Is a franchisee’s outlet licence a retail premises lease?

In an interesting recent decision from the Supreme Court,[1] Croft J held that an arbitration clause in a retail leases does not oust the Tribunal’s jurisdiction.

A detailed discussion of this issue can be found on Robert Hay’s blog here and here.

The Court also referred to a finding at first instance that the franchisee’s outlet licence is in fact a sub-lease.  This creates an interesting issue for practitioners acting for franchisees, franchisors and their landlords.

A common arrangement for a franchise in Victoria involves the franchisor:

  1. taking a head lease from the land owner;  and
  2. 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 at paragraphs [13] to [41] of the decision at first instance in Ireland v Subway Systems Australia Pty Ltd & Anor Retail Tenancies [2012] VCAT 1061, in which Senior Member Riegler quoted the colourful words of Lord Templeton in Street v Mountford:[2]

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 a spade.

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 sub-lease.

If, as the Tribunal’s decision suggests, a franchisee’s outlet licence can be regarded as, in substance, a sub-lease, the consequences could be significant.

For example:

  1. the Retail Leases Act 2003 (Vic) 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 obligations;
  2. there is an interesting question over whether the head lease to the franchisor is a retail premises lease for the purposes of the RLA;  and
  3. 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 sub-tenant, then there is no doubt that it has standing to seek relief from forfeiture.

What, then, happens if the terms of the franchise agreement are inconsistent provisions of the RLA?

In the Subway case, Croft J refers 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 (see paragraphs [61] to [67]).

The point for practitioners to note at this stage is that a franchisee’s outlet licence may well be characterised as a sub-lease, 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 sub-lease was not appealed and Croft J expressly left the question open: see paragraph [61].

About Sam Hopper

Sam is a property and insolvency barrister.

View all posts by Sam Hopper

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3 Comments on “Is a franchisee’s outlet licence a retail premises lease?”

  1. Anonymous Says:

    Thanks for the blog, Sam. This issue has arisen in my practice. Because the RLA doesn’t specifically address the issue of licenses, the franchisee is often left in the dark without access to a disclosure statement. Surely franchisees are the types of persons that the RLA was intended to protect. What is your view about whether there is any momentum to amend the RLA on the subject?

    Reply

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  1. Is a franchisee’s outlet licence a retail premises lease? | Australian Law Blogs - June 19, 2014

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