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Can a lessee be compelled to perform?

Sentinel Countrywide Retail Ltd v PC Emerald (QLD) Pty Ltd [2015] QSC 348

Under new regulations, tenants may be excused from opening for trade during the COVID-19 pandemic.  When the pandemic is over, can a lessee be compelled to re-open?

In a recent Queensland case, a landlord sought from the Court a mandatory injunction that would require the lessee to keep its shop open for business during the landlord’s shopping centre “trading hours” as provided for in the lease. The Court had to consider the settled practice of not granting mandatory injunctions which required persons to carry on a business unless there were “exceptional circumstances”.

Background

In February 2014, the tenant (PC Emerald (QLD) Pty Ltd) (“Tenant”) entered into a lease for premises in a shopping centre known as the Emerald Village Centre (“Centre”). In December 2014, the landlord, (Sentinel Countrywide Retail Ltd) (“Landlord”), purchased the Centre.  The Tenant’s lease was for a term of 7 years. With 5 years left on the lease, the Tenant closed its doors due to running at a loss and its future projection showing a continuation of such loss. 

The Tenant was a “one dollar company” set up solely for the purpose of this lease. The Tenant was a part of the Retail Food Group Limited (“RFG”).  Discussions between the Tenant and RFG led the Tenant to advise the Landlord of its intention to cease trading from the premises in the Centre from 31 October 2015.  The Landlord was told that the closure was because RFG had determined that the shop was “operationally unsound”.

The Landlord issued the Tenant a notice to remedy breach of covenant and required the breach to be remedied by 5pm on 31 October 2015.  RFG paid the rent on behalf of the Tenant until 30 November 2015. The Tenant and RPG sought to negotiate the terms of a surrender of lease with the Landlord. The Landlord sought an injunction requiring the Tenant to open the business for trade during the centre trading hours.

Issue for the Court to consider

The questions for the Court to consider were:

  1. was there exceptional circumstances thereby allowing a mandatory injunction to compel performance of a specific clause? or
  2. are damages an adequate remedy?

The specific clauses in the lease related to the “permitted use” and “trading hours”.

The general principle is that specific performance will not be ordered when damages are an adequate remedy.  However, this may not be the only reason why an order for specific performance may not be ordered.  There are a couple of reasons why the Courts would refuse to grant an injunction including:

  1. an order for a party to carry on a business would require “constant supervision by the Court”. Dealing with the repeated applications for rulings on compliance and the only means available to the Court to enforce its order is the quasi-criminal procedure of punishment for contempt;
  2. an order requiring the defendant to carry on a business may cause injustice by allowing the plaintiff (landlord) to be enriched at the defendant’s (tenants) expense meaning the loss which the defendant may suffer may be far greater than the loss of that the plaintiff would suffer from the contract being broken;
  3. the imprecision in terms of the order – if the terms of the Court’s order cannot be precisely drawn the possibility of wasteful litigation over compliance is increased;
  4. it is also not in the public interest for the Courts to require someone to carry on business at a loss “if there is a plausible alternative by which the other party can be given compensation”.

Landlord’s submission

Award of damages

The Landlord submitted that damages were not an adequate remedy as the closure of the store would have a detrimental effect on it that is unlikely to be quantifiable. The Landlord contended that the closure of this shop “adversely impacts on the Centre’s appeal to customers and may have direct impact of taking customers away to another centre”.  The Court stated that as much as the closure of the shop would adversely affect the Centre’s appeal to consumers of pizzas, since there were no other pizza shops in the Centre, it was not a drawcard attracting a large number of customers to the Centre like an anchor tenant would (such as Woolworths).

In this case, the Court was not satisfied that damages were an inadequate remedy.

If the Court didn’t come to this conclusion, it would need to consider the Landlord’s submission that this case warrants the grant of specific performance by a mandatory injunction and thereby making this case an exception to the settled practice.  The Landlord’s justifications for this were explained by Lord Hoffmann in Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998] AC 1. In that case, Lord Hoffmann examined the reasons why the Courts will apply the settled practice of never granting mandatory injunctions requiring persons to carry on business in “all but exceptional circumstances”.

The Landlord claimed this case to be “exceptional circumstances” as the closure of this store has a detrimental effect on it that is unlikely to be quantifiable (as discussed above).

The Court was not convinced this was the case due to the lack of evidence showing otherwise.

The Court accepted that there is a significant risk that the Landlord may be unable to recover any damages award made against the Tenant however, the risk of not being able to recover damages is a risk the Landlord assumed when it took the benefits and the burdens of a lease entered into with a one dollar company without securing guarantees from other companies or company directors.  The Landlord assumed this risk in acquiring the Centre in circumstances in which it should be taken to have understood that there is a settled practice not to grant mandatory injunctions in cases like this. The Court stated that “a sophisticated commercial organisation should have been aware that the remedy for breach of the covenant was likely to be limited to an award of damages” [para 29].

Tenant’s submission

The Tenant submitted that there were no exceptional circumstances to justify an order and that there are matters which would make it oppressive, if not contrary to public policy, to interfere with its legitimate commercial decision to end a loss-making venture. The Tenant stated that directors owe statutory duties to exercise the required standard of care and skill, and compliance with those duties may require a director to make the business decision to cease trading. If the Tenant was compelled to remain open it would probably incur new liabilities to creditors and employees which it could not meet.

The Tenant stated it was entitled to make a commercial decision to “cut its losses”.  The Tenant did not act secretly in ceasing to trade, the Tenant and RFG sought to negotiate terms of a surrender of lease.

Conclusion

In the absence of exceptional circumstances, the Court declined to make the order sought and instead found that damages would have been an adequate remedy.

The decision by a tenant to cease to trade is not a decision a tenant would make easily, in this case the Tenant at least tried to negotiate a deal with the Landlord. It appears the Landlord’s push for specific performance seems to stem from its idea that the franchisor would continue to come to the financial aid of the Tenant.

Lesson to be taken away from this case

If a landlord intends to lease premises to a “one dollar company” it should ensure it adds a covenantor as a party to the lease.

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