In preparing franchisee licences, the parties will need to turn their minds to whether the arrangement substantively amounts to a retail lease.
In brief: In the 2013 Supreme Court decision of Subway Systems Australia v Ireland1 reference was made to the Tribunal's finding in Ireland v Subway Systems Australia Pty Ltd & Anor Retail Tenancies2 that a franchisee licence was in fact a retail lease. In preparing franchisee licences, the parties will need to turn their minds to whether the arrangement substantively amounts to a retail lease.
What you need to know:
What is a retail premises?
The recent decision in CB Cold Storage3 has raised discussions about the meaning of "retail premises" and the widening circumstances that could satisfy the definition and thus be subject to the Retail Leases Act (Vic) 2003 (Act).
In determining whether a lease is retail in nature, one should consider the following:
- Section 4 of the Act sets out the definition of "retail premises" along with certain exclusions;
- Section 12(a) of the Act excludes leases that are less than one (1) year;
- the various Ministerial Determinations set out what are not retail premises;
- Ultimate Consumer Test upheld in the CB Cold Storage Case (see article by Jaclyn Tang for further information); and
- the various case law that set out the surrounding factors to be considered when determining whether the premises is retail in nature.
You should also keep note that it is not possible to contract out of the Act (see article by Rohan Ingleton, Partner) such that any explicit wording to that effect will not be sufficient in determining that the purported licence is not a retail lease.
What do franchise arrangements look like?
Traditionally, the franchise relationship is structured in such a way that the franchisor enters into a head lease with the owner of the property. The franchisor will then subsequently enter into a franchise agreement with the franchisee and grant them a licence to the property.
In 2015 the revised Franchising Code of Conduct was issued and regulates the conduct of parties to the franchising arrangement.
Why could franchisee licences be considered retail leases?
It is widely understood that "If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck." In essence, whilst the parties may choose to call or categorise an agreement as a licence, if on the balance, the substance and surrounding circumstances support the finding that it is a lease, then it should be treated as such.
Parties to a franchisee licence should have regard to the following, amongst other considerations, which would be considered when determining if the licence amounts to a lease:
- the terms of the agreement;
- whether exclusive possession has been granted;
- the intention of the parties;
- the circumstances of the transaction; and
- relevant case law.
As such, if the licence is substantively a lease and meets the definition of "retail premises" then the Act will apply to those purported licences.
Whilst the appeal of the VCAT decision did not consider the validity of the licence being characterised as a sub-lease, parties in a franchise arrangement should turn their mind to whether their purported licence is in fact a lease and in particular, a retail lease. Ultimately, if it acts like and looks like a lease then it is likely to be a lease in substance and the Act may well apply.
1  VSC 550
2  VCAT 1061
3 IMCC Group (Australia) Pty Ltd v CB Cold Storage Pty Ltd  VSCA 178
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Madgwicks is a member of Meritas, one of the world's largest law firm alliances.