Commercial leasing case update: NB2 Pty Ltd v P.T. Ltd [2018] NSWCA 10

On 14 February 2018, the New South Wales Court of Appeal handed down its decision in the case of NB2 Pty Ltd v P.T. Ltd [2018] NSWCA 10 (NB2 Case).  This decision serves as a reminder of the importance for retail lessees of ensuring that any matters on which they rely in entering into a lease are clearly and effectively addressed in the lease.

The Facts

A short summary of the relevant facts is as follows:

1. In 2009 and 2010, NB2 Pty Limited (the Tenant) negotiated a lease (Lease) for a retail fruit and vegetable shop in the Fresh Food Precinct of the Miranda Westfield Shopping Centre from the owner of the centre (Landlord).
2. During the negotiations, the Tenant attempted to obtain exclusivity for retailing of fresh fruit and vegetables in the shopping centre. After numerous discussions over a number of months, the Landlord agreed to include a clause in the Lease that the Tenant would be provided with exclusivity only in the Fresh Food Precinct of the shopping centre, and that the exclusivity would only extend to the Tenant being the only ‘independent’ fresh fruit and vegetable retailer.
3. During the negotiations, the Tenant stated that they would pay higher rent on the basis that they would not have competition. The Landlord only stated in response that the rent would be higher based on the fact that at that time there were no other such retailers in that part of the shopping centre.
4. The negotiations for the Lease were completed on or about 27 October 2009.
5. On 19 April 2010, the Landlord gave its consent for a plan for renovations submitted by the Franklins supermarket that leased a shop in the Fresh Food Precinct (Franklins). The renovations included an area for the sale of fresh fruit and vegetables, which Franklins did not previously sell.
6. The Lease was signed on 7 May 2010.
7. Franklins’ renovations were completed in March 2011 and it then began to sell fresh fruit and vegetables, in competition with the Tenant.
8. In 2012, the Tenant failed to make payments of rent. The Landlord then terminated the Lease on 31 July 2014 due to the continued non-payment of rent.

What were the issues?

The Tenant alleged that the Landlord made the following representations during the negotiations for the Lease:

1. under the Lease, the Tenant would be in a position to capture the whole market for fruit and vegetable retailing in the Fresh Food Precinct of the shopping centre;
2. under the Lease, the Tenant would be the only retailer of fresh fruit and vegetable produce in the shopping centre aside from Woolworths and any other new fresh fruit and vegetable retailer at the other end of the shopping centre, in respect of which the Tenant would have a right of first refusal; and
3. further, or in the alternative, the Tenant would have the right to be the sole independent specialty fruit and vegetable retailer in the Fresh Food Precinct,

(Representations).

The Tenant argued that the Landlord had breached sections 51AC and 52 of the former Trade Practices Act 1974 (Cth) (TPA) (now sections 20 and 18, respectively, of Australia Consumer Law set out in Schedule 2 to the Competition and Consumer Act 2010 (Cth)), which relate, respectively, to unconscionable conduct and misleading and deceptive conduct in trade or commerce.  The Tenant argued that:

1. the Landlord made the Representations, and the Representations became misleading and deceptive at the time that the Landlord became aware that Franklins intended to begin supplying fresh fruit and vegetables after completing its renovations, and the Landlord did not disclose that information to the Tenant; and
2. in the alternative, even if the Representations were not made, the Landlord engaged in misleading and deceptive and unconscionable conduct because they did not disclose their knowledge of Franklins’ plans, even though the Landlord had:
   • encouraged the Tenant to enter into the Lease on the basis that it would be able to capture the whole of the market for retail fruit and vegetable produce in the Fresh Food Precinct;
   • had negotiated the rent payable on this basis;
   • knew, or ought to have known, that as a result of Franklins’ planned renovations the Tenant would not be able to capture the whole of the relevant market; and
   • knew, or ought to have known, that the Tenant would spend approximately $1.5 million on renovations of its shop after it had signed the Lease.

What was the outcome?

The Court of Appeal decided that there was no misleading and deceptive conduct on the part of the Landlord.  This was because:

1. the first and second Representations were not in fact made by the Landlord. The Tenant had asked repeatedly for the type of exclusivity described in these Representations, but the Landlord had not agreed to those Representations with the Tenant.  The Landlord had always maintained that the extent of the exclusivity that it could provide was as stated in the Lease; and
2. the third Representation was made by the Landlord but did not have the meaning contended by the Tenant. The Tenant argued that the third Representation meant that the Tenant would be the only seller of fresh fruit and vegetables in the Fresh Food Precinct.  The Court of Appeal held that because the third Representation only extended to the Tenant being the only ‘independent’ fresh fruit and vegetable retailer, it did not mean that stores that were part of a chain, such as Franklins, would not be permitted by the Landlord to sell fresh fruit and vegetables.

The Court of Appeal also held that there was no unconscionable conduct on the part of the Landlord because the Landlord had not made any promises to the Tenant that the Tenant would have exclusivity for all fresh fruit and vegetable sales in the Fresh Food Precinct.  Accordingly, there was nothing in the relationship between the Tenant and Landlord that could lead the Tenant to hold a reasonable expectation that the Landlord would provide commercial information to the Tenant, such as the plans of Franklins.  The Court stated that the requirements of sections 51AC and 52 of the TPA do not prevent parties from engaging in a normal, arms-length commercial bargaining processes, which occasionally involves secretive conduct or withholding of information where this is not otherwise unconscionable.

What are the implications for retail lessees?

The NB2 Case highlights the importance for retail lessees of reviewing the proposed lease and the representations of the landlord carefully to ensure that the agreed provisions actually extend as far as the lessee expects and provide adequate protection to the lessee.  If the lease proves insufficient to meet the lessee’s needs down the track, it will not be enough to make out a claim of misleading and deceptive conduct simply because the lessee has stated its expectations to the landlord during the negotiating process.

At Bryks Lawyers, we are experienced in drafting and negotiating commercial and retail leases for both lessors and lessees.  Contact us today to see how we can assist you!