Landlords must be careful when making representations to encourage tenants to enter into retail leases, a recent Federal Court ruling stressed. This is especially true when the representations relate to essential matters affecting the viability and productivity of the prospective lessee's business.
In 2006 the applicants, Kathleen Miletich and her son Adrian, responded to an advertisement by Foodco Group Pty Ltd that was designed to attract people interested in running a Muffin Break franchise. Through their dealings with Foodco and its development manager Anthony Brusch, the applicants determined that a Jamaica Blue franchise would be better suited to their aspirations.
Foodco identified a potential site for their coffee shop within The Foundry shopping centre development in Melbourne. Negotiations were entered into between Wilmot Murchie Pty Ltd, the leasing agent engaged in respect of the development of the centre, and Anthony Brusch. The applicants were subsequently introduced to the developer's representatives and visited its leasing suite, where representations were made as to the nature and extent of the tenancies available within the centre and the level of patronage that would be generated.
The area of the premises which were to be allocated to the applicants, known as Shop T37, comprised 37 square metres of shop space, plus a licenced seating area in the central atrium of the centre. It was represented to the applicants that Shop T37 would take advantage of heavy foot traffic coming down from the travelators.
The applicants were given a walk-through of the development identifying the scale and location of all the tenancies. Promotional material, including a disclosure statement and a brochure, was also provided to the applicants. The brochure contained coloured site plans and promised the occupation of "40 quality tenants" within the centre. However, the brochure contained an express disclaimer that its contents should not be relied on and prospective lessees should make their own enquiries.
Wilmot represented to the applicants that at the time at which they would be opening their coffee shop, the other shops in the centre would be occupied and trading, thus generating a large amount of foot traffic throughout the centre.
The applicants relied on these representations and entered into a franchise agreement with Foodco to establish a Jamaica Blue coffee outlet within the centre. They also signed a subsequent lease agreement for Shop T37.
When the Jamaica Blue outlet opened, there were virtually no other tenanted shops in the centre and the common areas were operating at less than full capacity. None of the shops that were stated to be in existence were in the centre. There were no leases for a majority of the shops, and no prospective tenants for the shops that were unlet.
Furthermore, the applicants discovered that:
- the travelators were not always in operation;
- technical issues affected the running of extractor fans in the kitchen of Jamaica Blue due to further construction; and
- sewage was leaking from the floor above.
The combination of these elements led to the centre being a less than appealing place for people to shop in or walk through.
Due to all of these factors, the number of customers was very limited and at no time did the applicant's business make a trading profit. The applicants eventually abandoned Shop T37 after dismissing their staff. The total losses incurred by the applicants totalled almost A$400,000.
An application was bought against the respondents, including Wilmot and the sole director of the centre's developer, for misleading and deceptive conduct in contravention of the Trade Practices Act 1974 (Cth).
In deciding the application,(1) the court took into consideration:
- whether the representations related to future matters and were misleading and deceptive;
- whether the representations were relied on;
- whether the disclaimer found in the brochure negated any liability for other statements; and
- the total amount of loss suffered by the applicants.
With regard to the first three considerations, Section 51A(1) of the act provides that where a corporation makes representations as to future matters, in the absence of reasonable grounds, the representation is taken to be misleading. The court deemed that the representations made did indeed relate to future matters - namely, what the centre would look like when it was completed and open for business. The respondents were deemed to have had no reasonable grounds for making such representations, particularly given that no feasible evidence was tendered to support the making of their representations.
Section 52(1) of the act further provides that a corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive. Questions were raised as to whether disclaimers contained within the brochure operated to negate liability for other statements made during the course of negotiations. The question came down to whether the document itself was misleading or deceptive, or likely to mislead and deceive. This was answered by asking whether a reasonable person in the position of the applicants, on viewing the brochure as a whole, would rely on the representations. The court found that there was no doubt that the brochure was created to attract tenants and that a fine print disclaimer in legalistic language was unlikely to have dispelled the overall effect of the brochure.
In determining the loss suffered, in order for the applicants to claim damages successfully based on representations made by the respondents they had to establish that they had suffered loss or damage by that conduct and that they had acted to their detriment in relying on the representations (Section 82(1) of the act).
The applicants also argued a contravention of Section 9 of the Fair Trading Act 1999 (Vic), which adopts the Consumer Law for the Victorian jurisdiction. Under Section 159(1) of the act, in order for the applicants to claim damages, loss and damage must be shown because of the contravention.
In consideration of the reliance and ascertainment of damages, the court subsequently accepted the applicants' evidence that the representations made to them in the brochure, video and from Wilmot were relied on to their detriment in deciding whether to enter into the lease agreement. The loss suffered by the applicants included their set-up and operating costs and a claim for loss of income that would have accrued if they had remained in their previous occupations. The court calculated that the loss suffered by the applicants was in the vicinity of A$400,000.
The case is a reminder that commercial landlords must be especially vigilant when providing representations that aim to encourage prospective tenants to enter into retail leases. Any representation made in the advertising and promotion of specific premises should be scrutinised carefully to ensure that it is a truthful account of what the tenants are likely to expect on entering a lease agreement and commencing trade.
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