Essential terms are the building blocks of a contract. A contract that does not include the essential terms may not exist at all. In this article, we set out the key issues from Pozetu Pty Ltd v Alexander James Pty Ltd (the Pozetu case) concerning essential terms in retail leases in New South Wales.

What are essential terms?

Essential terms form the basis of the agreement between parties.

For example, a lease agreement would include essential terms covering:

1. the names of the parties to the lease;
2. the payment of rent to the landlord; and
3. a description of the premises to be leased.

Why are essential terms important in a lease?

The Pozetu case highlighted that, for a lease to actually exist, a lease agreement must contain essential terms, including:

1. details of the premises;
2. rent clauses; and
3. the commencement date of the lease.

In that case, the parties had not yet agreed on the rent for the option period. As the lease for the option period had no set rent it did not exist.

What if essential terms are not included in a lease?

The Pozetu case demonstrated that if the lease agreement does not include the essential terms of a lease, the lease will not exist.

Or if an essential term is invalid or void, no lease will exist.

In the Pozetu Case, Alexander James Pty Ltd (Alexander) wanted to exit the lease during the option period. However, the parties had not yet agreed on what the rent would be for the option period and there was no way to determine the rent for the option period.

As the lease for the option period had no set rent (and was therefore missing an essential term), the lease could not actually exist. Consequently, no enforceable lease existed between the parties for the option period. Therefore, Alexander was not bound to the terms of the lease.

Can parties agree on essential terms later?

The court is likely to render void ambiguous terms letting the parties decide on an essential term later.

In the Pozetu case, the rent for the option period was to be reviewed according to the current market value (market review). The market review clause in the lease included a ratchet provision which allowed increases in rent by the greater of either:

1. the current market rent; or
2. 105% of the rent in the last year of the previous term.

However, the Retail Leases Act 1994 (NSW) renders void a leasing clause that permits two methods of calculating a change in the rent according to the highest rental outcome.

Therefore, the ratchet provision in the Pozetu case was void. As the lease contained no mechanism for the parties to reach agreement on rent, the lease did not exist.

Key takeaways

A lease must include all the essential terms for it to exist. Clauses for essential terms should not allow parties to agree on an essential clause later.

Look out for clauses which may be considered void under the Retail Leases Act, as this could lead to other unexpected consequences in the interpretation of the lease.

Here to help

Contact us for advice and assistance in reviewing your lease agreement.