] Section 110 of the Transfer of Land Act. The position is different under residential tenancies.
[11] Section 74(3) of the Property Law Act 1969 (WA).