A few solicitors have asked whether, in light of the High Court’s decision in Willmott last week (discussed here), tenants still need to insist on the consent of their landlord’s mortgagee before taking a lease.

The answer is ‘yes‘.

The High Court’s decision in Willmott recognises that a landlord’s liquidator has the power to extinguish a lease.  It does not give the landlord’s mortgagee (or its receiver) that ability.

Mortgagee’s consent is still very important for at least two reasons.

1. the mortgage was granted before the lease;
2. the landlord defaults;  and
3. the mortgagee wants to sell the land free of the lease.

If events 2 and 3 happen, the landlord will usually have other financial problems and is likely to have a liquidator appointed at some stage.

However, a liquidator will not necessarily be appointed, particularly if the landlord is relatively small and there is not enough money in the company to justify the cost of a liquidation.  If so, there is no liquidator to disclaim the lease, the tenant faces a simple priorities dispute between it and the landlord’s mortgagee and the mortgagee’s consent is essential, if the mortgage pre-dates the lease or (in states other than Victoria) the lease is not registered.

Secondly, if a tenant tries to set aside a disclaimer by the landlord’s liquidator, it will need to show that the prejudice to it resulting from the disclaimer is ‘grossly disproportionate to‘ the prejudice to the landlord’s creditors if the disclaimer is set aside (see ss 568B and 568E of the Corporations Act).

If the liquidator proves that the mortgagee can sell the land free of the tenant’s rights (regardless of the disclaimer) it may be very difficult for the tenant to show that it has suffered any real prejudice and set aside the disclaimer.

Similar considerations would apply to a tenant’s financier looking to take a mortgage or charge over the tenant’s 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].

Whether a landlord can pass on the costs of complying with the Building Act 1993 has been the source of a significant debate over the last year or so.

A recent article of mine on this issue has been published in the Law Institute Journal here.

In summary, the article suggests that:

1. the better view is that landlords are able to recover from tenants the costs of compliance with the Building Act 1993 (Vic), including the costs of essential safety measures, at least where the landlord has incurred the cost itself;  and
2. in light of recent consternation on the issue, either legislative amendment or a test case in the Supreme Court is required.

Some background to the debate is available here, here, here, here and here.

A colleague recently sent me this excellent article by Bill Burrough from DibbsBarker titled ‘Service station lease: Ensuring the lease is manageable and saleable’.

The article talks about:

1. leasing issues for investors considering a service station – an investment considered by some to be ‘recession proof’;  and
2. the obligation to maintain the service station infrastructure and the impact of retail leasing and environmental legislation in Queensland and NSW.

The article also says:

It is common for the landlord to install and retain ownership of the infrastructure, while the tenant is obliged to carry out repairs and maintenance throughout the term. Replacement of certain items which reach the end of their useful life is normally considered to be a capital expense and would usually be the landlord’s responsibility.

This is good advice.  However, there may be a hidden trap for Victorian practitioners in the Retail Leases Act 2003 (Vic).

Section 52(2) of that Act says:

The landlord is responsible for maintaining in a condition consistent with the condition of the premises when the retail premises lease was entered into:

a)    the structure of, and fixtures in, the retail premises; and

b)    plant and equipment at the retail premises; and

c)     the appliances, fittings and fixtures provided under the lease by the landlord relating to the gas, electricity, water, drainage or other services.

There is also an exception in s 52(3), which states that:

However, the landlord is not responsible for maintaining those things if—

(a) the need for the repair arises out of misuse by the tenant; or

(b) the tenant is entitled or required to remove the thing at the end of the lease.

Importantly, under s 94 of the RLA, the parties cannot contract out of the covenants implied by the Act, including s 52.

Consequently, if the service station is a retail premises leases and the exception in s 52(3) does not apply, the landlord is probably responsible for maintaining the service station infrastructure.  This could be costly.

It is, of course, important to check whether the lease is governed by the RLA.  For example, a lease to a major petrol retailer is likely to be excluded by the public company exclusion (see s 4(2)(c) and (d) of the RLA).  However, a lease or a sub-lease to a franchisee will probably fall under the Act.

1. there are a number of unresolved issues associated with attempting to recover the costs of maintenance from a tenant as an outgoing under s 52 of the RLA (see an earlier post here);
2. the recovery of capital costs is prohibited under s 41 of the RLA;  and
3. there is an ongoing issue over whether the costs compliance with essential safety measures can be recovered from the tenant (see earlier posts here and here).

Sam Hopper and Kate Brideoake

Last Friday, 9 August 2013, the High Court heard an appeal against the Victorian Court of Appeal’s decision in Willmott Forests Ltd (Receivers and Managers appointed)(in liquidation) v Willmott Growers Group Inc and Willmott Action Group Inc [2012] VSCA 202.

For those following the development of the case, the transcript of the hearing can be found here and the transcript of the earlier application for special leave to appeal can be found here.

The details and implications of the decision are discussed and links to other online discussions are contained in earlier posts on this blog.

Another interesting discussion of the case by Minter Ellison can be found here.

Sam Hopper and Thomas Steains