Call 07 834 6000

When is an oral agreement to lease binding?

31 March 2017

Disputes commonly arise where a landlord and tenant enter into an oral agreement to lease a property. They might never have signed a lease document, or the oral agreement might have been made to vary the terms of the signed lease or extend the term of the lease after it had expired. Because the agreement is not recorded in writing disputes arise as to what has actually been agreed. Another more fundamental problem is that the oral agreement may not be enforceable.

Son claims oral agreement to extend lease of family farm

In a recent case the son had signed a lease of the family farm for two years. The lease stated that, if neither party confirmed to the other by end of the lease their willingness to renew the lease, then there would be no right of renewal. The lease also stated that, if the son continued to occupy the farm after the lease expired, then he would do so as a monthly tenant and either party could end the lease by giving one month’s notice to the other.

The son continued to occupy the farm for several years after the lease expired. No renewal was signed. For a long period the son missed rent payments and underpaid the rent. In February 2016, a representative of the family told the son that they would not be continuing with the lease and in October 2016 the family served notices on the son of their intention to terminate the lease. The son applied to the court for a declaration that the notices were unlawful and for an order preventing the family from acting on the notices.

In support of the son’s application he claimed that the family had made an oral agreement with him in 2015 to renew the lease until 2018. Because there was no signed document recording the renewal of the lease, in order to be successful, the son had to rely on the “doctrine of part performance”. The son claimed that he had done work on the farm (such as repairs and maintenance, managing his herd and lawn mowing) which proved the existence of the oral agreement.

Contracts for the sale or lease of land must be in writing

The Property Law Act 2007 requires a contract for the sale or lease of land to be in writing and to be signed by the person against whom it is being enforced. (This requirement does not apply to “short term leases” which are generally leases for one year or less or periodic tenancies for periods of one year or less.) The purpose of the requirement for writing is to avoid the need to decide which side is telling the truth and exactly what has been promised. Unfortunately, it means that some people will be able to break their promises.

The doctrine of part performance has developed to alleviate the sometimes harsh consequences of the requirement for the contract to be in writing. The doctrine means that the Court is able to declare the contract enforceable if it is shown that there is an agreement (that would be enforceable but for the requirement for writing) and that the person claiming the contract is enforceable has done something which shows that person is performing the contract i.e. there has been “part performance” of the contract.

Claim of oral agreement unsuccessful

In the case mentioned above, the Court did not find in the son’s favour. The evidence showed that it was highly unlikely there was an oral agreement which would support a finding of part performance.

This case is typical of the cases that lawyers commonly deal with. It shows the importance for both landlord and tenant to ensure that the requirements of any signed lease are followed when it comes to renewing or extending their lease. It is also critical for them to take legal advice to ensure that any change in the lease terms, or renewal or extension of the lease, is properly documented.

 

 

Please email me at barbara.mcdermott@nwm.co.nz with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.


Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.

 

Barbara McDermott