Australia: Shopping centre tenants who stop trading: Are damages an adequate remedy for landlords?

Last Updated: 26 February 2016
Article by Katie Miller and Grace Hurley

Where a shopping centre tenant makes the decision to cease trading after business failure, there is often uncertainty for landlords about what remedies are available. Can the landlord obtain a mandatory injunction requiring the tenant to recommence trading from the premises? Are the landlord's rights limited to damages for breach of lease?

Generally, the courts are reluctant to order specific performance of an obligation to carry on a business. An exception to this rule has developed where the landlord can show "exceptional circumstances" justifying such an order 1. However, there has been limited guidance from the courts as to what constitutes "exceptional circumstances".

The Supreme Court of Queensland recently considered this issue in Sentinel Countrywide Retail Ltd v PC Emerald (Qld) Pty Ltd [2015] QSC 348.

Facts

Sentinel Countrywide Retail Ltd (the Landlord) was the owner of a shopping centre at Emerald and entered into a seven year lease with PC Emerald (Qld) Pty Ltd (the Tenant) for premises to operate a pizza store (the Lease). The Tenant was a one dollar company that was part of the Retail Food Group.

Ten months into the term of the Lease, the Tenant was incurring substantial losses on the operation of the store and made a commercial decision to cease trading from the premises. The Tenant informed the Landlord that the shop was "operationally unsound". The Tenant continued to pay rent and sought to negotiate a surrender of the Lease. The Landlord applied to the Supreme Court of Queensland for a mandatory injunction, requiring the Tenant to keep the shop open for business during the "Trading Hours" of the centre as provided for by the Lease.

In order for the court to exercise its discretion to grant a mandatory injunction, the Landlord had to satisfy the court that:

  • damages would be an inadequate remedy; and
  • that there are "exceptional circumstances" justifying the order.

Damages an inadequate remedy?

The Landlord submitted that damages would be an inadequate remedy because:

  • closure of the store would have an unquantifiable detrimental effect as it would adversely impact the centre's appeal and may directly result in customers going to another centre; and
  • there was a significant risk that the Landlord would not be able to recover damages from the Tenant, as the Tenant was a one dollar company without any substantial assets and the Landlord had not obtained guarantees from the directors or a company related to the Tenant.

Justice Applegarth dismissed the Landlord's argument that damages would be unquantifiable, finding that difficulty to quantify damages does not mean that damages are not an adequate remedy. In relation to quantifying the Landlord's loss, Justice Applegarth acknowledged that a partially empty centre may be less appealing to customers and potential tenants, but was not satisfied that the pizza store was a drawcard in attracting customers to the centre. This was the case as 90% of the Tenant's trade occurred when most other stores in the centre were closed.

Addressing the risk of not being able to recover damages from the Tenant, Justice Applegarth took the view that although damages may be an inadequate remedy for the Landlord in this respect, the Landlord assumed this risk when they took the benefits and burdens of a lease with a one dollar company without obtaining guarantees from the directors or a company related to the Tenant.

Exceptional circumstances

The Landlord submitted that a combination of the following factors established "exceptional circumstances":

  • an order could be drawn by the court with sufficient specificity that would not require the court to hear indefinite applications in relation to compliance with the order;
  • the Tenant's forecasting of future losses may not be an accurate guide; and
  • the Tenant's loss would be roughly the same if the Tenant:
    • was ordered to recommence trading from the premises; or
    • continued to pay rent and outgoings without trading.

The central issue for Justice Applegarth was whether the Tenant should be required to continue operation of a business operating at a loss for an extended period of time. In this regard, Justice Applegarth noted that it would be oppressive and contrary to public policy for the court to interfere with the Tenant's commercial decision to cease operating a loss-making business.

Taking a practical view, Justice Applegarth outlined that if the Tenant were forced to continue trading, they would likely incur liabilities to creditors and employees that they might not be able to meet. This would give rise to the possibility of the directors of the Tenant engaging in insolvent trading. As such, an order requiring the Tenant to continue trading may be in conflict with the duties of the directors.

Ultimately, in the absence of exceptional circumstances, Justice Applegarth dismissed the Landlord's application.

Lessons learned

  • Landlords should be aware that where a tenant's business is unsuccessful and the tenant makes the decision to cease trading, the most likely remedy for a landlord will be an award for compensatory damages. Where the tenant is an anchor tenant or "drawcard tenant" and the business would continue to be viable, there is more scope to argue for the court to find that there are "exceptional circumstances" to grant a mandatory injunction requiring the tenant to continue to trade.
  • The decision further highlights the importance of landlords undertaking thorough due diligence on prospective tenants before entering a lease, to ensure that the tenant has sufficient capital and assets. Where a tenant is a one dollar company, the landlord should seek to obtain a guarantee from a company related to the Tenant or from the company directors, or another person or company that holds sufficient assets to satisfy an order for damages.

Footnote

1 For example, see Diagnostic X-Ray Services Pty Ltd v Jewel Food Stores Pty Ltd (2001) 4 VR 632

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

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Authors
Katie Miller
 
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