What are essential terms in a Retail Lease? (NSW)

What are essential terms?

Essential terms form the basis of the agreement between parties. A contract that does not include the essential terms may not exist at all.

Why are essential terms important in a lease?

Pozetu Pty Ltd v Alexander James Pty Ltd (the Pozetu case) highlighted that, for a lease to exist, a lease agreement must contain essential terms, including:

details of the premises;
rent clauses; and
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?

If the lease agreement does not include the essential terms of a lease 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 and Alexander was not bound by the terms of the lease.

Can parties agree on essential terms later?

A lease must include all the essential terms for it to exist. The court is likely to render void ambiguous terms which allow the parties to 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 allowing increases in rent by the greater of either:

the current market rent; or
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.