Focus: Leasing – April 2003
Unconscionability: Fayre's fair for landlords
In brief: Common sense prevailed when the High Court this month rejected the ACCC's appeal against a Federal Court decision that a landlord had not acted unconscionably in its dealings with a tenant. Special Counsel Brad Smith (view CV) and Consultant Professor Bryan Horrigan (view CV) look at the final chapter in the Berbatis/Farrington Fayre saga and the latest instalment of the evolution of unconscionable conduct in the Trade Practices Act.
Landlord's advantage
In light of the decision1, landlords can, within bounds, feel more comfortable about taking advantage of any natural bargaining advantages they might have in negotiating with their tenants. However, the case was decided under a relatively restrictive provision of section 51AA of the Trade Practices Act (TPA). Section 51AC (which was passed after the Berbatis facts arose) is wider in its scope, and has yet to be tested.
Background
The original case revolved around the renegotiation of a lease. Berbatis Holdings owned a shopping centre (Farrington Fayre) in Western Australia and one of the tenants, Mr and Mrs Roberts, operated a fish shop in the centre. The lease was due to expire and the Roberts were looking to sell their business. The value of that business depended largely on their ability to obtain a new lease.
The landlord insisted, as a condition of granting a new lease, that the Roberts give up a claim against the landlord (brought by a number of tenants) relating to the overcharging of outgoings. Ultimately Mr and Mrs Roberts gave a release from the claim to the landlord in order to secure a new lease and facilitate the sale of their business.
The Roberts said the landlord acted unconscionably in linking the two issues.
Core issue
Section 51AA of the TPA requires that a corporation must not, in trade or commerce, engage in conduct that is unconscionable within the meaning of the unwritten law from time to time of the States and Territories.
When the matter first came before the Federal Court, the original judge found that the tenant was at a special disadvantage and the landlord had acted unconscionably. On appeal the Full Court found, on the same facts, that the tenant was not at a special disadvantage and that the landlord did not act unconscionably.
The High Court (by a majority of 4 to 1) has upheld the Full Court decision. However, in doing so, the High Court has not restricted the circumstances in which a landlord might be found to have acted unconscionably as much as the Full Court had done.
The majority of the High Court accepted that there was inequality of bargaining power between landlord and tenant. However, they said that the landlord, whilst driving a hard bargain, had not acted in a way that was unconscionable in a legal sense.
The court also accepted the view that, while the tenant was in a greatly inferior bargaining position, the tenant did not lack the capacity to make a judgement about what was in its own best interests. In particular the court found that the tenant was at no special disadvantage and under no disabling condition which affected the tenant's ability to make that judgment.
In this case, the tenant had three potential outcomes before it:
1. obtain a new lease and not release the landlord;
2. not obtain a new lease and not release the landlord; or
3. obtain a new lease and release the landlord.
The landlord was not prepared to allow the first outcome and legally, the landlord could do that. The Roberts were free agents to make a call on the other outcomes and, in the view of the court, accepted an outcome that, whilst unpalatable, was their choice.
Significantly, the court did not subscribe to the Full Court's view that the tenant needed to show that its will was so overborne that it did not act independently and involuntarily. The High Court has left open the possibility that, in certain circumstances, a superior party may act in such a way that a tenant could not determine its own best interests. In that case the superior party could be acting unconscionably.
Implications
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To the extent that it goes, the decision is a win for landlords. The High Court has shown that it prefers a narrower, rather than a broader, view of s51AA and accepts that in business dealings, the vast majority of which are between parties of unequal positions, the realities of bargaining power and the cut and thrust of business means that tough outcomes in many cases have to be lived with.
Having said that, the High Court has not narrowed the scope for unconscionability to the extent that the Full Court did. There are dangers for landlords in any situation if they step over the line from hard bargaining to unconscionable conduct. Where that line is in a particular case will depend on the facts involved. -
In any case, a tenant will need to show more than just an unequal bargaining position and an inability to get the desired outcome that they want before the courts will assume unconscionability by a landlord.
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Landlords, when faced with discretionary decisions (such as whether to grant a new lease), will be able to take a wide view of their own interests. In other words the landlord is entitled, at least to some extent, to be subjective about its own interests.
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The decision will not be the last word on unconscionable conduct. The case turned largely on its facts and the issues litigated were narrow. A slightly different set of facts may well give a different result.
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The case was litigated purely on s51AA. The relatively new s51AC widens the scope of unconscionable conduct to include 'good faith' factors such as whether conditions imposed were reasonably necessary to protect the landlord's legitimate interests and whether the landlord's conduct was consistent with its conduct in similar transactions. These impose more subjective tests on behaviour that may lead to unfavourable outcomes for landlords.
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Importantly, s51AC is now mirrored in the retail tenancy legislation in Queensland, New South Wales, Victoria and the Australian Capital Territory – Western Australia is also expected to follow shortly. Landlords can expect allegations of unconscionability to become a more common weapon in the armoury of disgruntled tenants.
References
- Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd [2003] HCA18 (19 April 2003)
For further information, please contact:
- Grant HigginsPartner,
Brisbane
Ph: +61 7 3334 3540
Grant.Higgins@aar.com.au - Mark StubbingsPartner,
Sydney
Ph: +61 2 9230 4257
Mark.Stubbings@aar.com.au - David McLeishPartner,
Melbourne
Ph: +61 3 9613 8954
David.McLeish@aar.com.au
