The Supreme Court of Western Australia recently held that a tenant’s conduct in obtaining access to premises the subject of an offer to for lease for fit out purposes, before obtaining all required approvals did not constitute a waiver by the tenant of their right to rely on those conditions and terminate the offer to lease.

Landlords, tenants and leasing agents should note the importance of having well drafted conditions in offers to lease and the potential impact of allowing a tenant early access or possession to premises that are intended to be leased, before a lease is signed.

In Bowen v Alsanto Nominees Pty Ltd , the Western Australia Court of Appeal held that a tenant’s conduct in obtaining access to the premises the subject of an offer to lease (OTL), before all required approval conditions under the OTL had been satisfied, did not constitute waiver of the tenant’s right to rely on approval conditions contained in the OTL, and terminate the OTL where those conditions were not satisfied

The facts

An OTL was entered into between the appellants (tenants) and the respondent (landlord) for commercial premises in Fremantle, Western Australia.

The appellants, both pharmacists, domiciled in New South Wales, intended that the premises would be used as a pharmacy. The Pharmacy Act 1964 (WA) (Act) (subsequently repealed by the Health Practitioner Regulation National Law (WA) Act 2010 (WA)) required the pharmacy to be registered under the Act and the business must be under the immediate supervision of a pharmacist licensed under the Act and domiciled in Western Australia.

The appellants intended to locate a site that was suitable for a pharmacy and then to find a pharmacist domiciled in WA who was carrying on a licensed pharmacy in the same area who would relocate and transfer their pharmacy to the premises. It was intended that the WA pharmacist would be the lessee, not the appellants.

To facilitate these requirements, the OTL provided that it was subject to “the lessee at the lessee’s cost and best endeavours gaining Medicare and Pharmaceutical Council of WA approval to purchase and relocate any required licences and gaining local council approval.”

Before the appellants obtained approval from the Pharmaceutical Council of WA, the respondent allowed the appellant early possession of the premises for fit out purposes. The appellant was ultimately unable to obtain all of the approvals, and at the time possession was granted, the terms of the lease had not been agreed.

The appellant argued that as it was unable to obtain the approval, the OTL was frustrated and incapable of performance. The respondent argued the appellant had waived the benefit of the approval condition and the OTL was unconditional by reason of having taken possession of the premises. The respondents accepted the appellant’s repudiation and ultimately relet the premises at a lower rent than agreed in the OTL.

At first instance, the District Court awarded the respondent $456,970 in damages, finding the appellants breached the OTL in failing to take a lease of the Premises. The damages largely comprised the difference in rent that would have been payable under the OTL and the rent payable by the new tenant.

The appellants appealed to the Court of Appeal on three grounds, including that the District Court erred in concluding that in obtaining access to the Premises for fit-out and commencing the fit-out, the appellants waived the benefit of their right to terminate the AFL if the approvals in respect of the use of the premises were not obtained.

What the Court of Appeal held

The appellants' conduct in commencing fit out with the respondent's consent was consistent with seeking to ensure the pharmacy would be able to operate once the expected approvals were obtained and the proposed lease had been executed.

The respondent had agreed to allow the appellants to commence fit out before the lease was signed and did not require it be executed before possession. The respondent was also aware that the lease was to be entered into by a local pharmacist, not the appellants and that the appellants had entered into the OTL simply to secure the premises whilst they sought to arrange for a local pharmacist to transfer their business to the premises as part of the approval conditions.

The appellant's conduct in obtaining access for fit-out and commencing the fit-out did not constitute waiver of their right to rely on the approval condition as there was no clear and unequivocal conduct (viewed objectively) that constituted an election by the appellants choosing to forgo or abandon their right to rely on the approval condition, including if those approvals could not be obtained. The appellants were simply making the Premises ready for business in the expectation that the relevant approvals would be obtained.

The appeal was allowed and the damages award in favour of the respondent was set aside.

 What you need to know

Landlords, tenants and leasing agents alike should note:

  1. the importance of ensuring leasing conditions are drafted to include what is to happen if any approvals conditions are not obtained; and
  2. the potential effects of allowing a tenant early access or possession to premises that are intended to be leased, without a formal lease having been signed.