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New Life in Owners Corporations - Leases and Licences of ‘Real Property’

Introduction

Taking advantage of leases and licences can offer significant opportunities to an owners corporation.  Leases and licences can be undertaken is respect of both ‘real property’ (meaning land or an interest in land) and ‘personal property’ (other articles and items, such as security equipment and office equipment).  The fundamental difference for an owners corporation is that a special resolution is needed when granting or obtaining leases and licences for ‘real property’.

When it comes to ‘real property’ owners corporations and their managers have to be alert to the differences between a lease and a licence and to understand some of the problems that can arise.

The power to lease or licence ‘real property’

The owners corporation’s powers when granting or obtaining leases and licences for ‘real property’ (meaning land or an interest in land), are found in Division 3 of the Owners Corporations Act 2006 (the relevant sections are reproduced below):

Division 3—Powers Relating to Property

14. Leasing or licensing of the common property

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.

15.          Power to obtain lease or licence over land

By special resolution, an owners corporation may obtain a lease or licence over any land (including Crown land) whether or not in the plan.

Given the crucial distinctions between a lease and a licence there are a number of issues from an owners corporations perspective which have to be carefully addressed.  Foremost of these is making sure that the owners corporation has actually been properly empowered by the appropriate resolution to grant a lease or a licence.  In a 2008 VCAT case, Boswell v Forbes & Ors, the Tribunal decided that 7 votes out of 11 in favour of a resolution only represented 63% of the votes cast and could not be taken as a ‘special resolution’ for the purposes of validating the grant of a licence.

Matters for caution

Choosing between a lease or a licence is a hurdle that has to be overcome by making sure that the owners corporation knows what it wants before the special resolution is tabled; the choice between a lease or a licence has to made early so that the special resolution is specific as to what is actually going to be entered into by the owners corporation. The differences between the two are so significant that a special resolution which leaves open the choice (or hands the decision to the committee) may risk being attacked in VCAT.

Other issues that also need to be carefully addressed concern the accurate description of the land concerned that is the subject of the lease or licence, making sure that the parties are correctly identified as well as ensuring that the terms of the lease or licence reflect what has actually been resolved by the owners corporation.

Of particular importance is the question of whether the obligations placed on the parties to a lease or licence can be passed on to other parties.  The difficulty is that, although it is readily understood that a lease or a licence is intended to create rights and obligations between the parties to the agreement, it is not automatically the case that those rights and liabilities can be transferred to a third party.  What is actually transferred hinges upon whether the transfer is by way of an “assignment” or by way of a “novation”.

Generally, an assignment only serves to transfer the rights but not the obligations of the assigning party.  On the other hand, a novation can serve to pass both rights and obligations. The reason for this lies in the nature of a novation – and the clue lies in the word itself; from the Latin novātio, a renewing.  A novation ‘renews’ a lease or a licence by effectively substituting the ‘incoming’ party in place of the ‘outgoing’ party.  However, novation is not quite as simple as that.  Because novation relies on this substitution, in order for it to be valid, both the party that benefits from the obligations and the incoming party that will assume those obligations have to consent to the outgoing party passing its obligations to the incoming party.

Even so, a successful novation depends not only upon the obligations involved being precise and explicit but also that the mechanism for transferring those obligations is clear and is followed by the parties concerned. In 2010 the Federal Court, in Goodridge v Macquarie Bank Limited, expressed the view that the party that benefits from the obligations cannot “…consent in advance to an unspecified means of novation that will subsequently be binding at election of another party.”

A similar problem arises with the assignment of a licence.  Because a licence - unless agreed otherwise between the parties - cannot be transferred, any such mechanism for transferring the licence has to be strictly followed.  In a 2010 VCAT case, Owners Corporation 1 Plan No. PS422669H & Anor v United Property Fund Melburnian Project Pty Ltd & Anor, the Tribunal decided that the failure to comply with a particular transfer process resulted in there being no assignment of two licences.  As Senior Member Lulham put it (at Para 37), “…it is not a question of Mirvac, and then Millem, having exercised a right to assign but merely not followed a machinery provision.  Rather, by failing to comply with the machinery provisions they did not assign the licences” (emphasis added).

Owners corporations have to tread warily when it comes to granting or obtaining leases and licences for ‘real property’ and should pay particular attention the issues that may arise in any transfer of contractual rights, obligations and liabilities.

Should you have any comments in relation to this article or require assistance with any owners corporation leases or licences, please do not hesitate to contact Jenny Wang or Lindsay Crofton of Berrigan Doube Lawyers on 03 9600 2577.