As often happens with retail shopping centre leases, when a shopkeeper sees their sales revenue fall away they ask the landlord for rent relief.
In Spuds Surf Chatswood Pty Ltd v PT Ltd (No.2)  NSWADTAP 35) (the “Principal decision”) the NSW Civil and Administrative Tribunal (Appeal Panel) decided that the tenant had good reason to ask for rent relief after the centre manager had installed three kiosks in the walkway in front of the shop.
The Supreme Court of New South Wales Court of Appeal in PT Ltd v Spuds Surf Chatswood Pty Ltd  NSWCA 446 (Sackville JA, McColl JA and Leeming JA agreeing) directed the Tribunal to assess the damages flowing from the landlord’s unconscionable conduct under section 62B(1) of the Retail Leases Act, 1994 (NSW) (the “Retail Leases Act”) by installing the kiosks because they obstructed the sightlines to the tenant’s shop.
In Spuds Surf Chatswood Pty Ltd v PT Ltd (No.4)  NSWCATAP 11 (“Spuds Surf No 4”), the Tribunal assessed the damages. This is how the Tribunal did so.
The surf wear shop
Spuds Surf’s shop, Surf City, was located in Westfield Shoppingtown Chatswood, a large retail shopping centre in Sydney.
Surf City had a prominent location on level 4 at a T-junction of walkways. Visitors to the shopping centre who came up from the car park entrance would have a clear view of the shop signage on Shop 417 in the distance, if their sightlines were not obscured by the kiosks.
Having leased shops 415 and 416 since 1999, the Spuds Surf entered into a new lease in July 2002, with the addition of shop 417 (which had the prime location at the T-junction). The minimum rent was agreed at $427,500 per annum, with annual increases, which was a “premium” rent to reflect the prime location.
The Surf City shop sold surf wear, snow clothing, surf boards, wet suits and other apparel from the enlarged premises from August 2002 until it vacated in June 2007, before the 6 year term expired.
Click here to view the image.
Photo – the former Surf City shops 417 & 416 are now called ‘Forever New’ (the sign is on shop 417) and shop 415 is now called ‘Strandbags’ (taken 28/03/2015)
In July 2002, when the new lease was entered into, a B-Zone kiosk was situated in the walkway, about 2.7 metres in front of shop 417.
In November 2002, a Boost Juice kiosk replaced the B-Zone kiosk. It had two blade signs 2.8 metres high and a drinks refrigerator 1.8 metres high.
In about June 2003 a Telechoice kiosk was installed in the walkway next to the Boost Juice kiosk, further away from the shop. It had blade signs.
In about March 2005, a third kiosk – Love Salad kiosk was installed in the walkway, next to the Telechoice kiosk.
Westfield Chatswood has a Fitout Requirements Handbook for tenants called the ‘Red Book’. In the 2002 booklet, it stated that: Maintaining sightlines through all Kiosks is essential, therefore height restrictions apply - maximum height 1.4 metres; overhead signage including menu boards and blade signs to be kept to a minimum; canopies will not be approved. A new ‘Red Book’ was issued in 2005 which liberalised the height restrictions, so that the three kiosks became compliant.
Spuds Surf raised concerns about sightlines when entering into the lease in 2002 by handwriting into the lease that a 10% rent reduction was to apply for each day a stall above 1.4 metres high visually impeded the shop. This amendment to the lease was not agreed. The tenant’s concerns about the non-compliance with the height restrictions (as per the ‘Red Book’) were raised in August 2002, and again in December 2002 when the Boost Juice kiosk was installed. Spuds Surf repeated its concerns in May 2003, in December 2003, and throughout 2005 and 2006. Westfield did not offer any rental or other financial assistance in response to the concerns, but did offer to allow Spuds Surf to relocate its signage to a more prominent position.
Click here to view the image.
Photo - the Boost Juice kiosk with its 2 illuminated blade signs (note the how queue spoils the view), the Sunglass Hut kiosk (where the Telechoice kiosk was), and an ATM to the left (taken 28/03/2015)
Was Spuds Surf entitled to rent relief because of the kiosks?
Spuds Surf claimed 10% of the rent paid from July 2002 ($400,000), for the decrease in sales revenue because of the obstruction to sightlines to the shop caused by the three kiosks.
Westfield denied the claim and said that there was no greater obstruction to sightlines caused by the kiosks than was caused by the B-Zone kiosk which had existed when the new lease commenced in 2002. And even if there were, it could have been cured by repositioned signage on the tenant’s shop.
The Spuds Surf No 4 decision is the latest of 7 decisions (so far) between the parties which started in 2006 as a tenant claim for rent relief and a landlord claim for rent arrears.
The Retail Leases Act provides these bases for tenants claiming rent relief:
- for disturbance to the flow of customers or trading (quiet enjoyment) under s. 34;
- for unconscionable conduct in retail shop leasing transactions under s. 62B;
- for misleading or deceptive conduct in connection with retail leases under s. 62D.
In its Principal decision, which the Court of Appeal approved, the Tribunal said that it was nonsense to suggest -
that the presence of structures that interfere ... with sightlines along a much-used walkway towards a shop in a retail shopping centre will have no impact whatsoever on the sales achieved in the shop.
The Tribunal found that the landlord had acted unconscionably in breach of s. 62B(1) of the Retail Leases Act by satisfying three criteria in s. 62B(3):
- approving blade signs 2.8 metres high for the Boost Juice kiosk, and later, the Telechoice and Love Salad kiosks, in breach of the ‘Red Book’ height restrictions (s. 62B(3)(h));
- not informing Surf City of its approval for the blade signs (s. 62B(3)(i)(i));
- using unfair tactics to reject the tenant’s complaints about height breaches from 2002; and from 2005, relying upon the liberalised rules to justify signage up to 2.6 m high (s. 62B(3)(d));
and that the unconscionable conduct had caused economic loss to Spuds Surf.
What amount of compensation should be paid to Spuds Surf?
Spuds Surf claimed damages for economic loss based on loss of profits and lost value of the business, alternatively, relief from the rent arrears for the unconscionable conduct, under s. 74AA(1) of the Retail Leases Act.
In the Spuds Surf No 4 decision, the Tribunal found no immediate and continuing impact on the turnover of the shop, and therefore no quantifiable loss, for the loss of profits and lost value of the business for these reasons:
- The sales revenue did not start to decline until 18 months after the Boost Juice kiosk, 12 months after the Telechoice kiosk and 7 months after the Love Salad kiosk, were installed.
- The sales figures increased significantly when shop 417 was added, but they also increased significantly at other times, which showed little correlation with the installation of the kiosks.
- External factors such as ceasing to sell two well-known brands of surf wear (Billabong and Mambo) mid 2004 could have contributed to the decline in sales revenue.
The Tribunal then considered what relief to award for rent arrears on a ‘best we can’ basis.
The Tribunal focused on the fact that the rent for the new lease in 2002 was $28,500 per annum higher than the previous total rent for shops 415, 416 and 417. The Tribunal called this amount an ‘annual rent surplus’ and that it represented -
the extent that the lessor has been enriched, at the expense of the lessee, by conduct that has been held unconscionable
The Tribunal awarded rent relief of 80% of $28,500 pa, as adjusted for rent increases. Because the unconscionable conduct was ongoing, the award was for 5 years from November 2002 when the Boost Juice kiosk was installed until November 2007 when the lease ended – a total of $127,143.47 plus interest.
This amount was offset against the rent arrears and damages for lost rent of $327,533.85 plus interest owed by Spuds Surf. The net amount Spuds Surf was ordered to pay was $257,283.55.
If Spuds Surf could have proved a quantifiable loss, then it would be fair for it to be compensated.
But it is difficult to see from a commercial perspective why Spuds Surf should be compensated for rent relief for what was minor breach of s. 62B(1) of the Retail Leases Act, despite the ‘moral tainting’ of the centre manager’s conduct, for these reasons:
Spuds Surf was an experienced retailer and an existing tenant. It made commercial decisions to expand its premises and to pay the ‘annual rent surplus’, knowing there was already a kiosk in front of the shop. And when the new kiosks were installed, it made a commercial decision to not take up Westfield’s offer to allow its shop signage to be relocated to a more prominent position because it did not wish to incur the expense.
This decision serves as a warning to shopping centre landlords to take care in approving designs for kiosks and other structures so as to minimise interference with sightlines to shops from walkways. Kiosk approvals should be given in accordance with fitout guidelines.
Marketing Commentary provided by Michael Field, Managing Director of Michael Field Strategic Marketing Consultants
On average, up to 40% of all retail sales are unplanned purchases. To capitalise, retailers clamor for attention with bright lights, pumping music and eye-catching window displays. Any distractions (such as pop-up shops and kiosks) can be costly to the retailer with already high rental overheads as once the consumer has exhausted their discretionary spend, it’s gone and the shopping trip ends, often in the food court.
The surf-wear and snow-gear category has an interesting mix of high and low price points. Items such as snow jackets and surfboards are more likely to be seasonal, planned purchases. However sunglasses, caps and T-shirts are often unplanned purchases made with discretionary spend.
Although there is some correlation, it is difficult to prove sales decline for Spuds Surf Chatswood was caused by the appearance of the kiosks. It is more likely a combination of factors that contributed to their poor sales performance, such as:
- Lost sales over time on larger, planned purchases when consumers discovered their favorite brands were no longer available (i.e. not maintaining major brands such as Mambo and Billabong)
- Declining discretionary spend on smaller items such as T-shirts and sunglasses as a result of reduced traffic flow (potentially impacted by the kiosks affecting store visibility)
- Failure to take advantage of the offer by the landlord to improve signage
- Too large a shop footprint without proper consideration for improving their retail offering to match the expanded premises
- The ever increasing impact of online shopping and factory outlets such as DFO on specialised categories such as surf-wear and snow-gear
In summary, although it is reasonable to assume that kiosks (even partially) blocking line-of-sight to shop fronts would impact sales, it is more likely an already weak retail offering was impacted by changed shopper traffic conditions over time.