The recent decision in Spuds Surf Chatswood Pty Ltd v PT Ltd (No. 4)[1] (Spuds Surf No. 4) marks the conclusion of an ongoing struggle between a landlord and tenant over the placement of kiosks within a large retail shopping centre.

Borne out of decreasing revenue and increasing frustrations, this case illustrates the extent to which landlords may be liable to tenants if their business decisions impact on tenant income.

In this alert, Partner James Bottomley, Solicitor Justin Raiteri and Law Graduate Kerrod Giles discuss the key commercial considerations flowing from this decision for both landlords and tenants.

Background

Spuds Surf (the tenant) occupied three shops in a prime area of Westfield Shoppingtown Chatswood, Sydney (the Premises). The tenant, who had leased two shops in that area since 1999 and in July 2002, took a new lease of the existing two shops plus a third additional shop directly next to its existing shops (the Lease).

Between November 2002 and February 2005, the landlord entered into leases of three new kiosks.  Those kiosks were positioned in the walkway in front of the Premises.

For each of the kiosks, the landlord approved signage which exceeded the maximum height restrictions imposed by the landlord’s existing fitout guidelines.  In January 2005, the landlord took steps to amend its fitout guidelines such that, from the date of amendment, the signage for each of the kiosks became compliant with the amended guidelines.

The non-compliant signage partially obscured sightlines to the Premises that existed before erection of the kiosks. Consequently, the tenant commenced action against the landlord claiming damages, or alternatively, rent relief.  

Proceedings

In the principal decision  of Spuds Surf Chatswood Pty Ltd v PT Ltd (No. 2)[2], later upheld by the New South Wales Court of Appeal, it was held that the landlord had engaged in unconscionable conduct in contravention of section 62B(1) of the Retail Leases Act 1994 (NSW) (NSW RSL Act) by:

  • approving kiosk signage that exceeded the height restrictions imposed on kiosk tenants by the landlord’s own fitout guidelines;
  • failing to notify Spuds Surf of approval of and installation of the kiosk tenants’ non-compliant signage;
  • amending the landlord’s fitout guidelines in January 2005 to ensure that the kiosks artificially then complied with the landlord’s new height restrictions (described as ‘unfair tactics’); and
  • utilising the landlord’s superior bargaining position to block any attempt by Spuds Surf to obtain acknowledgement of the landlord’s error and its true impact on Spuds Surf.

The New South Wales Court of Appeal found that the landlord’s conduct concerning the kiosk tenants’ signage collectively amounted to unfair tactics which were highly unethical and had a sufficient degree of moral tainting to permit a finding of unconscionable conduct.

The New South Wales Court of Appeal referred the case to the New South Wales Civil and Administrative Tribunal Appeal Panel for an assessment of damages.

The question to be decided by the Tribunal in Spuds Surf No. 4 was whether Spuds Surf was entitled to damages for loss of profits and lost value of business or, at least, rent relief due to the landlord’s unconscionable conduct.

Judgement

The Tribunal found that Spuds Surf could not prove that any quantifiable loss had been sustained as a result of the landlord’s unconscionable conduct so as to allow an order for damages.

It was determined that the landlord’s actions had no immediate or continuing impact on the turnover of Spuds Surf’s business, noting that sales revenue did not begin to decline until a substantial time after the erection of the kiosks and suggesting that other extenuating factors may have contributed to a decline in Spuds Surf’s profits.

However, the Tribunal did conclude that the tenant was entitled to rent relief under the New South Wales RSL Act, as the tenant had enriched the landlord by continuing to pay rent in accordance with the Lease while the landlord was acting unconscionably.

Considerations for Landlords

Key commercial considerations for landlords to take into account when erecting kiosks or other similar free standing mall tenancies in their Centres are:

  • It may be considered unconscionable conduct if a landlord allows the erection of a kiosk or other similar tenancy in front of a pre-existing tenancy where aspects (e.g. signage) are not in compliance with fitout or other requirements of the landlord in place at the time the kiosk or other similar tenancy is erected; and
  • It is not sufficient in the above circumstances for a landlord to attempt to absolve its wrongdoing by subsequently amending its fitout or other requirements so that from the commencement of the amended requirements, a kiosk or other similar tenancy recently erected or soon to be erected in front of a pre-existing tenancy is then compliant with the landlord’s requirements.

Considerations for Tenants

Important commercial considerations for tenants to take into account when considering whether to pursue a landlord for damages for particular conduct are:

  • The refusal by a tenant to accept a landlord’s reasonable proposal in order to assist the tenant where there is a dispute between the parties (e.g. accepting an offer to permit the tenant to increase the height of its signage where increasing the height would result in clear sightlines being returned, even if the proposal is to be at the tenant’s cost) is unlikely to be viewed favourably if the tenant then attempts to pursue the landlord on grounds which form the basis of the landlord’s reasonable proposal; and
  • In order to receive an award for damages, a tenant must be able to show on balance that the landlord’s conduct in question has directly resulted in an economic or other form of loss to the tenant.  A general decrease in profits over time is not enough to establish causation, especially if the tenant in question sells seasonal or other specialised items.