Owners Corporation update: Leases and licences – Which, when and why?Aug 22, 2017
When an owners corporation proposes to allow a lot owner or other person to occupy or use for their own benefit part of the common property, our owners corporation lawyers are frequently consulted (sometimes with much confusion) about whether it is a licence or lease that is required to be granted, or what may need to be done in that regard.
There are fundamental differences between leases and licences. By having a proper understanding of these, owners corporations will be able to make the appropriate choice. Also, there is a strict process that must be followed by the owners corporation otherwise any lease or licence will not be validly granted and may therefore not be enforceable.
Pursuant to section 14 of the Owners Corporations Act 2016 (the Act):
- By special resolution, an owners corporation may lease or license the whole or any part of the common property to a lot owner or other person.
Accordingly, an owners corporation cannot grant a licence or lease by resolution of its committee. To grant a licence or lease a special resolution of the members of the owners corporation must be passed at either an annual general meeting (AGM) or at a special general meeting (SGM) or by way of a ballot.
Given that AGMs are held only once a year, and there is much work involved in calling and holding a SGM or running a ballot, it is most important that:
- the proposed licence or lease is tabled for approval; and
- those proposing that it be granted have a full and proper understanding of why a licence or a lease is proposed.
The owners corporation will then be able to respond to members’ queries hopefully in a way that will result in support for the proposed special resolution.
It is also most important that the resolution put to the meeting, or in the ballot, is properly worded, otherwise the resolution may not comply with section 14 of the Act and the licence or lease will not be validly granted. For example, a resolution to grant a lease or a licence that does not properly specify the terms of the lease or licence is not sufficient. Further, a resolution to grant a lease or a licence with the terms and conditions to be decided by a person or committee nominated for that purpose is also not sufficient.
To lease or licence – what’s the difference?
The table below illustrates the fundamental differences between a lease and a licence.
A tenant has exclusive possession of the leased area subject only to limited rights granted to the landlord under the lease.
A licensee is granted a right to use an area but is not granted exclusive possession of it.
Transfer to a
A lease is an interest in land and can be transferred to a 3rd person.
Sometimes under the lease, the landlord’s consent is not required and in other cases it is required.
When the landlord’s consent is required but not given or obtained the lease may still be transferred but because the transfer is without consent, it is a breach of the lease and the landlord may terminate the lease.
A licence is a contract made between the licensor and the licensee.
A transfer of a licence by a licensee will not give the transferee any rights against the licensor because a contract will not exist between them.
When a landlord transfers title to land subject to a lease if the tenant is in possession at the relevant time, the new owner takes the tile subject to and is bound by the lease and the new owner is entitled to enforce the lease against the tenant.
As the new owner is subject to the lease the tenant can enforce it against the new owner.
When a Licensor transfers title to the land subject to a licence the new owner is not subject to or bound by the licence and it cannot enforce the licence against the licensee.
As the new owner is not subject to the licence the licensee cannot enforce it against the new owner.
When should a lease or licence be granted?
The answer to this question is always dictated by the relevant circumstances.
For example, should a part of common property be proposed to be fenced in with exclusive use by the lot owner for use as a courtyard, it may be appropriate to grant a long-term lease to a lot owner subject to agreement being reached on commercial terms.
In this situation, the long-term lease of common property for use as a courtyard is likely to add considerable value to the associated lot and the owners corporation may therefore require more than a nominal rent.
It may also be appropriate in those circumstances to provide in the lease that the tenant / lot owner can transfer the lease without the landlord / owners corporations consent to its successor in title to the associate lot, but not otherwise.
Another situation may be the proposal to permit a lot owner to park a motor vehicle in a carpark on common property. This is usually a right granted by way of licence rather than lease because at the time when the car parking space is not used by the lot owner, it may be used by others.
When an owners corporation proposes to grant a lease, it should consider if the lease will be subject to the Retail Leases Act. This Act does not apply to licences.
The provisions of the Retail Leases Act prevail over inconsistent provisions in a lease. This Act may also require an owners corporation to assume obligations that are commercially undesirable. For example, obligations to maintain the leased area, including plant and equipment belonging to the landlord in that area.
Owners corporations need to be aware that the Retail Leases Act does not only apply to traditional retail shops and can include uses that may not be considered by a lay person as a retail use. An owners corporation should always seek legal advice in this regard in connection with any proposed lease.
Common issues for leases and licences
When proposing to grant a lease or a licence there are many issues that need to be considered and covered in the lease or licence, including:
- the relevant area, often best described by reference to a plan that shows relevant boundaries and its location within the common property;
- the term or period for which the lease or licence is granted;
- the rent or licence fee payable, and how and when it is to be paid;
- whether the tenant or the licensee is responsible for any outgoings associated with the relevant area;
- the make-good obligations of the tenant or the licensee when the lease or licence ends; and
- the use that the tenant or licensee is permitted on carry on in the relevant area.
This is not meant to be an exhaustive list.
What to do when a lease or licence has not been granted or special resolution passed
From time-to-time, situations arise whereby an owners corporation has allowed part of the common property to be used by a lot owner or third party for many years without first passing a special resolution to grant a lease or licence, or may have even signed a lease or licence but has no record of passing the appropriate special resolution.
Even if such a situation (or 'defect') is because of a simple omission, the conduct of the parties (acting as if a valid lease or licence has been granted) does not rectify the defect because the parties cannot contract out of the requirements of section 14 of the Owners Corporations Act 2006.
The defect can only be rectified if the owners corporation passes a special resolution authorising the grant of a lease or licence and if the appropriate lease or Licence is then granted.
A special resolution ratifying a lease or licence previously granted will not comply with section 14 of the Act and will therefore not rectify the defect.
As long as the defect exists, neither the landlord / licensor / owners corporation nor the tenant / licensee will be able to enforce in a court their rights under the relevant lease or licence.
Owners corporations acting prudently should seek legal advice whenever it is proposed that a lease or licence be granted in respect of common property so that the owners corporation can make sure that it achieves its desired outcome.
For more information, or to discuss any of the information contained in this update, please contact Anton Block, Principal Lawyer and Head of owners Corporation, on (03) 8600 8833.
For information on the author, Anton Block.
Note: This update is a guide only and is not intended to constitute legal advice.