Australia: Permitted use for retail premises: it is allowed but is it exclusive?

It's that 'light bulb' moment for a prospective tenant when it sees a gap in the market (in this context, a retail space) and intends to operate a business with exclusive rights to sell a particular item or service. However those on each side of the leasing transaction may have different views as to whether there is actually an "exclusive" right or, if there is such a right, the extent of that right.

Two cases in point

Khao Thai¹ (the tenant) proposed to open a Thai/Malaysian take away business in the popular Sydney Central Plaza. The tenant asked the landlord for exclusive rights to be the only vendor of Thai/Malaysian cuisine. The landlord did not agree but, to provide some comfort to the tenant during negotiations, specified in the letter of offer to the tenant, "it is our intention not to have more than one operator of Thai and Malaysian food".

The tenant took the landlord's representation on face value and accepted the letter of offer. However the landlord's representative tempered the earlier statement by issuing a further letter to the tenant saying, "...while we have stated that it is not our intention to have more than one operator of Thai and Malaysian food, this does not confer exclusivity in relation to Thai and Malaysian food".

The tenant commenced operations convinced that he would be the only vendor of Thai and Malaysian cuisine. Within a short time, with his sales falling, he realised that other food operators within the centre were selling a similar (if not the same) style of cuisine. Was the tenant induced by the landlord into signing the lease under the false pretence that the tenant would be the only operator of Thai/Malaysian cuisine?

In a South Australian case² concerning a pizza bar, the permitted use under the lease was a 'Take-away Café'. When Gallo (the tenant) began to struggle to pay rent, he complained to the landlord that another operator in the centre, trading as a bakery, was selling take-away pizzas and competing with the pizza bar.

Gallo argued that that he was entitled to compensation from the landlord on the basis that the landlord had made a pre contractual agreement to provide the tenant with the exclusive right to sell pizzas and, pursuant to s38(1)(d) of the Retail and Commercial Leases Act 1995 (SA), the landlord did not take reasonable steps to prevent the competitor's interference with that exclusive right.

The upshot

In the case of Khao Thai, the tenant commenced proceedings in the NSW Administrative Decisions Tribunal. The Tribunal considered the statement in the letter of offer to be crucial. The landlord argued that, although its statement expressed its current intention not to allow an operator of a similar nature to trade within the plaza, this was subject to change at the landlord's discretion.

The Tribunal disagreed, concluding that the statement, having regard to the ordinary meaning of the words used, provided that the tenant would be the only vendor of such cuisine. The Tribunal went on to say that this condition was intended to have contractual effect and formed part of the agreement. The landlord was found to have breached the "exclusivity" condition and ordered to pay $45,000 in lost profits.

In Gallo's case, the Court rejected the tenant's claim that he could rely on the relevant section in the legislation. Section 38(1)(d) of the Retail and Commercial Leases Act 1995 (SA) refers to a landlord's failure to take reasonable steps to put a stop to anything within the landlord's control which causes significant disruption to a tenant's trade.

The Court held that the landlord's failure to take steps to stop the competitor from selling pizza did not constitute a failure to take all reasonable steps under section 38(1)(d). That section is directed towards preventing significant disruption of a physical nature and is not intended to protect a tenant from competition from another trader's activities.

Key considerations

Both cases highlight the importance of ensuring that lease terms precisely reflect the intended use of the premises and whether that use is to be (and remain) exclusive to the tenant.

Tips for landlords:

• Landlords must be careful at the negotiation stage not to induce, or be seen to be inducing, prospective tenants into signing a lease on the basis of any statement which is not reflected in a specific lease term. (As shown in the Khao Thai case, the landlord could not escape liability by claiming that it was simply stating the "current position" in relation to retailers).
• Agreements which comprise an offer by a landlord and acceptance by a prospective tenant can be contractually binding on the parties, even if the particular terms do not make their way into the lease document.
• Landlords need to be very specific in letters of offer and ensure that their intentions are stated in ordinary language so as to not be misconstrued.
• Landlords must ensure that lease terms accurately reflect the tenant's specific use of the premises.
• Landlords should consider restricting the permitted use under the lease in order to control activities which the tenant can undertake at the premises.

Tips for tenants:

• Tenants should seek clarity from the landlord regarding exclusivity and should realise that, if a lease does not express the permitted use to be exclusive, then in most cases the landlord will not be prevented from changing the tenancy mix within the centre. The fact that no other retailers are trading in the tenant's particular use when the tenant starts trading may not stop a landlord from granting a lease to a competitor in the future.
• Tenants should ensure that the permitted use is broad enough to adequately cover their core business and any ancillary activities they wish to undertake.
• A tenant should avoid a 'permitted use' which is so restrictive that it could prevent any possibility of assigning the lease or sub-letting the premises.

Footnotes

¹Khao Thai Pty Ltd v Coles Myer Properties Holdings Ltd, Administrative Decisions Tribunal of New South Wales, Donald B, Judicial Member, 21 May 2001, Khao Thai Pty Ltd v Coles Myer Properties Holdings Ltd (No. 2), Administrative Decisions Tribunal of New South Wales, Donald B, Judicial Member, 12 November 2001.
²S & A Gallo Pty Ltd v Hollowood Pty Ltd (2012) 114 SASR 127.

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.