The recent Federal Court case of Miltech v Murchie [2012] FCA 1013 highlights the need for Landlords to exercise caution when making representations to prospective tenants regarding a future or actual state of affairs.

Landlords must take care to ensure that any representations as to future matters given to a prospective tenant are based on reasonable grounds and are capable of substantiation. Failure to do so may amount to misleading and deceptive conduct under the Australian Consumer Law.

The Facts

The Applicants, Kathleen Miletich, a career school teacher, and her son Adrian Miletich, a tradesman plasterer decided to go into business together to run a café.

In 2006, they responded to an advertisement by Foodco Group Pty Ltd (Foodco), the franchisor of café businesses Muffin Break and Jamaica Blue. Through their dealings with Foodco, and particularly its development manager Anthony Brusch, they decided to enter into a Jamaica Blue Franchise.

83 East Pty Ltd (83 East) was the developer of a shopping centre complex named ‘The Foundry’, with frontages on Bourke Street and Little Collins Street in Melbourne. Wilmot Murchie Pty Ltd (Murchie) had been a leasing agent for The Foundry by 83 East.

In June 2006, the Applicants and Mr Brusch attended a meeting with Mr Donnelley, the sole director of 83 East and Mr Murchie, its leasing agent for the purpose of viewing Shop T37 at The Foundry as a prospective premises for a Jamaica Blue café.

At this meeting, a number of representations were made to the Applicants by the developer and the leasing agent.

The Representations:

At the meeting, the Applicants were invited to watch a video, including computer animated segments of ‘The Foundry’, in which a camera moved through each of the four levels of the proposed development, showing tenancies of specific natures.

The Applicants were also shown a model of The Foundry development and given a promotional brochure containing a large set of coloured plans for retail premises on each level. The brochure promised ’40 quality tenants’ in the centre and that the development would create a natural internal thoroughfare between Little Collins and Bourke Streets, resulting in a high level of foot traffic.

The brochure also contained an express disclaimer that recipients should not rely on representations made in the brochure and should instead make their own enquiries and seek independent advice.

During the meeting, Mr Donnelly made verbal representations to the Applicants regarding the types of retail businesses that would be present in The Foundry, and that the site for the Jamaica Blue café was ‘well placed’ due to its proximity to the travellators.

The Court held that as a result of the combined promotional materials and statements, the respondents had conveyed to the Applicants that when they opened a business in Shop T37, the other shops in The Foundry would be occupied and trading, that there would be people moving through the Foundry and that there would be 40 ‘quality tenants’.

A disclosure statement was provided by Murchie following the meeting. The disclosure statement stated that 40 premises would be available for leasing at The Foundry and indicated a ‘tenancy mix’ of particular tenants and that this mix was likely to change over time. The disclosure statement significantly provided that the Centre ‘is under construction and not fully leased.’

The description of the tenancy mix was held to convey a representation that there were actual prospective tenants of other premises in The Foundry answering to the descriptions provided. Furthermore, the words ‘not fully leased’ were held to contain a representation that at least a substantial number of the available premises had already been leased. In fact, at the time of the representations, no other leases had been entered into.

In reliance upon the representations made by the Respondents, the Applicants entered into a Franchise Agreement with Foodco for the operations of a Jamaica Blue franchise at Shop T37, The Foundry.

The Reality:

The Lease was subsequently finalised and the Jamaica Blue café opened for business in August 2007.

At the time the Applicants opened the café, there were only very few tenancies leased, there were no retail shops in the premises of the kind indicated by the respondents during the course of the original meeting, there was almost no pedestrian traffic through The Foundry, there was a lack of heating and customer toilet facilities, the travellators were consistently inoperative and the centre was frequently dusty and noise filled.

The Jamaica Blue café was unable to turn a profit and was closed in October 2007.

The Law and the Court’s Decision

In 2010 the Applicants commenced proceedings against the respondents, including 83 East and Murchie for misleading and deceptive conduct under the Trade Practices Act 1974 (Cth) (TPA) and the Fair Trading Act 1999 (Vic).

The Trade Practices Act has since been replaced by the Australian Consumer Law (ACL).

Section 51A(1) of the TPA (now section 4 of the ACL) provides that where a corporation makes a representation as to future matters, the representation is taken to be misleading unless there are reasonable grounds for the representation.

Justice Gray of the Federal Court held that the representations amounted to representations as to future matters within the meaning of section 51A of the TPA.

The respondents were unable to produce evidence that they had reasonable grounds for making the representations. Accordingly, the representations were deemed to be misleading and deceptive by operation of section 51A(1).

The Court accepted the Applicant’s evidence that the representations made to them were relied upon by them to their detriment, as required to establish a claim for damages pursuant to section 82(1) of the TPA (now section 236 of the ACL).

Importantly in this instance, Justice Gray did not consider that the disclaimer within the brochure, which had been included in fine print, operated to prevent the representations from being misleading and deceptive.

His Honour stated ‘So far as the operation of section 52 of the Trade Practices Act is concerned, the question was not whether a written disclaimer operated to negate liability for statements found elsewhere in the document. The question was whether, as a matter of fact, the brochure was misleading and deceptive or likely to mislead and deceive.’ It was held that a reasonable reader would understand the brochure as a whole, including the fine print disclaimer, to contain representations that could be relied upon.

The Applicants’ loss of approximately $400,000.00 was found to be attributable to the developer and the leasing agent. His Honour entered judgment against the developer 83 East, and its sole director Mr Donnelley.

Lessons

The outcome of this case serves as a reminder to retail landlords to take great care when making representations to encourage tenants to enter into retail leases and to ensure that a reasonable foundation exists for any representations that are made.

This case also highlights the importance of ensuring that disclosure statements are accurate in all respects, and should be reviewed for potentially misleading or unclear statements.