The charging clause in the contract to lease did not create an immediate equitable charge: court
The WA Supreme Court has dismissed a claim by a commercial lessor seeking to enforce an equitable charge against a lessee’s residential property.
The dispute arose from a lease agreement for a commercial property in Kenwick and centered on whether a charging clause in a preliminary contract to lease created an enforceable charge that survived the subsequent execution of a formal lease.
The plaintiff, as lessor, argued that the defendants, as lessees, granted an equitable charge over any property they owned when they signed the contract to lease in April 2014. The plaintiff sought to enforce this charge against the defendants' residential property in Gosnells to recover unpaid rent. The defendants had abandoned the leased premises in April 2019 and later entered bankruptcy in December 2019, with the plaintiff's debt included in the bankruptcy proceedings. The plaintiff maintained that the charge survived bankruptcy and remained enforceable.
The court considered two main issues. The first was whether the charging clause in the contract to lease created an immediate equitable charge. The plaintiff argued that the clause imposed an enforceable obligation upon signing, while the defendants contended it merely expressed a future intention, contingent on the execution of the formal lease. The second issue was whether the charge, if created, continued in force after the lease was executed in June 2014. The defendants maintained that the formal lease, which did not include a charging clause, replaced the contract to lease under the doctrine of merger. They also pointed to an entire agreement clause in the lease, which they argued confirmed that the lease alone governed the parties' relationship.
The court ruled in favour of the defendants on both issues. It found that the charging clause lacked the necessary immediacy to create an equitable charge. The language used—“agree to charge”—suggested a future obligation rather than an immediate encumbrance. Additionally, the clause referenced obligations arising "under the lease," reinforcing that any charge would only take effect upon the execution of the lease. The court concluded that the clause did not create an equitable charge at the time of signing the contract to lease.
Even if an equitable charge had been created, the court determined that it did not survive the execution of the formal lease. The lease was a comprehensive, 38-page document prepared by solicitors, and it omitted the charging clause. The court found that the lease was intended to replace the contract to lease entirely, making it the definitive agreement between the parties. The absence of the charging clause in the lease suggested a deliberate decision to alter the security arrangements. The lease also modified other financial terms, including replacing a security bond with a bank guarantee, which further supported the view that the lease governed the parties' rights exclusively.
The Supreme Court dismissed the plaintiff’s claim, concluding that no enforceable equitable charge was created or continued to exist.
