Month: August 2016

The Property, Stock and Business Agents Amendment (Property Reports and Exemption) Regulation (NSW) 2016 came into effect on 15 August 2016. These new exemptions are likely to have both a positive and negative effect for both commercial real estate agents and substantial property owners.

In very broad summary (but the devil is in the detail! – see below), there is now a complete exemption from the requirements of the Property, Stock and Business Agents Act 2002 (NSW) (PSBA Act) for commercial agents either:

1. acting for a substantial property owner (ie owning property exceeding particular thresholds); or
2. engaged by an owner within its own corporate group (provided that the entities are linked in a particular way).

It’s important to be aware that the exemptions won’t apply to all commercial agency relationships.

The Good

The new exemptions are great news for large property owners who manage, lease and sell their own assets via a separate, but related, licensed entity (which usually charges a fee to the owner). It means that those internally controlled agency entities no longer have the administrative burden of maintaining a real estate agent’s licence (including paying fees, annual CPD, required signage etc), managing trust accounts and holding PI insurance. It’s easy to understand why certain large shopping centre owners have been pushing for this change for many years.

It’s also great news for large commercial real estate agencies who will no longer need to ensure that they strictly comply with NSW agency law, particularly in the area of having compliant agency agreements, for their large clients. The courts have been brutal with real estate agents who do not have strictly compliant agency agreements (ie signed at the right time, containing all of the prescribed terms in the right places, and signed and served properly). In a commercial property industry which is largely dependent on relationships, it makes sense to relax the strict requirements so that agents can collect the agreed commission without having to jump through hoops.

The Bad

The changes also lead to a negative result for commercial real estate agents. If large property owners can now easily internally manage their property management, leasing, acquisitions and disposals, there is now less disincentive to outsource this previously troublesome role to an external licensed real estate agent.

Our understanding is that the legislation was passed with little opposition from the real estate industry. Most large real estate agencies couldn’t oppose the changes without offending their most important clients!

However, as in any industry, there’s always a place for absolute experts. Ultimately, it’s likely that large property owners will always want to deal with the experts employed by large commercial real estate agencies, even if it is now easier to choose to do some of the work themselves.

Devil in the detail

The exemptions only apply to “commercial property agency work” – that is selling, purchasing, exchanging, leasing, managing or otherwise dealing with property that isn’t “residential property” or “rural land”. Both “residential property” and “rural land” have particular meanings in the PSBA Act and it is possible that a property you thought was exempted as commercial may well be captured by the strict definitions.

The new exemption for internally managed commercial agents only applies if the agent entity is an “affiliate” of a principal/owner. This can be any agent entity that is controlled by an owner entity (ie if it has the power to make decisions about its financial and operating decisions). For entities which are body corporates, subsidiaries and parent companies are also affiliates. Affiliates can be, but aren’t limited to, companies, trusts (including trustees), partnerships and individuals. This means that most corporate groups will be captured by the definition, but it’s worth being aware that particular shareholding, unit ownership and external custodian/trustee relationships for some fund managers, trusts and investment schemes may not strictly comply.

The new exemption for substantial owners only applies to real estate agents acting on behalf of a principal/owner who owns property worth at least $40 million (at market value) or with an aggregate gross floor area of at least 20,000 square metres. The value and floor space amounts will include property that is co-owned an affiliate, presumably only to the extent of the ownership, but this is not clear. However, it is important to note that property that is wholly owned by an affiliate and not by the principal/owner itself, is not counted within this threshold.

NSW vs national position

The amendments bring NSW agency law closer to its Queensland counterpart, with 2 important differences:

1. the Queensland thresholds are less ($10 million and 10,000 square metres); and
2. the NSW exemptions are based on the principal/owner, whereas in Queensland they are based on the property or the parties that for the relevant transaction/agency agreement.

It’s noteworthy that NSW originally followed the Queensland approach in an earlier version of the new regulation, but changed it to its current state after a period of public consultation.

None of the other states/territories in Australia currently offer complete exemptions from the relevant agency legislation for commercial agency work.

 

Lease negotiations can often be lengthy and take place over a number of weeks and months. It’s not unusual for there to be an abundance of emails back and forth, telecons, face to face meetings between the parties (and their representatives) from the early initial commercial discussions to the time that the lease is signed up.

A recent High Court case (Crown Melbourne Limited v Cosmopolitan Hotel (VIC) Pty Ltd & Anor [2016] HCA 26) has considered whether an informal verbal assurance from the landlord to an arguably anxious tenant during negotiations was sufficient to bind the landlord to grant a further 5 year lease once the initial term had expired.

 

The facts

• In early 2005, the tenant (Cosmopolitan) and the landlord (Crown) entered into negotiations for new leases of 2 restaurant spaces in the Crown Casino complex.
• The new leases offered by Crown were limited to a term of 5 years only and did not contain any option for renewal. They also required Cosmopolitan to undertake major refurbishment works at commencement.
• During lease negotiations, Cosmopolitan requested a longer lease term having regard to the substantial cost of the refurbishment works Crown required it to carry out. Crown refused, but evidence indicates they assured Cosmopolitan that they would nevertheless be “looked after at renewal time”.
• Under clause 2.3 of the leases, Crown was required to give at least 6 months’ notice before expiry stating whether:

“(a) the Landlord will renew this Lease, and on what terms (this may include a requirement to refurbish the Premises or to move to different premises…);
(b) the Landlord will allow the Tenant to occupy the Premises on a monthly tenancy after the Expiry Date; or
(c) the Landlord will require the Tenant to vacate the Premises by the Expiry Date.” 

• In December 2009, Crown gave notice pursuant to clause 2.3(c) that it would not be renewing the leases and required Cosmopolitan to vacate in August 2010.
• In July 2010, Cosmopolitan brought proceedings alleging that Crown, by the representations made by its representatives during lease negotiations, was bound to grant a further 5 year lease. The case was heard by VCAT in the first instance which determined there was both a collateral contract and an estoppel argument in favour of Cosmopolitan, and then subsequently appealed to the Supreme Court of Victoria, Court of Appeal and then ultimately the High Court.

 

High Court’s decision

 

There were 2 main issues that the High Court had to consider, namely:

1.  whether there was a collateral contract created by Crown’s representations under which Crown was obliged to offer Cosmopolitan a further 5 year lease; or

2.  alternatively, whether Crown was estopped from denying an obligation to grant a further 5 year lease.

Having regard to the assessments carried out by the lower Courts, a majority of the High Court determined that:

• there was no collateral contract as, in the circumstances, Crown’s statement that Cosmopolitan would be “looked after at renewal time” could not have objectively been understood to amount to a binding contractual promise. In short, this statement was no more than “vaguely encouraging”
• the estoppel claim could not succeed as the Court found that Crown’s statement was not capable of conveying (to a reasonable person) an expectation that a further lease would without doubt be granted (on the same or substantially similar terms).  In any event, the Court was unable to satisfy itself on the evidence available that Cosmopolitan had relied and acted upon such an expectation.

 

Implications for Landlords and Tenants

 

Although in this case the landlord’s statement was not of sufficient quality to amount to a contractual promise, this case is a good reminder for landlords (and leasing agents) to be careful about the statements or assurances made to tenants during lease negotiations.  An “entire agreement” clause in the HOA or the lease itself is not “bulletproof”, and a Court will look beyond this to consider objectively (not subjectively) whether a party intended for its separate promise or assurance to be contractually binding.

Likewise, it is important for tenants to ensure that any assurance given by the landlord is adequately reflected in the lease documentation.  Failure to do so may have significant financial consequences – in this regard, we note that Cosmopolitan entered into external administration shortly after the leases ended in 2010.

For further information, please contact Leisha De Aboitiz or Ben Malone.

 

---

Disclaimer: This article is intended to provide commentary and general information.  It should not be relied upon as legal advice.  Formal legal advice should be sought having regard to any particular facts or circumstances.