Commercial Lease Agreement

Lease

The owner of real estate may give possession of that real estate to another person, such that the other person has the right to use and enjoy the real estate to the exclusion of the entire world, including the owner.

Such a right is recognised as a proprietary right and thus protected by the law. Ownership does not pass, merely possession, and the owner retains the right to reclaim full enjoyment of the property at the expiration of the lease, a right known as the right of reversion.

The two key elements which arise from this description of a lease are:

• Exclusive possession – The lessee must be exclusively entitled to enjoy the premises to the exclusion of all others, including the lessor.
• Definite time span – The lease must be for some definable period of time. This might be a fixed term, such as one year, or a periodic term, such as from week to week.

If the arrangement fails to satisfy either of these basic criteria it will not qualify as a lease and will be regarded as a licence, which is merely a contractual relationship which does not attract the benefits available to a proprietary interest.

Lease or tenancy

Whilst there may have been a difference in the past between the meaning of lease and tenancy, the terms are now effectively interchangeable. To lease premises is the same as to rent. The landlord is the same as the lessor, and the tenant is the same as the lessee. This commentary uses the word lessor to describe the owner of the premises or landlord and lessee to describe the tenant.

Lease or licence

A lease is as a proprietary right, and, as such, enjoys the protection of the law. The lessee is entitled to enjoy the right until it expires and may enforce that right against the entire world. A licence however is merely a contractual right that exists between the parties to the contract. It is not enforceable against third parties and may be revoked by the grantor, subject to contractual remedies available to the licensee.

A person who enters onto land without even the licence of the owner, such as a squatter, or remains on land after a licence has been revoked may be subject to the summary procedure for possession. This is available even if the name of the occupier is unknown, but should not be used if there is a real question as to whether the occupier is in possession pursuant to a lease.

Duration

Whilst there is little doubt that a lease for one year is of a fixed duration, a lease from week to week may go on forever. However such an arrangement is still regarded as a lease for a fixed duration as it is capable of termination by either party at the end of each repeating period. An arrangement ‘for the duration of the war’ or ‘until the land is required by the council’ is not for a fixed or determinable duration and is not a lease. It is therefore a licence.

Commencement date

A lease must have a specified or definable commencing date. A lease that does not have a commencing date capable of precise definition will be void.

Formality

Validity

The common law has traditionally required proprietary rights to be established in a formal way, indeed the fundamental requirement in relation to interests in land is that they be created by deed, which is a document formally executed by seal. An arrangement that does not satisfy this level of formality will be invalid or void at law.

However there has always been an exception for leases for a period of less than three years, which may be created orally. Such a lease will be a valid legal lease provided that one of the parties can satisfy the court of the essential terms.

Enforceability

Even if the lease satisfies the legal test for validity, the modern equivalents to the statute of frauds require contracts relating to land to be in writing and signed by the parties. If not, such arrangements will be unenforceable, which means that whilst they may validly exist, they cannot be enforced in a court. However it has been held that this requirement does not apply to a lease, but rather to an agreement to lease, which is the relevant ‘contract’.

However the doctrine of part performance has always been an exception to this restriction and if the court is satisfied that the parties have partly performed the lease then it will be enforceable, notwithstanding that there is no written and signed document.

A lease for a period of more than three years which is not in the form of a deed will be regarded by the law as void. To overcome this possibility, the concept of an equitable lease was developed.

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