In a recent decision from the Supreme Court of Victoria, Croft J
held that an arbitration clause in a retail lease does not oust the
A detailed discussion of this issue can be found on Robert
The Court also referred to a finding at first instance that the
franchisee's outlet licence is in fact a sublease. This creates
an interesting issue for practitioners acting for franchisees,
franchisors and their landlords.
A common arrangement for a franchise in Victoria involves the
taking a head lease from the land owner
granting a franchise agreement and an 'outlet licence'
to the franchisee.
In these arrangements, the franchisee is ordinarily not treated
as a tenant of a retail premises lease.
However, it is well established that an agreement in substance
creating a lease will be treated by the courts as a lease, even
though the parties choose to call it a licence.
This was considered by the Tribunal in Ireland v Subway Systems
Australia Pty Ltd & Anor Retail Tenancies  VCAT 1061
(Subway), in which Senior Member Riegler quoted the colourful words
of Lord Templeton in Street v Mountford:
"The manufacture of a five pronged implement for manual
digging results in a fork even if the manufacturer, unfamiliar with
the English language, insists that he intended to make and has made
After considering the text of the agreement, the surrounding
circumstances and other relevant authorities, the Tribunal
concluded that the outlet licence in fact granted exclusive
possession to the franchisee and was a sublease.
If, as the Tribunal's decision suggests, a franchisee's
outlet licence can be regarded as, in substance, a sublease, the
consequences could be significant.
the Retail Leases Act 2003 (Vic) (RLA) will almost always apply
to the franchisee's outlet licence. That means, for example,
that the franchisee is entitled to a disclosure statement, an
estimate of outgoings and a five year minimum term and that s 52 of
the RLA governs the franchisor's repair and maintenance
there is an interesting question over whether the head lease to
the franchisor is a retail premises lease for the purposes of the
it is controversial whether a licensee (as opposed to a tenant)
has standing to seek relief from forfeiture if the licence is
terminated. However, if the franchisee is in fact a subtenant, then
there is no doubt that it has standing to seek relief from
What happens if the terms of the franchise agreement are
inconsistent provisions of the RLA?
In the Subway case, Croft J refers to this problem and to the
fact that the franchise agreement in that case was with another
entity within the franchisor's group of companies. However,
while expressing a view that the RLA may render specific provisions
of a franchise agreement void if those provisions were inconsistent
with specific provisions of the RLA, His Honour did not need to
finally resolve this question.
The point for practitioners to note at this stage is that a
franchisee's outlet licence may well be characterised as a
sublease, which could give to the franchisee significant leverage
when the franchise agreement comes to an end. The extent of that
leverage will, as always, depend on the circumstances.
The Tribunal's determination that the outlet licence was in
fact a sublease was not appealed and Croft J expressly left the
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.
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