The success of a retail franchise is usually inextricably linked to the success of the site selected for the premises and the terms that can be negotiated to lease the site.
The case of Miletich v Murchie highlights the dangers associated with site selection for the operation of a franchise and particularly in relying on representations made by the Lessor, or its agents, without independent verification or testing of the claims made.
The case concerned representations made by a property developer (Stephen Donnolly) and the developer’s leasing agent (Alan Murchie) to Kathleen Miletrich and her son Adrian Miletich.
The Miletichs had responded to an advertisement by Foodco Group Pty Limited (Foodco) to start a business through the grant by Jamaica Blue (Franchisor) of a franchise Jamaica Blue café business. Firstly, however, the Miletichs had to find premises for their new franchise.
In 2006, there was a shopping centre development under construction in Melbourne known as the Foundry. On 22 June 2006, the Miletichs, and a representative of Foodco, met with Mr Murchie and Mr Donnelly at the leasing suite of the property development company of the Foundry, which was set up to entertain potential lessees.
The Miletichs and Foodco were invited to watch a video which included computer-animated segments, in which a notional camera moved throughout the Foundry and up and down travelators between the Bourke Street ground floor level and the Little Collins Street level.
The segments showed the shops that will be occupying the premises by a description in large letters above each shop. The video showed people moving about the shopping area and apparently patronising the business in it.
Mr Donnolly, the principal of the property developer, also spoke to the Miletichs mentioning that there would be boutique shopping at the site with a sporting retail outlet and a Drummond Golf store.
He also specified there would be a hairdresser, a gift shop, an Irish bar, a chemist, a newsagent and a food court. He then stated that the shop ‘T37’, where the Miletichs would be designated, was in a prime spot because of its proximity to the travelators linking the floors.
The Miletichs were given a brochure which illustrated the movement around the Foundry and specified that there would be 40 quality tenants. There was, however, a disclaimer of liability for those who sought to rely on the publications.
The Miletichs decided to take up the offer of a lease of ‘T37’ and the Lease disclosure document provided contained a heading ‘Centre Details.’ This specified that the opening was anticipated to be 21st May 2007 and there will be 40 premises available for leasing. The tenancy mix also contained a large array of businesses from supermarkets to household appliances.
By December 2006, unbeknownst to the Miletichs, not a single lease of any shop premises in the Foundry had been entered in to.
The franchise opened on 6 August 2007 and a coffee outlet and a travel agency were operating in the Foundry, but were in street view, away from the Jamaica Blue store.
The travelators did not work and construction of an IGA was ongoing which significantly affected the Miletichs’ business. There were no shops inside the Foundry.
By the 22 October 2007, the IGA, a hair dresser and a couple food outlets had opened. At no time did the business make a profit whilst trading and it was asserted that there was no prospect of it doing so. Consequently, the business closed suffering substantial losses.
The property development company went into liquidation and proceedings were brought.
The Court was asked to determine whether:
- the statements made in the video, the brochure and orally by Donnelly and Murchie were representations as to future matters or mere promotional material;
- the representations were misleading and deceptive;
- the disclaimer in the brochure limited the liability to the Miletichs;
- the Miletichs relied on the representations when entering the lease agreement;
- Foodco were liable as concurrent wrongdoers;
- The Miletichs mitigated their loss.
Was it a representation?
The Federal Court found that the combination of the video, the brochure, the model, the enlarged plans on the walls of the leasing suite and the statements by Donnelly and Murchie were representations.
These conveyed to the Miletichs that if they were to open 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 patronising the businesses in these shops. Additionally, the leasing disclosure statements which stated the tenancy mix conveyed that there were actual prospective tenants of other areas of the Foundry.
The Court held that these were all representations and not promotional material as the question is not whether the Miletichs should have displayed more wisdom or discernment, but rather whether the conduct was designed to influence prospective tenants to operate a business in the Foundry. Therefore, they were all representations as to future matters and not mere puffery.
Misleading and deceptive?
Section 51A(1) of the Trade Practices Act 1974 (TPA) has the effect that unless Donnelly and Murchie had reasonable groups to make the representations then they are taken to be misleading.
Donnelly and Murchie did not adduce evidence that it had reasonable grounds for making the representations and thus, they were misleading and deceptive.
Effect of the disclaimer?
The Court also dismissed the reliance sought to be made on the disclaimer.
The question the Court must ask is whether, by examining the brochure as a whole, including the fine-print disclaimer, a reasonable reader in the position of the Miletichs would understand the brochure as a whole to contain representations that could be relied upon.
A fine-print disclaimer in formulaic and legal language was unlikely in the view of the Court to have dispelled the overall effect of the brochure upon the mind of a reasonable reader.
Was there reliance?
Section 82(1) of the TPA requires the Miletichs to have suffered loss or damage by Donnelly and Murchie’s conduct. Therefore, the Miletichs must establish that they acted to their detriment in relying on the representations made by Donnelly and Murchie.
The Court agreed that had the Miletichs been told at the meeting on June 22 2006 that not a single shop had been leased in the Foundry then they would not have entered into the lease. Subsequently, the Miletichs relied upon the representations and as such, suffered substantial detriment..
The Court also noted that section 52 TPA is not directed to protecting the legally knowledgeable consumer.
A person who has been persuaded by means of a representation to believe that a certain state of facts will exist at a subsequent time is unlikely to be on guard against the possibility that the representation will turn out to be untrue.
Are the lessors concurrently liable?
Donnelly and Murchie claimed that the lessor, Foodco, and Franchisor, Jamaica Blue, should be liable as concurrent wrongdoers under TPA provisions having passed on the material to the Miletichs, particularly the leasing disclosure statement.
The Court, however, held that there is no evidence that either Foodco or the Franchisor Jamaica Blue had represented that any material passed on from the property developer, Donnelly or Murchie was true and thus the Court found that they had not engaged in misleading and deceptive conduct towards the Miletichs.
The Lessor and Franchisor were simply the vehicle for communication between Donnelly and Murchie and the Miletichs.
Mitigation of loss?
The loss claimed by the Miletichs was all the expenses of setting up and running the business along with loss of income from their previous employers. This, however, was mitigated since the Miletichs had not sought full-time employment since the closing down of the business.
The loss suffered by the applicants, therefore, amounted to a total of $398,557.39 which was to be payed by the Donnelly and Murchie.
Practical tips for site selection
To avoid being caught in a similar situation, franchisees/franchisors should ensure the following:
Have a Checklist: Ensure the lease is in an area most suitable for your franchise. For example, a checklist should include:
- Is the area accessible?
- Is there convenient parking?
- Is there a continual flow of pedestrians?
- Is the area visible to potential customers?
- Is there local competition?
- Does the tenant mix complement my franchise?
- Is the location suitable for my target market?
- Are the trading hours appropriate for my franchise?
- Does it meet the operational requirements of my franchise?
- Could future development plans make the location unsustainable?
Do some research: Do not simply rely on representations made by parties to you. Do your own investigations and research on the points above before signing the lease including any future changes that may be made. This may also provide bargaining power when it comes to the lease negotiations.
Confirm in writing: If a leasing agent makes verbal claims, ask them to confirm those claims in writing. Additionally, ensure all representations which have been made are contained in the Disclosure Statement. This will provide comfort and assist in obtaining relief if the representations were not as claimed.
Ask questions: Ask lots of questions regarding your checklist. Silence or concealment, in some instances, can lead to a misleading representation in itself. This may provide relief if the concealment affects your business. Record the answers given to you after the meeting or during if permitted.
Talk to others: Speak to others with knowledge of the area to see if claims made are confirmed by non-interested parties. Additionally, speak to other tenants in the centre about operating a business in the centre and the inflow of customers.
Negotiate: There is no such thing as a standard lease. Read your lease closely and get advice on its terms before signing.
Get Representation: Consult either solicitors who specialise in leases, leasing agents or real estate agents who specialise in negotiating lease terms or other qualified and experienced parties who can assist if you lack expertise.
Beware: of passing on information of others and ensure you are not representing that its contents are truthful and therefore impliedly can be relied upon if you do not hold that opinion.