City Convenience Stores Pty Ltd v Third Lafite Pty Ltd (No 2)  NSWCATAP 90 and City Convenience Stores Pty Ltd v Third Lafite Pty Ltd  NSWCATAP 254
These cases analyse a landlord’s attempt to avoid the effect of section 6A of the Retail Leases Act (NSW) by terminating a short term licence without recovering possession of the premises. There was a real threat of a five year lease at a low rent- if the tenant elected to take that. That did not occur, but the attempt to avoid section 6A failed and cost the landlord $80,000.
In this case, the lessee initially occupied premises in George Street Sydney for use as a City Convenience Store under a 3 month (approximate) licence from 3 June 2013 to 4 September 2013. After 4 September 2013, the lessor allowed the lessee to hold over on a month to month basis.
The parties were negotiating a 5 year lease during this time, however that lease was never agreed or entered into.
The lessor gave the lessee notice of termination and required them to vacate on 30 May 2014. Notwithstanding this, the lessee continued to occupy the premises until February 2015 but only paid one more weekly instalment of rent (for which the lessor provided a tax invoice).
The lessor repossessed the premises on 4 February 2015.
The in-between period from 1 July 2014 to 4 February 2015 was subject to litigation. At first instance, the Tribunal found that the lessee was a trespasser for this period. The lessor was granted mesne profits (which is like rent, but paid by a trespasser). The lessor was awarded a damages claim of $226,295.52, being the mense profits for that period based on the rent that the lessor might have received under a lease and arrears owed under the expired licence.
The lessee appealed, arguing that the Retail Leases Act (NSW) never applied, and so the Tribunal did not have the jurisdiction to make the award of damages. The lessee failed with that argument, however, the Appeal Panel found reasons to reduce the damages awarded.
The lessor and lessee then commenced negotiating a new five year term. The rent under that lease would have been greater than the rent under the licence. (The licence rent was $5,500 per week; the lease would have been approximately $31,000 per month.)
The negotiations continued until early 2015, when the lessee withdrew from further negotiations. The lessor then promptly re-entered possession of the premises.
During that negotiation period, the lessor had invoiced the lessee for rent at the rate specified in the proposed new lease. The lessee refused to pay those amounts, and requested invoices reflecting the rent payable under the licence.
The Tribunal had to consider what was the nature of the lessee occupation of the premises after 30 May 2014 (the termination date according to the lessor’s notice) until 4 February 2015 (the repossession date).
The lessor admitted that their notice terminating the licence on 30 May 2014 was intended to prevent the operation of section 6A of the Retail Leases Act (NSW), rather than to end the occupation.
Section 6A provides first that the Retail Leases Act (NSW) does not apply to leases (or licenses) that are less than 6 months long. However, if the lessee remains in occupation for more than 12 months, the Retail Leases Act (NSW) will apply.
Here, the initial licence was 3 months. However, by May 2014, the lessee had occupied the premises for 11 months … the effect of 6A was approaching. Section 6A combines with section 16 – minimum 5 year term. If the Retail Leases Act (NSW) applies, then section 16 creates a 5 year lease, but only if the lessee elects to have a 5 year lease. (The election requirement is part of section 6A.)
As the 12 month deadline was approaching, the lessor had a risk that the lessee would elect for a 5 year term, which would most probably be at the rent described in the initial licence.
The Tribunal initially found that after 30 May 2014, the lessee was a trespasser. It awarded mesne profits for that period, being the market rate (the amount in the proposed lease). On appeal, that was overturned. The Appeal Panel found that both the lessor and lessee understood that the lessee would continue to occupy the premises after 30 May 2014. The lessor’s tax invoice at the initial licence rate given for the first 2 weeks after 30 May 2014 further indicated that the intention was that the lessee was to continue under the existing arrangement until a new lease was negotiated and entered into.
The real risk in this case was that the lessee then could have elected to have a five year term at the initial licence rate. In fact, the lessee did not make such an election, so the lease was not extended to a term of five years. The actual effect of the Appeal was that the amount of damages awarded to the lessor reduced to $166,248.95 to reflect the rate of $5,500 per week.
The landlord’s attempt to avoid the operation of section 6A by terminating the licence without recovering possession of the premises failed. It was significant that the landlord provided an invoice at the old rate, however, the key component was that the lessee remained in possession without any new agreement substituting the old agreement. Hence, the lessee remained in possession holding over under the terms of the expired initial licence.
On 1 July 2017 the Retail Leases Act amendments remove the minimum 5 year term provision for new leases. Section 6A remains with only minor amendments, however a lessee in occupation under a short term lease (initially less than 6 months) who continues in occupation for more than 12 months may not make the election under section 6A for a 5 year term after 1 July 2017. For landlords, that risk is almost passed.
Matthew Rafferty, Partner