Out­go­ings — review of let­table area 

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In brief

Broad­ly speak­ing, the def­i­n­i­tion of the let­table area in a lease must be appro­pri­ate­ly draft­ed and scru­ti­nised to ensure that it encap­su­lates the inten­tion of the land­lord and the tenant.

This is para­mount in regard to a land­lord’s abil­i­ty to appor­tion costs to and recov­er costs from ten­ants and weighs heav­i­ly on the pro­por­tion of costs attrib­ut­able to a build­ing payable by a tenant.

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The case

In the deci­sion Ray Mullins & Sons Pty Ltd v Sky­corp Invest­ments Pty Ltd [2011] WAS­CA (Ray Mullins Case), the land­lord and the ten­ant were in dis­pute in regard to, amongst oth­er things, the pre­cise area of the build­ing occu­pied by the ten­ant and oth­er occu­pants in the building.

This point was sig­nif­i­cant because the area occu­pied by oth­er occu­pants was a cru­cial fac­tor in deter­min­ing the let­table area of the build­ing and, there­fore, the pro­por­tion of out­go­ings payable by the tenants.

Lease definitions

In essence, in the dis­put­ed lease, the Floor Area of the Build­ing was defined as the aggre­gate floor area of the Let­table Parts of the Build­ing as cer­ti­fied by the land­lord from time to time using the lat­est method of mea­sure­ment pub­lished by the Prop­er­ty Coun­cil of Aus­tralia Lim­it­ed for com­mer­cial retail premis­es (cita­tions omit­ted). This def­i­n­i­tion is what one would expect to see in a lease.

The expres­sion Let­table Parts was defined as those parts of the build­ing des­ig­nat­ed by the land­lord from time to time as being intend­ed for let­ting.

Letting

In the Ray Mullins Case, the term ​‘let­ting’ was not defined in the dis­put­ed lease and it was held by Buss JA, Newnes and Mur­phy JJA that the pre­cise mean­ing of ​‘let­ting’ in a par­tic­u­lar case will depend upon the con­text in which the word is used.

Sig­nif­i­cant­ly, it was held that the term ​‘let­ting’ with­in the def­i­n­i­tion of Let­table Parts was con­fined to the grant­i­ng of leas­es or ten­an­cies in the strict sense. The term ​‘let­ting’ in the dis­put­ed lease did not extend to licences, includ­ing licences for exclu­sive pos­ses­sion, unless the licence was, as a mat­ter of law, a lease or tenancy.

Test

Their Hon­ours held that, on its prop­er con­struc­tion, whether a part of the build­ing is with­in the def­i­n­i­tion of Let­table Parts is a ques­tion of fact and an objec­tive test is to be applied. 

In cir­cum­stances where there is no cer­tain­ty behind the def­i­n­i­tion of ​‘let­ting’ one must look at the par­tic­u­lar part of the build­ing that is des­ig­nat­ed by the land­lord as avail­able for leas­ing or as set aside with the object or pur­pose of being leased.

The con­sti­tu­tion of a tenancy

Var­i­ous arrange­ments includ­ing ​“licences” of store­rooms and out­door areas were con­sid­ered in deter­min­ing whether those areas formed part of the Let­table Parts of the building.

In decid­ing whether parts of the build­ing con­sti­tut­ed a lease or ten­an­cy or a licence or oth­er infor­mal arrange­ment, their Hon­ours con­sid­ered whether the rel­e­vant occu­piers were grant­ed by the land­lord exclu­sive pos­ses­sion for a fixed or peri­od­ic term cer­tain in con­sid­er­a­tion of a pre­mi­um or peri­od­ic payments.

Result

When draft­ing a lease, the let­table area of the build­ing must be defined in detail to include what the land­lord will, in prac­tice, use to deter­mine the let­table area of the space in the building.

If it is intend­ed that the let­table area of the build­ing is to include areas the sub­ject of a licence, the def­i­n­i­tion of let­table area should explic­it­ly pro­vide for licences.

From a ten­an­t’s per­spec­tive, under­stand­ing the areas that the land­lord will clas­si­fy as form­ing part of the let­table area of the build­ing will impact on the pro­por­tion of the out­go­ings that a ten­ant is liable to pay. The more area attrib­ut­able to the let­table area of the build­ing will result in a low­er pro­por­tion of out­go­ings payable by a tenant.