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Property Law Update - May 2009

Property Law Update – May 2009

Published on May 1, 2009 by Paul Carroll and Matthew RaffertyPaul Carroll and Matthew Rafferty

Blackler v Felpure 

“Vacant Possession”

There is an argument that the expression “vacant possession” could refer to vacant physical possession or to legal possession of vacant premises. Justice Bryson considered this question in the case Blackler v Felpure Pty Ltd [1999] NSWSC 958 in relation to section 35 of the Retail Leases Act (Demolition). The Act provides that a demolition clause cannot be used to terminate a retail shop lease unless the substantial repair, renovation or reconstruction of the building cannot be carried out practicably without vacant possession of the shop. Counsel for the landlord argued that either interpretation of “vacant possession” was sufficient to enable a landlord to terminate a lease using a demolition clause. However, Bryson J decided that “vacant possession” refers only to physical vacant possession and that a requirement for a legal entitlement to possession could not be of significance in determining whether the demolition clause could be used.

Practically, this means that to terminate a lease using a demolition or a relocation clause, the works proposed must not be able to be carried out without the lessee ceasing to trade and moving out of the shop so that the landlord may access the vacant shop for the purposes of the building work.

Further, Bryson J remarked that the use of the word “practicably” in the Retail Leases Act invokes consideration and assessment of “practical concerns such as time, expense and inconvenience” [at 46]. In the case before him, he found that although it would be possible to complete the works without vacant possession of the shop, it would cost somewhere between 40% and 70% extra and take up to twice the time if the works were completed without obtaining vacant possession of the shop. This was enough to conclude that the work could not be practicably completed without vacant possession of the shop.

Skiwing Pty Ltd v Trust Company of Australia

“Genuine Proposals”

There is a requirement for a relocation or demolition notice to indicate to the lessee that there is a “genuine proposal” to redevelop the premises or centre, so that a lease can be terminated under a relocation or demolition clause. Both the Administrative Decisions Tribunal and the NSW Supreme Court considered the requirements of a genuine proposal in the Skiwing series of cases. (Skiwing Pty Ltd v Trust Co of Australia Ltd (No 3) [2004] NSWADT 94; Trust Co of Australia Ltd (Stockland Propperty Management Ltd) v Skiwing Pty Ltd trading as Café Tiffany’s [2005] NSWADTAP 9; Skiwing Pty L:td v Trust Co of Australia Ltd trading as Stockland Property Management [2006] NSWCA 276)

In these cases the landlord attempted to relocate a number of tenancies, including Café Tiffany’s from one floor to various other premises within the building. The landlord wanted to undertake the works so as to have a market repositioning of its arcade to attract the youth market, to enter into a lease with an icon tenant suitable to its new market position and use that icon tenant to attract a new tenant mix. The landlord issued three separate relocation notices to the sitting tenants, one after the other, each of which it conceded in turn to be invalid.

The tenants argued that the notices were invalid for three reasons:

  1.  that the intended works were aimed at replacing an existing tenant with a preferred tenant and as such did not indicate a “genuine proposal” to redevelop the centre;
  2. that the premises offered in substitution were not alternative; and
  3.  that the rent payable on the alternative premises did not comply with section 34A(c).

At first instance and on appeal, the second reason was supported by the ADT and the Supreme Court.  (Discussed below) The third reason was supported by the ADT and in each appeal.

The first reason was supported by the ADT at first instance, but the decision was reversed on appeal and the appeal was upheld in the Supreme Court.  The Tribunal in the first instance was swayed by the fact that the lease had been renegotiated only a year prior and no mention was made of the landlord’s desire to change the market position of the centre.  The Tribunal saw the actions of the landlord as an attempt to use the relocation rights to replace an existing tenant which had only recently had its lease renewed for a new 7 year term, and who had satisfactorily refurbished its shop.  The Tribunal found that to use the relocation rights in this matter was demonstrably invalid.  (At [94])

On appeal however the panel overruled this decision.

The Appeal Panel, quoting Justice Bryson in the Blackler & Felpure Pty Ltd case in the NSW Supreme Court, found that a landlord may use a power to terminate a lease provided it has a genuine proposal to redevelop the centre or premises, even if the landlord is using that power with a view to its own advantage (at [225]).  That is, a landlord may still have a genuine proposal even though it is for its own benefit.

The tenant appealed this decision to the Court of Appeal where, in Chief Justice Spigelman’s judgment (with whom Justices Hodgson and Bryson agreed), support was found for decision of the appeal panel.  Spigelman CJ explained that “a proposed ‘refurbishment, redevelopment or extension’ does not lose the character of a ‘genuine proposal’ by reason of the fact that the commercial motivation of the lessor is to attract a tenant or a particular kind of tenant”.  (at [22])

In Blackler v Felpure Bryson J examined the demolition notice provided by the landlord to ascertain if the details provided in it were sufficient to indicate to the tenant that the landlord had a genuine proposal to refurbish the premises/ centre. (at [36]). Bryson considered the purpose of the notice containing such details. These were so that the tenant could “come to a conclusion about whether the termination will be effective”, and so the sufficiency of the details provided should be tested in relation to that purpose.

The genuineness of the proposal was not contested in the case of Blackler v Felpure. Bryson remarked that there was no reason to doubt that there was a genuine proposal (at [38]). The notice simply claimed that the landlord proposed to carry out works, and listed those works. The practice of developing plans, marketing material, and discussing the plans with the tenants, would contribute to ensuring that the tenant could not doubt that the proposal was genuine. The notice (relocation or demolition) should attach or refer to these things so that the notice is effective.

“Alternative Premises”

The requirement for the relocation notice to provide an offer of “alternative premises”, as required by the Retail Leases Act, was also considered in the Skiwing cases. At first instance in the ADT, Judicial Member Donald found that the premises offered by the landlord as alternative were not alternative premises.  Donald stated:  “I do not think the proper construction of ‘alternative’ in the relocation provisions is simply to allow the offer of any ‘other’ premises at all; there must be some degree of commercial similarity such that they are appropriate for the nature and size of the business conducted by the tenant”.  (At [90])

On appeal by the landlord on this point, the appeal panel of the Tribunal agreed with Judicial Member Donald that the ”differences in floor area and layout were sufficient to support its finding that there was no commercial similarity to the existing premises”.  (At [26]).  On this basis alone the appeal panel found that the relocation notices were invalid.  This particular issue was not argued before the Court of Appeal. 

Although the Supreme Court did not endorse or reject the whole of Judicial Member Donald’s test, when considering the requirement that the premises be alternative with the additional requirement in section 34A(c) of the Retail Leases Act the new lease be on the same terms and conditions as the existing lease, we can be reasonably certain that all commercial aspects of the new lease offered, including the commercial aspects of the alternative premises itself, are relevant to the question of the validity of the relocation notice. The “commercial similarity” requirement would include size, shape, position within the centre relative to entrances, customer flow, and other tenancies, and perhaps even extend to required trading hours, proximity to storage, and the market position of the area/precinct of the alternative premises.

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