Leases between Related Parties – Recent case reinforcing the need to have a formal lease in place
Published on August 24, 2022 by Matthew Rafferty
Olde English Tiles Australia Pty Ltd v Transport for New South Wales [2022] NSWCA 108 [1]
Introduction
This recent case is a reminder for parties in lease arrangements to ensure that they have a formal lease in place documenting the arrangement.
Common related party arrangements that include leases are:
- A self-managed super fund leasing a commercial property to the beneficiary’s business
- A trust or trustee leasing to the beneficiary or the beneficiary’s business
- A company leasing land from the company directors and/or shareholders
- Leases between family members
Because the parties are related, these lease arrangements may survive for many years on an expired lease or without any formalised lease at all. But while the lease arrangement can survive without a formal lease, often regulation will require formal lease documentation.
The case details
The recent case (Olde English Tiles Australia Pty Ltd v Transport for New South Wales [2022] NSWCA 108) [2] about a family business on Parramatta Road at Annandale reinforces the need to always have formal lease documentation in place, even if the parties are related.
In the case, the land was owned by the sole directors and shareholders of a company operating a tile shop. Although the same people that owned the land also owned and controlled the company, the company is a separate legal identity.
The land was compulsorily acquired by the NSW Government and the owners were awarded compensation for the land. The company was initially also awarded about one million dollars for business relocation costs.
However, as a result of appeals to the NSW Supreme Court, the business relocation costs have been taken away because the company did not hold any ‘interest’ in the land. The business occupied the land under a bare licence which was terminable at will by either party and could not be transferred to another entity. As a result, the NSW Government was not obliged to provide compensation to the company for its business relocation costs. The decision affirmed previous caselaw that found that any relationship between the owner and occupier of the land (such as being the directors and shareholders of the company) is irrelevant for the purposes of determining compensation for compulsory acquisitions. If there had been a lease in place establishing the company’s interest in the land at market value, then the result may have been different.
The owners have indicated that they will appeal this case to the High Court.
What you can do
The case highlights important considerations for those involved in any common related party arrangements. The requirements for each situation will be different, however usually, a formal lease at a market rent will need to be drafted, signed by both parties and registered. Carroll & O’Dea Lawyers are able to assist with formalising lease arrangements between related parties. You should contact us today to discuss your leasing arrangements, particularly if this article has raised issues for you.
[1]-[2] https://www.caselaw.nsw.gov.au/decision/181a2936464cc853f511f15b
