Liquidation and assignment
This Victorian case involved a restaurant in Cowen on Phillip Island. The five year lease expired on 31 March 2017, but contained 3 five year options to renew.
On 7 August 2017, the lessee was placed into voluntary administration, and then a few weeks later, went into liquidation. Just before all that, one of the directors of the lessee incorporated a new company. That new company entered into negotiations with the liquidator to buy the business and become the tenant.
The liquidator of the lessee agreed to sell the business to that new company. The new company claimed that the landlord agreed to consent to the assignment of lease provided the arrears were paid. On that basis the new company paid the arrears, but soon after, the landlord made attempts to end the lease. The new lessee sought an injunction from the Tribunal to prevent the landlord from terminating the lease.
En Avant Pty Ltd v Baltars  VCAT 367
Just after the liquidator was appointed, the landlord sought to ensure all arrears (approximately $10,000) would be paid. The new company was trading as a licensee of the old lessee. The landlord was aware that the new company wanted the lease to be assigned to it, and this would not be possible if the landlord terminated the lease for unpaid rent. The landlord demanded the new company pay the arrears. The new company responded stating that the Australian Motorcycle Grand Prix was on Phillip Island the next weekend (19-22 October 2017), and with the increased in trade it would be able to pay the arrears. The arrears were not paid, and in December 2017 the landlord sent the new lessee another breach notice for unpaid rent, locked the premises and demanded payment. The new lessee paid the arrears and was permitted to re-enter the premises.
The landlord then served a notice terminating the lease on the basis that it had expired and was only a month-to-month tenancy.
The new company argued that in September 2017, the landlord had represented to them that they would consent to the assignment provided the arrears were paid. This representation was alleged to have been made during a phone conversation.
The new company claimed that the payment of the arrears in December 2017 was in reliance on that representation. They claim they paid the arrears (which were owed by the old lessee, in liquidation) because they understood that the lease would not be terminated if they did. They also claimed that they completed the purchase of the business by paying the purchase price (approximately $50,000), took possession of the premises and operated the business and also made goodwill payment to other creditors of the former lessee (approximately $50,000), all in reliance of the landlord’s representation.
The landlord claimed that the representation was only a promise to work with the new lessee if they paid the arrears and consider consenting to a assignment of the lease.
On the basis of the representation of consent to the assignment, the new company sought an injunction to prevent the landlord from terminating the lease. Although the lease had expired, if the landlord was prevented from terminating the lease, the tenant would be able to take advantage of section 28 of the Retail Leases Act.
Section 28 of the Retail Leases Act requires the landlord to give the tenant a reminder that the option exercise period is approaching. This reminder needs to be given between 6 and 12 months prior to the last day the tenant can exercise the option. If the landlord fails to give that reminder, the option exercise window is extended to the day 6 months after the landlord does give that reminder. If that extension is beyond the end of the lease, then the lease is extended until that date.
It seems that the landlord had not given the section 28 reminder. If they win the case, the new company would seek that extension, and with that extension, they would have time to exercise the option to renew and have the benefit of a new five year lease.
These are complicated issues and the parties disagree on the facts, especially regarding what was said in the phone call. Ultimately, the new company will need to prove:
- that the landlord did make the representations over the phone in September 2017, and
- that the payments made by the new company were in reliance of those representations;
But the Tribunal did not have to resolve those issues in this case. The Tribunal had to decide whether to grant an injunction preventing the landlord from terminating the lease until the matter could be properly heard. To obtain an injunction, the new company needed to prove three things:
- That it had an arguable case – or that there was a serious question to be tried;
- That the balance of convenience favoured the grant of the injunction; and
- That damages would not be an adequate remedy for the new lessee if the injunction was not granted but it later won the case.
The Tribunal divided the alleged representations into two: the first, that the landlord would not terminate the lease based on the lessee being in liquidation – which it was entitled to do; the second, that the landlord would consent to the assignment.
The Tribunal found that the evidence presented showed that it was arguable that the new company paid the arrears and purchase price for the business in reliance of the representations. As this was only an application for an injunction, the Tribunal did not have to make a final decision, but only find that the case was arguable. The Tribunal made this finding.
Balance of convenience – the Tribunal found it clear that if the injunction were not granted the new company’s business would be destroyed. Whereas, if the injunction was granted, the landlord was not inconvenienced at all because the new company would just continue to pay the rent while the injunction was current. In those circumstance, granting the injunction was the least risky course of action.
Damages adequate remedy – the new company argued that if it were to be evicted, it may become insolvent, and that later winning a court case would be of no benefit. The landlord pointed to the history of late payments of rent, and also suggested that the new company may become insolvent anyway, and be unable to pay any damages. The Tribunal found that the balance of convenience favoured the new company, and granted the injunction.
The new company and its director had to undertake to abide by any order for damages resulting from the injunction and it was a condition of the injunction that the new company pay all rent and other money in full and on time.
The injunction was granted, and the landlord is prevented from terminating the lease until the substantive issues can be resolved by the Tribunal (and any appeals are finalised).
Presumably the landlord has now served its section 28 notice giving the lessee 6 months to exercise its option, and the clock is ticking. The liquidator is unlikely to exercise an option to renew. Will the substantive case be heard in time for the new company to exercise the option?
Matthew Rafferty, Partner