Tenants usually occupy premises for their business according to the terms of the lease. However, as with most aspects of business, negotiations do take place, and the parties agree to other terms separate from the lease. Without written agreements, it is always contentious as to whether the outcomes of these negotiations are upheld or whether they form broken promises.

For business owners who are tenants of a commercial or retail premises, it is important to know the terms of your lease to ensure they coincide with any oral agreements you may have made with the landlord. You don’t want to end up like the tenants in the recent matter of Crown Melbourne Limited v Cosmopolitan Hotel (Vic) Pty Ltd [2016] HCA 26. This article will explore this case in more detail and highlight the legal effect of statements made during leasing negotiations.

The Lease Terms

In this High Court of Australia decision, the tenants, Cosmopolitan Hotel (Vic) Pty Ltd (Cosmopolitan) occupied two premises within the complex.

The lease which they entered was for the term of 5 years. The lease did not contain an option for renewal. Rather, it included clauses which required the landlord, Crown Melbourne Limited (Crown), to provide Cosmopolitan with six months notice stating that either:

  • The lease would be renewed;
  • A monthly tenancy will ensue; or
  • The tenant would need to vacate the premises.

Cosmopolitan signed the lease in 2005 for the term of five years and in December 2009, Crown notified Cosmopolitan that they would need to vacate the premises in August 2010.

What Did Cosmopolitan Allege?

Crown provided Cosmopolitan with the relevant notice period. However, Cosmopolitan alleged that Crown had made representations that they would be allowed to stay on the premises for a further term of five years.

When Cosmopolitan received a notice to vacate, this is undoubtedly not what they were expecting as they were relying on the promissory statements Crown had allegedly provided. They went further to claim that these statements induced them to enter the lease.

Did the Statement Amount to a Collateral Contract?

A collateral contract is one that can exist side by side to the main contract. Statements made during negotiations can amount to a collateral contract if the parties had the intention for the statement to be binding.

The test to determine whether there was intention is by looking at it from the perspective of an objective bystander. What would a reasonable person in the position of the parties have understood to be intended?

The main statement Cosmopolitan relied on was that they would be “looked after at renewal time”.  The court rejected that a collateral contract was formed in this case, noting that the statement was only “vaguely encouraging” and did not have the quality of a contractual promise.

Is Estoppel Relevant?

Estoppel allows the prevention of something occurring because of an individual’s actions or words to the contrary. In this case, estoppel was considered to prevent Crown from issuing a vacancy notice to Cosmopolitan.

Again, this claim was based on the representation that they would be ‘looked after at renewal time’.

For estoppel to apply, Cosmopolitan needed to show that they:

  • Relied on an assumption or expectation made by Crown; and
  • They suffered detriment as a result of Crown acting inconsistently with this expectation.

The Court did not allow the remedy of estoppel as Cosmopolitan did not show that an assumption or expectation was created. They were also unable to prove that they acted upon any assumption or expectation by entering the lease.

Key Takeaways

The main point to take away from this case is that no matter how convincing or promissory a representation or statement sounds, the terms of your lease will ultimately determine your legal relationship with the landlord. To avoid any ambiguity, costs, or court cases, it is in your interests to update the lease to include any relevant and material representations and promises.

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If you have any issues regarding your lease arrangement or broken promises made with your landlord, get in touch with our disputes lawyers on 1300 544 755.

Kristine Biason

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