In brief - Call option agreement did not give purchaser right of occupation

Even if the purchaser of a convenience store exercised a call option agreement, all that the it could acquire under that agreement was an interest in land and premises and the business, it could not however become a lessee of the premises.

Call option agreement to sell 30% interest in business and land

In the recent case of 73 Union Street Retail Pty Limited v J&S Group Pty Ltd & Ors (No.2) [2012] NSW ADT 278, a decision was handed down in the Retail Leases Division of the Administrative Decisions Tribunal on 14 November 2012 as to whether an interest pursuant to a call option agreement could be a retail shop lease.

This case concerned a convenience store at 73 Union Street, Pyrmont.

The property had been leased for many years as a 7 Eleven store.

The lease ended around November 2011. The owner spoke with some principals of the City Convenience Stores about a possible loan and call option agreement to sell a 30% interest to them of a new business to be set up at the store and 30% ownership of the freehold.

Pursuant to the terms of the loan and the call option agreement, in November 2011 the City Convenience business commenced operation from the premises.

Purchaser argues that it has right to occupy premises under retail shop lease

Under the terms of the call option agreement this new business of the City Convenience business belonged to Union City Convenience, of which neither the manager nor the purchaser under the call option agreement were directors or shareholders.

However, the purchaser, 73 Union Street, asserted that pursuant to the terms of the call option agreement, it was vested with an interest in the City Convenience business that had been operating since November 2011 by reason that the purchaser had to pay for the costs and collected part of the profit and the principal of the purchaser effectively managed the new business. The purchaser argued that it was given a right to occupy the premises with this new entity and that occupation amounted to a retail shop lease.

Purchaser claims protections of Retail Leases Act including five year term

The argument by the purchaser was that whilst the City Convenience business commenced operation from the premises in November 2011 as a lessee, that occupation was not exclusive of an alleged occupation by the purchaser also as a lessee.

The purchaser contended that the call option agreement gave the purchaser an interest in the ownership of the City Convenience business and therefore it also was a lessee of a retail shop and had all the protections of the Retail Leases Act including a five year term.

Purchaser did not exercise its rights in the call option

However given that this is a call option agreement, any interest in the ownership of the business did not come about until the purchaser exercised its call option. That call option period did commence on 1 December 2011 and ended on 13 November 2012, and as at the date of the case the purchaser still had not exercised the rights in the call option.

Clause 12 of the agreement set out the business ownership interests between the purchaser and the vendor and there was an acknowledgment by the parties that the purchase price of the call option represented 30% of the combined value of the land and the business that shall be established on the land. That business was to be established by the grantor and the grantee, each contributing to the costs in respect of shares in the business, of which the purchaser would ultimately acquire a 30% interest.

Tribunal holds that purchaser not a lessee even if call option agreement exercised

In the view of the Tribunal member, on its proper construction, the call option agreement gave no more than a 30% interest in the land, ie the premises and the business which was to be established by the purchaser and the vendor and the land.

It was all subject to the purchaser exercising the call option, but even if the purchaser did this, all that the purchaser could acquire under the call option agreement was an interest in land and premises and the business, it could not however become a lessee of the premises.

The call option agreement clearly established a transitional arrangement that after 7 Eleven vacated, a new business entity would lease the premises to a related entity of the owner of the City Convenience business with rental, outgoings, terms, etc all set out in the call option.

The purchaser was to contribute 30% to the cost of establishing and running the business and would be entitled to 30% of the income. The principal of the purchaser was let into possession to run this new business on behalf of the parties to the call option agreement.

Purchaser did not have right to occupy the premises

In the view of the Tribunal member, the proper construction of the call option agreement was an immediate right to 30% of the income, but subject to contributing 30% of all costs. He could not construe through this lease clause or the income clause or any other clause in the call option agreement that the purchaser had a right of occupation of the premises.

This case can be contrasted with a the recent decision in the Tribunal by the appeal panel, where a caterer's license was held to be a retail shop lease. In that decision the caterer was given exclusive occupation of the kitchen and servery area to operate a restaurant. (For more information about that case, please see our earlier articles A club caterer can be a retail shop tenant and Unexpected leasing liabilities flow from rights to work in parts of premises.)