Assignment of lease after the exercise of an option

June 1, 2011

Property / leasing

An interesting issue came across my desk.

A tenant had exercised an option to renew its lease but, for various reasons, a deed of renewal was never executed.  The tenant then purported to assign the lease.  The question arose as to whether a lease in those circumstances is capable of assignment.

It seems to be well established that the exercise of an option creates an agreement to lease rather than a lease (see Farrands, The Law of Options, 2010 at 137).  The lease is not created until the parties execute a deed.

Under the doctrine in Walsh v Lonsdale, the putative tenant is to be treated as in many ways the same as a tenant of a legal estate.  However, the Courts have been careful to point out that Walsh v Lonsdale is based on the putative tenant’s ability to seek and obtain specific performance of an agreement to lease, and that the putative tenant does not have a legal lease (see, in particular, Chan v Cresdon Pty Ltd (1989) 168 CLR 242 and the discussion in Bradbrook, Croft and Hay, Commercial Tenancy Law, 3rd ed, 2009, at [4.8]).

An interest in a contract cannot be unilaterally assigned.  A tripartite agreement to novate is required, extinguishing the old contract and creating a new one. Consequently, it follows that the putative tenant under an agreement to lease can’t unilaterally assign its interest.  It seems to follow that the agreement for lease can’t be unilaterally assigned.

However, it may be possible to characterise the purported assignment as an agreement to assign future property (ie to assign the lease if and when it is created).  An agreement to assign future property may be effective and crystalises the moment the property is created (see discussion of Meagher, Gummow & Lehane, 4th ed, at [6-190] to [6-330]).

If that argument can be made out, then the assignee would need to either issue proceedings in the name of the assignor (or possibly join the assignor as a defendant) seeking specific performance of the agreement to lease and compelling the landlord to produce a deed.  However, if the assignor is in liquidation, deregistered or dead, specific performance of the agreement to lease may be difficult to obtain.

I have not found  a case directly on point, but the arguments seem compelling.  This all highlights the need to obtain a deed of renewal of a lease when an option is exercised.

About Sam Hopper

Sam is a property and insolvency barrister.

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6 Comments on “Assignment of lease after the exercise of an option”

  1. Vanessa Says:

    A colleague and I have had to consider a similar issue.

    Can the assignment be effected without novation – ie an assignment of the benefit of the contract?

    Does S134 of the PLA assist you? Until today I had thought it would only assist in assignments of legal choses but I found this on Halsbury’s

    “[185-430] … The expression ‘legal chose in action’ in that legislation applies to equitable choses as well as legal choses.”

    Would the position be different if the assignee had partly performed?

    Reply

    • Sam Hopper Says:

      Thanks for the comment, Vanessa.

      You can only assign the benefit of a contract, not the burden. That still leaves the assignee unable to enforce the agreement for lease against the landlord.

      As for s 134, the rights of the tenant would need to be characterised as a thing in action, which is a form of property. I am not sure that a tenant’s right under an agreement for lease is any more than a contractual right coupled with a right to seek specific performance. However, I could be wrong.

      The other thought I had was that it may create some kind of equitable lease, but my research kept leading back to Walsh v Lonsdale.

      Reply

  2. vanessa Says:

    Sam

    I think one of the benefits of a contract is the ability to enforce it.

    I also would have thought that the agreement to lease (which you say arises by virtue of the exercise of the option) confers on the tenant an equitable right to be granted the lease on the terms of the lease renewal – a chose in action. “Assignments of Choses in Action in Australia” Starke states on page 9 (a very old edition) that an option to purchase is a chose in action and I am not sure that an option to renew is different. He refers to an old case, Griffith V Pelton 1957. I assume but have not checked that this remains good law.

    Reply

    • Sam Hopper Says:

      The correct characterisation of an option is not settled. Some cases suggest an option is an offer, others suggest it is a conditional contract. Some commentators suggest that it depends on the wording and context of the offer.

      Whatever the option is, the authorities seem to all agree that an option, once exercised, gives rise to a contractual right to a new lease. The tenant under that agreement then has a right to specific performance of that contract, and is often described as the tenant of an equitable lease. The idea of an equitable property right suggests that it may be capable of assignment. However, a right under a contract that is capable of specific performance sounds like it cannot be assigned.

      The closest thing I have found to a direct reference in the commentary is the following from Redfern and Cassidy at [14 75]:

      Specific performance will be available against a landlord who refuses to deliver a formal lease for the new term or against a tenant who refuses to execute it. Equity may, without necessarily awarding consequential relief, grant a declaration that the option has been validly exercised. The tenant is well advised to regularise the position in this way for in the event of an assignment of the reversion his or her interest may be in jeopardy. However, as between the original parties to the lease an equitable term is created and the tenant will be fully protected in equity.

      This suggests that the agreement for lease is not binding on the assignee of the reversion, which is consistent with my argument that the agreement for lease is a contractual right that can’t be assigned.

      Reply

  3. Jane Says:

    Sam,

    This is slightly off-track, but do you have any opinion on the status of a further option available under a specifically enforceable equitable lease created by the valid exercise of a prior option?

    Jane.

    Reply

    • Sam Hopper Says:

      Hi Jane,

      If I understand your question correctly, you are asking about a tenant who has exercised a previous option to create a contract between landlord and tenant, but no new deed has been executed. Your question goes to the status of the option in the new agreement to lease and whether it can be exercised by the tenant.

      Provided that there has been no purported assignment by the tenant, it seems to me that the option can be exercised in the ordinary way and creates a new contract.

      This will, of course, depend on the wording of the option contained in the original lease. If this relates to a real situation (as opposed to intellectual curiosity), you should consider getting an opinion from counsel.

      Sam

      Reply

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