Welcome to the first of our streamlined editions of Business Insights, this time focusing on business sales, mergers and acquisitions.

“My Restaurant Rules” no more!

We recently came across an interesting case involving a three-way dispute between the seller, buyer and landlord of a Sydney restaurant.  If you are a business seller, the case highlights the need to control the “anxious” buyer – in particular, keeping them at arm’s length from your landlord or other key suppliers until the deal is done.  

The seller operated the restaurant from leased premises in Sydney. The seller and buyer entered a sale contract providing that the landlord’s consent was required to assign the lease.

The buyer planned to do its own fit-out of the premises and was anxious to commence despite completion of the sale not having occurred. The buyer commenced the fit-out and made alterations without the formal consent of the landlord. When the landlord found out that there were building contractors accessing the premises, the landlord wrote to the buyer informing the buyer that building contractors were “effectively trespassers” and that it had directed the seller to hand over the keys and stop people accessing the premises. A deed of assignment of the lease was prepared and was with the landlord for execution; however, that deed was never signed. Instead, the landlord terminated the lease for the seller’s breach of the alterations clause and re-entered the premises.

The seller was placed into liquidation and the buyer purported to terminate the sale contract on the basis of the liquidation and commenced proceedings to recover the deposit. However, the seller cross-claimed seeking the balance of the purchase price and damages on the basis that the buyer’s unauthorised fit-out works caused the landlord to terminate the lease.

The Court held that the buyer’s conduct constituted a breach of the sale contract. The seller only granted the buyer access to the premises so the buyer could plan its fit-out and the landlord terminated the lease because the buyer commenced unauthorised fit-out works.

The seller benefitted from an express provision in the sale contract that each party do everything necessary to ensure the lease is assigned, which carried with it a requirement that the parties not do anything which would prevent the assignment.

This case highlights the need for parties to wait for the landlord’s consent and completion of the sale before commencing fit-out works, or risk losing the benefit of the sale altogether.