Property Law Update (Retail Leasing) – November 2009
Assignment of Retail Lease Successfully Refused by Landlord Due to Change of Use
“If it waddles like a duck and quacks like a duck, it is …”
These are learned words from Judicial Member Fox in the ADT to describe why a landlord was able to refuse consent to an assignment and prevent a sale of a business from proceeding.
In a recent case (Jewell Bay Pty Ltd v DPT Operator Pty Ltd  NSW ADT 225) the “Coast” restaurant at Cockle Bay Wharf wanted to assign its lease to Gourmet Pizza Kitchen Pty Ltd (“GPK”). The landlord refused consent on the basis that a GPK restaurant would be a change of use from the Coast restaurant.
The lease commenced in 2002 for a term of 15 years with a five year option. The rent was approximately $30,000 per month. The Lessee had spent about $1.5 million on the original fitout. The restaurant had not been a financial success for some time and in order to avoid ongoing losses it was placed on the market for sale in September 2008.
In February 2009, the lessee found a buyer – GPK. GPK had traded in Sydney for about 10 years and at the time operated six suburban locations.
The Retail Leases Act
(1) The landlord is entitled to withhold consent to the assignment of a retail shop lease in any of the following circumstances (and is not entitled to withhold that consent in any other circumstances):
(a) if the proposed assignee proposes to change the use to which the shop is put,
(b) if the proposed assignee has financial resources or retailing skills that are inferior to those of the proposed assignor;”
(There was no question that GPK met the financial resources and retailing skills tests.)
The permitted use in the lease was stated as “contemporary modern Australian licensed restaurant with Italian and Mediterranean bias”.
The Tribunal had to decide what that meant and whether a GPK complied with that use. Experts were called to give evidence. While none of the experts who gave evidence to the Tribunal had ever dined at Coast or at a GPK restaurant, the Tribunal was able to determine that “contemporary modern Australian licensed restaurant with Italian and Mediterranean bias” means “that such a restaurant must have an emphasis on fresh seasonal produce, which entails a menu which changes quite often, perhaps to reflect the four seasons, as well as having a daily market menu to reflect that which was fresh at the market in recent days”.
GPK had a summer and winter menu, each of which would vary little from year to year. GPK was unable to include produce which was available for a very short season, and in fact its modus operandi was such that the minimum time it could include any particular item on the menu was six months. GPK was also solely a pizza and pasta restaurant, which the Tribunal characterised as a “Contemporary modern Australian licensed Pizza restaurant”.
The Tribunal concluded that a GPK restaurant would be a change in use, and so the landlord was entitled to refuse consent to the assignment. The sale of business was unable to proceed.
The decision is interesting in that it shows that usage clauses in leases can be upheld and enforced – both in assignments and more generally. The Tribunal asked whether it would be a breach of the lease if, in the interests of generating better returns, the operators of ‘Coast’ changed their menu so that they were only offering pizza and pasta. The answer was ‘yes’ – that would be a breach.
Although the Tribunal recognised that it can be difficult to define concepts, it can be relatively straight forward to identify examples. (Hence: “if it waddles like a duck and quacks like a duck…”) The Tribunal could identify that GPK was not an example of a “contemporary modern Australian licensed restaurant with Italian and Mediterranean bias.”