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Funds Management - Real Estate & Superannuation

Focus on Leasing – July 2001

In this issue: The Full Federal court has reviewed the Berbatis decision relating to unconscionable conduct; and Victoria's Supreme Court looks at the effect of a 'letter of intent' where no formal lease has been concluded. 

Unconscionability revisited – Berbatis overturned

In brief: A finding in proceedings instituted by the ACCC that a landlord had engaged in unconscionable conduct has been overturned on appeal1. Matthew Raven, a Senior Associate in our Brisbane office, looks at the decision.

Berbatis owned a shopping centre known as Farrington Fayre in WA2. One of the tenants, the Roberts, ran a fish shop in the centre. The Roberts' daughter had a serious illness and they assisted her with medical bills. Their lease was due to expire, and they were looking to sell their business. The value of the business was dependent 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 (brought by a number of tenants) relating to overcharging of operating expenses. Ultimately the Roberts gave up the claim in order to secure the new lease.

Driving a hard bargain and unconscionable conduct

On appeal, the Full Court found that the landlord had not acted unconscionably. The decision was based on the following observations:

  • the fact that the value of the business depended on the Roberts' ability to negotiate a new lease did not itself mean they were at a 'special disadvantage';
  • the evidence did not show that the Roberts' daughter's illness caused them to give up the claim;
  • the claim was relevant to the lease renewal – it arose from the relationship of landlord and tenant which they were seeking to renew; and
  • the landlord was not obliged to offer a new lease. It had offered the Roberts a lifeline, which they had accepted. They made a commercial decision that they were better off accepting the new lease and giving up their claim. The landlord may have driven a hard bargain, but had not acted unconscionably.

The court referred to an earlier decision in which a landlord who insisted on payment of a $70,000 premium for a lease renewal was also found not to have acted unconscionably3. The tenants had failed to exercise an option on time and stood to lose their business and their home. As the judge put it, the landlord had them over a barrel. Although the landlord was found to have adopted an 'avaricious, opportunistic approach and struck a very hard bargain', its conduct fell just short of unconscionable. The fact that the tenants were experienced business people and had brought the problem upon themselves appeared to be important factors.

The result: Landlords still need to show caution in discussing lease renewals

Traditionally, unconscionability claims have been founded on inherent or personal weaknesses such as age, lack of English or drunkenness. Berbatis extended the scope of unconscionability to 'situational disadvantage' – the Full Court did not disagree with that, it simply came to a different conclusion on the facts. Therefore, whilst it may now be a little more difficult for a tenant to show a landlord has acted unconscionably whilst negotiating for a new lease, there is still a line which cannot be crossed – where driving a hard bargain becomes taking unfair advantage.

A further caution is necessary – these cases were decided under the general law. The new section 51AC includes a number of indicators of unconscionable conduct, such as 'were the conditions imposed reasonably necessary to protect the landlord's legitimate interests?' and 'was the landlord's conduct consistent with its conduct in similar transactions?' and 'the extent to which the parties acted in good faith'. Therefore, landlords will still need to be wary about conditions they impose on tenants when negotiating from such a strong bargaining position.

  1. C G Berbatis Holdings Pty Ltd v ACCC, Federal Court of Australia, Full Court, 27 June 2001
  2. The facts of the case are set out in detail in Focus on Leasing, November 2000
  3. ACCC v Samton Holdings Pty Ltd, Federal Court of Australia, Carr J, 29 November, 2000

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Damages awarded for loss of unenforceable lease

In brief: Questions often arise about the effect of 'letters of intent' where no formal lease is concluded. Cathy Atkinson, an articled clerk in our Brisbane office, discusses a recent case that deals with this issue4.

The search for new premises

McKendrick operated a timber and hardware business in Mildura from two locations. Its lease at one of the locations was due to expire on 30 June 1999 and the owner had refused a 12-month extension. An agreement was being negotiated for purpose-built premises to be constructed and leased to McKendrick. In the meantime, McKendrick was looking for a temporary location from which to carry on its business.

McKendrick had a number of discussions with an agent, Mr Murphy, about a property in Etiwanda Avenue. Telstra occupied part of this property under a monthly tenancy. McKendrick made it clear '31 July was D-Day' and it would need vacant possession by that date.

There was an exchange of letters on 9 July confirming a verbal agreement but 'subject to final discussions'. On 19 July, McKendrick was given a copy of a letter from the agent to the owners' solicitors setting out the terms of 'a new lease of the premises' . These included:

  • a 12-month term;
  • rent of $44,000;
  • access to the yard to begin moving in equipment on 14 July; 
  • and lease commencement on 1 August

McKendrick paid a $5,000 deposit and was given the keys to the yard. It then began disassembling its timber racking in the old premises and re-erecting some of it in the yard at Etiwanda Avenue.

Agreement comes unstuck

On the same day, Telstra wrote to the owners indicating it would require one month's notice to move out but would be willing to allow part of the site to be used for storage. McKendrick was made aware of the problem on 27 July and immediately began looking for an alternative location. It signed a lease of a property in Byrne Court (which it had previously rejected as unsuitable) on 30 July. The Byrne Court owners had required a five-year term and a higher rent. McKendrick sued the owners of Etiwanda Avenue and their leasing agent seeking to recover the loss it suffered as a result of the enforced move to Byrne Court. The judge was required to consider a number of issues which commonly arise in cases of this type.

1. Was there a concluded agreement or simply an agreement subject to formal documentation being signed?

The judge found an agreement had been concluded on 19 July although certain matters such as the basis for rent review if the option was exercised, details of the landlord's fittings and whether directors' guarantees were required had not been discussed. The major terms had been settled and although a formal lease document was contemplated, the parties had intended to be bound on 19 July.

2. Were the statutory requirements for writing met?

Under the Victorian Property Law Act 19585, to be enforceable, a lease must be in writing signed by the parties or an agent authorised in writing. An exception arises where possession is given under a verbal lease or there are other acts of part performance referable to the concluded lease. Here the correspondence between the parties did not satisfy the statutory requirements because the agent did not have the necessary authority. There were not sufficient acts of part performance because possession to the yard was not given under the lease but in anticipation of its commencement on 1 August. Payment of the deposit by itself was not sufficient.

3. Could the tenant rely on representations by the owner and its agents?

Despite this, the tenant succeeded with its damages claim because of assurances made by the owner after the agreement was concluded on 19 July that there was a concluded agreement and that the premises would be available on 1 August.

Firstly, because of the landlord's conduct, it was prevented from defending the claim on the basis there was no concluded agreement. This is called 'estoppel'. The landlord induced a belief in McKendrick that vacant possession would be given on 1 August. McKendrick relied on that representation and acted to its detriment by beginning to move into Etiwanda Avenue and ceasing to look for alternative premises. Secondly, the owners and agent had engaged in misleading and deceptive conduct under the Trade Practices Act 1974 and its Victorian equivalent. Thirdly, the agent, in making the representations between 19 and 27 July, had acted negligently.

McKendrick awarded damages

The court awarded McKendrick $145,000 in damages, including:

  • additional rent payable at Byrne Court;
  • the cost of moving fixtures and timber a second time;
  • compensation for storm damage to goods stored in the open at Byrne Court because the tenant did not have sufficient time to arrange undercover storage; and
  • loss of profit caused by disruption associated with the sudden change of plans.

The decision is a useful illustration of how a 'subject to formal agreement' clause in a letter of intent might come unstuck. It also shows how conduct after a concluded agreement is reached can be important. The conduct of the owners and their agents after the agreement was concluded and leading up to the commencement date lead to the landlord's downfall in this case.

  1. McKendrick & Co Pty Ltd v Fush, Supreme Court of Victoria, Ashley J, 18 April 2001
  2. Similar provisions exist in the other states

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