Focus: Leasing – March 2002
Anchors away?
In brief: Leases often provide that landlords can refuse consent to assignment, where the assignee has inferior trading ability. Is this inconsistent with a landlord's statutory obligation not to unreasonably withhold consent? Senior Associate Matthew Raven looks at a recent NSW decision which considered this point in the context of the Franklins sale.
Sanwick owned the Riverwood Plaza Shopping Centre in NSW. The centre was anchored by Woolworths and Franklins. Franklins had a 10-year lease which commenced on 28 June 1999.
The Franklins sale
Franklins agreed to sell various businesses including its Riverwood Plaza store to IGA. Franklins sought consent to assign the lease to IGA, which intended subleasing the store to a subsidiary to operate the business. IGA is one of Australia's top 150 companies, distributing goods to over 4,500 retailers. While it is predominantly a grocery wholesaler, some of its subsidiaries operate supermarkets.
The landlord's refusal
Clause 17.2 of the lease provided that the landlord would not withhold its consent to an assignment if, among other things, the proposed assignee was respectable and financially responsible and an experienced retail trader with management and size similar to that of Franklins. The landlord refused its consent, claiming that IGA was an inexperienced retailer. IGA sought an order that the landlord's refusal was unreasonable and contrary to s133B of the NSW Conveyancing Act1.
The assignment clause
IGA submitted that clause 17.2 was contrary to s133B – that any requirements in an assignment clause (other than the statutory requirement that the landlord not unreasonably withhold consent) were to be ignored. The judge rejected this. He accepted that an assignment clause could include guidelines which the parties agreed were relevant in deciding whether consent should be given. He said the matters listed are not necessarily conclusive (if one of them is not satisfied, it is not automatically reasonable for the landlord to refuse consent) but the court could take them into account in deciding what is reasonable.
He also pointed out that a landlord does not have to prove its decision was justified, only that the same decision might be reached by any reasonable person in the circumstances.
The landlord's purpose
Franklins also argued that the landlord had refused consent with a view to ultimately securing a surrender of the Franklins lease, so that it could grant a new lease to Coles at a higher rent.
The judge noted that the purpose of an assignment clause is to protect the landlord from having its premises used in an undesirable way or by an undesirable tenant. It follows that a landlord is not entitled to refuse consent on grounds which have nothing to do with the relationship of landlord and tenant.
However, if the consent is based on a concern that is legitimate for the landlord to take into account, the fact that it may involve a collateral motive or purpose, or some back-up scheme, is not enough to show that a landlord has unreasonably withheld consent.
The judge accepted that the landlord withheld consent because of IGA's lack of retail experience, and because it believed two anchor tenants were necessary and that only Coles could compete effectively with Woolworths. There was also some evidence that other tenants in the centre opposed the introduction of an unknown operator.
He concluded that even if there was a collateral purpose, it was for the good of the shopping centre and the other tenants – the landlord's approach was therefore reasonable in the circumstances.
The decision means landlords don't need to consider a request for assignment in a vacuum – they can take into account other important factors such as the tenancy mix and the impact on other tenants.
[Source: Tamsco Ltd v Franklins Ltd, Supreme Court of New South Wales, Young CJ, 14 December 2001]
References
- The section (which applies despite anything in the lease) implies a requirement that landlords may not unreasonably withhold consent in leases which prohibit assignment without consent. Other states have similar legislation.
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 - Tony DaviesPartner,
Brisbane
Ph: +61 7 3334 3250
Tony.Davies@aar.com.au
