Baker & McKenzie Comments on The Hamilton Island George Harrison Estate Decision – a Stark Reminder to All Private Island Resort Owners - By Graeme Dickson and Daniel Arapere, Baker & McKenzie

The decision reaffirms the legal position that a landlord’s refusal to consent to an assignment of lease is unlawful, where the landlord is seeking to introduce new terms to the lease and impose additional restrictions upon an assignee.

The decision also serves as a reminder of the challenges faced by owners of private island resorts, where the promotion of low-impact development standards is of paramount importance.

The issues highlighted in the decision must be carefully considered by all private island resort owners when acquiring an island resort.

Lessons learnt

The main lesson from this case is that when setting up a development, be it island resort or otherwise, the best way to achieve the desired level of uniformity and control of a development is to ensure that all of the rules and regulations are in place from the beginning and bind all subsequent owners and occupiers. This is particularly important if a developer is seeking to impose stringent architectural, environmental or other standards, which may otherwise be considered to be discretionary matters falling within the domain of the individual/occupier as opposed to the developer.

Background

The decision in Boss & Ors v Hamilton Island Enterprises Ltd [2009] QCA 229 relates to the largest house on Hamilton Island, which was built on a prime waterfront lot by the former Beatles member, Mr George Harrison as his Australian sanctuary (the Property).

Since Harrison's death in 2001, the Property, which he named Letsbeavenue, has been vacant and in the ownership of the trustees of his estate (the Trustees).

In January 2008, the Trustees contracted to sell the Property, which included the transfer of the sub-lease interest in the Property, for A$8.5 million. The sale was conditional on obtaining the approval of the lessor to the transfer of the lease. The lessor granted its approval, subject to the condition that the purchaser agreed to be bound by certain rules and regulations including the lessor's standard conditions, which applied to other leases on the island. The purchaser refused to be bound by those rules and regulations, which were not contained in the original sublease, and sought a declaration from the Court that the transfer of lease could proceed.

Hamilton Island rules and guidelines

The whole of Hamilton Island is subject to a perpetual lease from the Crown to Hamilton Island Enterprises Limited (HIE). HIE is a company controlled by the Oatley family of the Wild Oats fame. Accordingly, there are no public spaces on the island such as public roads. Houses (including the Property), apartments and other buildings on Hamilton Island are held under sub-leases granted by HIE.

As part of HIE’s administration of Hamilton Island, it requires, as part of the grant of all new sub-leases, that the sub-lessee agrees to be bound by the Hamilton Island Rules and Regulations (the Rules) and the Hamilton Island Building and Sitting Guidelines (the Guidelines).

The Rules state that the right to visit or reside on the island may be denied or rescinded by HIE at any time. It also empowers HIE to remove from the island, using reasonable force, any persons who breach the Rules, and prevent them from returning to the island. The Rules may be amended from time-to-time at HIE’s discretion, and purport to apply to all persons on the island.

The Guidelines contain development controls and design criteria, some of which are more restrictive or prescriptive than the relevant local planning laws. It also requires that any building plans must be approved by a design committee appointed by HIE.

The lease

Both the Rules and the Guidelines contain provisions that are more restrictive than the terms and conditions contained in the original 70 year sub-lease of the Property (the Lease).

The Lease itself did not contain any covenants requiring compliance with the Rules as that covenant was introduced after the Lease commenced. It was the inflexible policy of HIE to require all the occupants to comply with these standards in what they claim is for the betterment of Hamilton Island.

The Lease did, however, contain a standard restriction on assignment without first obtaining the lessor’s approval. That is, such an approval will not be withheld if the proposed assignee was financially sound and respectable.

Overlaid on the lease provisions is section 121(1) of the Property Law Act 1974 (Qld) which states that, where the lessor’s consent to the assignment of a lease is required, such consent must not be unreasonably withheld. This statutory provision applies to all leases, which contain a covenant against assignment.

The court case

The case revolves around the refusal by the buyer of the Property, Northaust Leisure Pty Ltd (Northaust) (a company controlled by Melbourne developer, Mr George Adams) to agree to be bound by the Rules and the Guidelines, which HIE sought to impose.

HIE argued that it was within its rights to refuse consent to the assignment on the ground that Northaust is not respectable due to its persistent refusal to agree to be bound by the Rules and the Regulations.

This is despite the fact that Mr Adams, the owner of Northaust, had been the sub-lessee of various apartments on Hamilton Island since 1991 and HIE offered no suggestion of any misconduct on the part of Mr Adams during that period.

HIE contended that its requirements were reasonable and in the interests of all occupants of Hamilton Island. It stated that more than 500 of the 860 residences had sub-leases expressly incorporating the Rules and the Guidelines. It also claimed that of the remaining 337 residences, 323 are apartments for which the building guidelines applicable to apartments are incorporated. That left 14 sub-leased lots on the island, which had no terms requiring the sub-lessee to comply with the Rules and the Guidelines. The Court was not persuaded.

Decision

Under the common law, the grounds upon which a refusal may be based should be concerned either with the character and personality of the proposed assignee, or with matters affecting the use or occupation of the premises.

Withholding consent to an assignment of lease, in order to obtain a collateral advantage or more advantageous contractual position, is unlawful. 

In this case, the Court found that to subject Northaust to the control of HIE, as contemplated by the Rules and the Guidelines, was to introduce terms well outside the terms of the Lease and to impose substantial additional restrictions upon the sub-lessee.

This was primarily based on the fact that the Rules and the Guidelines permitted HIE to significantly erode the sub-lessee’s right to quiet enjoyment by empowering HIE to refuse entry to, or remove people from, the island.

In addition, HIE was being asked to promise not only to comply with HIE’s rules and regulations, but with any other rules, which HIE or its successor may see fit to impose.

The Court agreed that HIE’s refusal to consent to the assignment of the Lease from the Trustees to Northaust was unreasonable in the circumstances and the assignment could therefore proceed. On appeal, the Court confirmed the decision of the lower court and ordered HIE to pay the costs of the Trustees and other parties to the proceedings.

Summary

The decision reaffirms the circumstances in which a landlord’s refusal to consent to an assignment of lease is unlawful and highlights just one of the issues that must be considered when thinking about buying an island resort.

For a thorough understanding of other issues to consider, please view our October 2008 article "Thinking about buying an island or remote resort?  If you are, read this.".

About Baker & McKenzie

Founded in 1949, Baker & McKenzie provides sophisticated advice and legal services to many of the world’s most dynamic and successful organizations through more than 3,900 locally qualified lawyers and more than 5,800 professional staff in 67 offices and 39 countries.  Baker & McKenzie is known for having a deep understanding of the language and culture of business, an uncompromising commitment to excellence, and world-class fluency in the way we think, work and behave.  (www.bakermckenzie.com)


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