NSW Retail Leasing Update – January 2007

On November 13 2006, the Administrative Decisions Tribunal (the Tribunal) handed down its decision in the matter of Armstrong Jones Management Pty Ltd v Saies-Bond & Associates Pty Limited [2006] NSWADT 323.

The Armstrong Jones decision is likely to become a leading authority in retail lease disputes which involve allegations against a landlord of:

• pre-lease misrepresentations

• unconscionable conduct, and

• failing to mitigate.

Armstrong Jones Management Pty Ltd (the Landlord) granted Saies-Bond & Associates Pty Ltd (the Tenant) a five-year lease of a shop in a newly-established 'bulky goods' style retail shopping centre.

The Tenant, a retailer of Balinese style furniture, did not meet turnover expectations and fell into arrears. The Landlord terminated the lease by re-entering the premises and changing the locks. The shop had not been re-let by the time the claim was heard.

The Landlord commenced action in the Tribunal claiming the arrears of rent and future loss (damages). The Tenant filed a defence asserting that the Landlord had failed to mitigate its loss and a counterclaim alleging pre-lease misrepresentations, misleading and deceptive conduct and unconscionable conduct.

Armstrong Jones focused on the false and misleading pre-lease misrepresentations by the Landlord's agent to the Tenant, which ultimately induced the Tenant into entering into the lease.

Of the 13 or so oral and written misrepresentations asserted against the Landlord, the Tribunal only sustained one. Despite the high attrition rate, the Tribunal still determined that the effect of the misrepresentation was to:

• release the Tenant from liability to pay unpaid rent, and

• repay money drawn down on the bank guarantee.

The Tenant asserted both oral and written misrepresentations, which collectively 'glowingly' described the centre as a place for the Tenant to establish a business along with other high quality tenants.

The Tenant alleged nine instances of oral pre-lease misrepresentations by the leasing agent.

The Tribunal approached each of the alleged oral representations individually by asking:

1. what the leasing agent actually said
2. whether it was false or misleading
3. whether he knew, or ought to have known, that it was false or misleading, and
4. whether the Tenant relied upon the representation.

Upon examining each oral representation separately and applying the above test, the Tribunal found that eight of the nine categories were not false and/or misleading either because:

• there was no specific representation made by the agent on the evidence available to the Tribunal, or

• although a representation was made by the agent, there was no evidence to suggest that the agent knew the representation to be false or suspected that it was false at the time he made it, or

• although a representation was made by the agent, it was not a 'material' misrepresentation and thus not relied upon by the Tenant.

The only oral representation found by the Tribunal to have been made and be false and/or misleading at the time it was made was that 'Harvey Norman was a prospective tenant' in the centre (Harvey Norman representations).

The Tenant also asserted that it relied on misrepresentations contained in the disclosure statement and in the brochure (documents) promoting the centre when entering into the lease.

The allegations were that the brochure represented that:

• the managers of the centre were experts who could be trusted

• the huge population and household growth on the doorstep of the centre

• the Tenant's business would flourish, and

• there was significant signage to the centre to maximise exposure to attract patrons.

The Tribunal applied the same criteria to the written representations as it did the oral instances, examining each alleged misrepresentation individually and in detail.

It found that, although the Tenant relied on the material contained in the documents:

• the first and fourth alleged misrepresentations were not false to the knowledge of its maker

• the second was not false

• the material relied upon to establish the third, does not support the allegation it was in fact made

and therefore, the Tenant was not entitled to compensation under section 10 of the Retail Leases Act (the Act).

The Tribunal awarded damages to the Tenant as the Harvey Norman representations were found to be instrumental in inducing the Tenant into the lease so much so that had the representation not been made, the Tenant would not have entered into the lease.

In determining the Harvey Norman representations, the Tribunal also placed great weight on the comprehensive (but not always coherent) notes taken by the Tenant either during, or shortly after the many conversations with the Landlord's agent. The leasing agent did not take any notes of conversations with the Tenant's representative (despite his 10 years of experience).

This put the Landlord at a distinct forensic disadvantage. Wherever the Tenant's notes coherently contradicted the agent's oral testimony, the Tenant's position, when supported by the Tenant's notes, was preferred. Indeed, the notes were so significant, particularly in respect of the Harvey Norman representations, that it is fair to say the Tenant prevailed in this litigation due to the serious shortcomings in the leasing agent's record keeping practices.

Lessees' disclosure statements are an important weapon for defending allegations of pre-lease misrepresentations.

Section 10(2A) of the Act states that:

The disclosure statement, which was in the prescribed form, provided that apart from any statements or representation set out in the statement, no other promises, representations, warranties or undertakings (other than those in the lease) had been made by the Lessor… in respect of the premises or the business to be carried out on the premises (Waiver).

The Landlord in Armstrong Jones argued that because of this term (and because the Tenant had taken legal advice), the Tenant should have specified any statements or representations relied upon in the disclosure statement and was 'estopped' from relying on any of the alleged misrepresentations as grounds for relief.

The Tribunal did not entirely agree with this approach but it did reject recent authority that attempted to nullify this defence (Gizah Pty Limited v AXA Trustees Ltd [2002] NSWADT 116). Instead, it narrowly construed the term. It found that it only relates to representations in respect of the premises or the business to be carried out on the premises. The Harvey Norman representations fell outside the scope of the waiver as they did not relate to the 'premises' or the business, but related to premises nearby.

The good news for landlords is that the failure by a lessee to include a representation in its disclosure statement can in fact provide an answer for the landlord to misrepresentation claims provided the representation is in respect of the premises or the business to be carried out on the premises.

What Does It All Mean?

• ultimately, it is not a matter of whether the representation was made. What is important is that it was false at the time it was made and that the tenant in fact relied upon it to the extent that it was instrumental in inducing the tenant to enter into the lease

• failure to take comprehensive and coherent notes of lease negotiations places owners at a huge disadvantage in disputes. Always take notes of all conversations with prospective tenants

• leasing agents need to be counselled and monitored to ensure that record keeping occurs and that it is contemporaneous and coherent. The balance of power between owners and their retail tenants means a leasing agent who does not meet this standard is a liability, no matter how persuasive or effective he/she is in landing deals

• disclosure statements are to the benefit of landlords and tenants and not just a nuisance. The disclosure statement can provide a good defence to allegations concerning misrepresentations about the premises or the business to be carried out in it.

Was It Unconscionable, Or Merely Unjust Or Unfair?

Allegations of unconscionable conduct are commonplace in retail lease disputes. They have, to date, represented the great unknown that has given rise to considerable uncertainty for landlords. The decision in Armstrong Jones provides a useful examination of the standard of conduct required to cross the 'unconscionable' threshold and, in the process, also provides certainty and some welcome relief for landlords.

In Armstrong Jones, the Tenant, cited the following:

• pressure by the Landlord to sign the Tenant's disclosure statement

• failure to advise about delays to the opening of the shopping centre that would impact on the lease commencement date

• failure to advise of unforseen risks associated with taking on a new tenancy in the shopping centre's development

• failure to allow the Tenant to remedy alleged breaches of the lease (ie. not provide notice of intention to re-enter)

• failure to warn the Tenant that it would be locked out of the premises, and

• a refusal by the Landlord to negotiate in good faith.

Despite the Landlord re-entering the premises without notice, the Tribunal found that a significant period of time was in fact made available for the Tenant to remedy its breaches and that there was an express right, under the lease, for the Landlord to terminate for default in payment of rent that subsisted for 14 days or more (without requiring notice).

The Tribunal agreed that the Tenant had been targeted as a 'problem tenant' and that other tenants who were in default of payment of rent did not attract the same degree of attention but there was no evidence to suggest that this conduct was anything more than 'unfair'. Similarly, the Tribunal found that there was not enough evidence to satisfy the allegation that the Landlord refused to negotiate in good faith.

The Tribunal found 'significant shortcomings' by the Landlord to ensure that the Tenant has adequate financial capacity to take on its tenancy and the Landlord's conduct was described by the Tribunal as 'negligent and/or incompetent and/or in breach of standards of sound management practice'. However, the Tribunal decided that it could not be said that the Lessor's (and its agent's) conduct was of the standard required of unconscionable conduct, that is 'highly unethical' or involving a 'high degree of moral obloquy'.

The only claim that the Tribunal upheld as unconscionable conduct stemmed from the misrepresentation made by the Lessor's agent regarding Harvey Norman (see Pre-lease misrepresentations - Landlords beware - it only takes one).

When a tenant falls into arrears, the Armstrong Jones decision confirms that landlords may take a strict approach to enforcing their rights under a lease against any tenant in default. 'Unfair' treatment alone falls short of unconscionable conduct. For a landlord to be 'unconscionable', conduct must go beyond poor professionalism or management failures. It requires 'highly unethical' behaviour involving a 'high degree of moral obloquy'. (Yes, we have looked up 'obloquy' and it means abuse or detraction).

Retail leases are highly unlikely to set out a standard for shopping centre management. It is not however the case that the tenant will have no remedy in instances of serious or intentional neglect or recklessness. In Armstrong Jones, the Tribunal took the opportunity to put shopping centre owners and managing agents on notice of a remedy for seriously poor centre management. The Judgment stated that if the Landlord:

… failed to establish or maintain the centre as a moderately attractive place to visit, or to arrange any significant publicity for it, with the entirely foreseeable result that some or all of the tenants failed to achieve sufficient sales to pay their rent and thereby became vulnerable to eviction, the Tribunal might well hold that this amounted to unconscionable conduct...

Armstrong Jones Management Pty Ltd v Saies-Bond & Associates Pty Ltd [2006] NSWADT 323 at 335.

In the absence of contractual rights, unconscionable conduct may provide a minimum standard for shopping centre management.

The Armstrong Jones decision includes a useful summary of much of the law on mitigation in a Retail Lease context and an example of its application. This is discussed below.

The duty to mitigate provides that:

…a plaintiff who acts unreasonably in failing to minimise his loss from the defendant’s breach of contract will have his damages reduced to the extent to which, had he acted reasonably, his loss would have been less.

Karaconinakis v Big Country Development Pty Limited [2000] NSWSCCA 313 per Giles JA.

The Landlord claimed approximately $360,000.00, comprising:

The Landlord relied on actions taken by its managing agent to find a replacement tenant. The managing agent had:

• requested expressions of interest from 29 'bulky goods' retailers selected from his list of retailers who might be appropriate for the premises

• placed a single-page advertisement in a publication advertising 'bulky goods', and

• sent letters of offer to four prospective tenants and negotiated with an unspecified number of other prospective tenants.

The Tenant made the following submissions in reply:

• the advertisement did not make special mention of the premises. Rather, it was an advertisement of three 'bulky goods' centres, one of which happened to be the centre in question

• each letter of offer (with one exception) was sent more than six months after the Landlord had terminated the lease

• an advertisement had not been placed on the website www.propertylook.com.au

• the Landlord did not erect a 'For Lease' sign outside the shop. Instead, the landlord erected a sign outside the shop stating a 'new exciting retailer' was 'coming soon'. This sign was untruthful and had the effect of discouraging enquires, and

• very little had been done to try to re-let the premises in the period immediately following the termination.

The Landlord relied upon Giles JA's judgment in Karaconinakis v Big Country Development Pty Limited [2000] NSWSCCA 313:

The Tribunal accepted that a tenant has to prove a landlord has failed to mitigate and that the standard of a landlord's duty to mitigate is 'not high'. Nevertheless, it found that the Landlord had not adequately mitigated its loss, as:

• the advertisement made no specific reference to the premises

• the vacancy was not advertised on the 'propertylook.com.au' website, and

• the sign outside the premises suggested that no tenant was required.

The Tribunal calculated the effect of the Landlord's failure to adequately mitigate upon the Landlord's damages claim. This was done by applying the rule that a landlord's damages claim (being principally for lost rent) should be reduced by the:

'realistic rental that the landlord would have received had he mitigated his loss'.

Austin J, [29], Young v Lamb (2) [2001] NSW SC 1014.

The Tribunal accepted the Landlord's estimate of the rent achievable for the premises ($80,000.00 per annum) and calculated that the realistic rent the Landlord would have received, had it mitigated its loss, was:

• nil for two months from the date of termination (being time in which to find a new tenant), and

• thereafter rent in the same amount as the Landlord's estimate (ie. $80,000.00 per annum).

Failure to mitigate the Landlord's loss resulted in a reduction of the Landlord's damages claim of approximately $60,000.00.

Mitigation 'Tips And Traps'

• commence efforts to re-let the vacant premises immediately upon termination

• advertisements of the retail centre as a whole will not help; the particular vacancy should be nominated

• advertise the vacancy online and give particular consideration to advertising the vacancy on www.propertylook.com website or other prominent website(s) advertising commercial leases and property in Australia, and

• a 'For Lease' sign is preferable to a sign that a 'new exciting retailer' is 'coming soon'. The latter may be a 'face saver' but it runs counter to the duty to mitigate. If a 'For Lease' sign is not acceptable, no sign at all may be the preferable option.

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.