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Misleading and deceptive conduct – exclusivity

A recent NSW case dealt with a tenants claim that the landlord made representations which were misleading and deceptive when dealing with a tenants request for exclusivity. The landlord represented that the tenant would be the only independent fresh fruit and vegetable shop in the Fresh Food Precinct and as such should pay higher rent.  Later in the negotiations, the landlord knew that Franklins (in the Fresh Food Precinct) were going to expand its offering to include fresh fruit and vegetables.

The tenant’s claim failed.  The Court found that Franklins was not “independent” and in any event the landlord’s representation was not about the future.  However, it is another reminder about how difficult it is to win misleading and deceptive conduct cases.

Misleading and deceptive conduct

Commencing in 2004, a 5 year lease was entered into between NB2 Pty Ltd (Tenant) and the owners (Landlord) of a premises in Westfield Miranda (the Centre).  The Tenant had an independent fresh fruit and vegetable (FFV) shop along with one other tenant whose shop was in the Fresh Food Precinct (the Precinct) in the Centre (Woolworths who was selling FFV was in the Centre but in a different precinct).

As the only other FFV shop in the Precinct failed in 2009, the Tenant wished to acquire a lease of over that premises and continue trading from that new premises as well as their current premise.  In 2009/2010, negotiations commenced between the Tenant and the Landlord for a lease over Shop 2082 to be entered into for a period of 10 years.  In the Landlord’s Disclosure Statement to the Tenant in 2009, it was the stated “Permitted Use of shop” was as follows:

Fruit and vegetable shop with exclusive pre-packed delicatessen lines as per the agreed menu, including retail sale of flowers.

            Note: The lessee does not have any exclusive right to sell particular goods or services. There are or may be other lessees in the centre selling the same or similar goods or providing the same or similar services to those to be sold or provided by the lessee.

The main negotiation point was with respect to “exclusivity”.  The Tenant wanted to capture all of the market share for FFV in the Precinct.  The Landlord’s representative discussed with the Tenant about a need to pay a higher rent for their current premises because their shop would then be capturing all the FFV trade in the Precinct from the one site.  The Tenant was happy to pay a little more if it meant they would have no competition. Accordingly, the Tenant requested an exclusivity clause be inserted due to the high rent amount to be payable. The Landlord’s representative advised the Tenant that the Landlord could not offer exclusivity as Woolworths were already selling FFV in the Centre. The Landlord’s representative did however, suggest an exclusivity clause for the Tenant to be the only “independent” operator in the Centre.

The Tenant put forward two proposals for the rent payable either:

  1. $788,500 + gst; or
  2. $888,500 + gst with the following term included in the lease:

Exclusivity: Exclusive right to be the sole independent Fresh Produce operator in the Centre. This will require an agreement to terminate the lease on Shop 2089/2090 with effect 30/9/09.”

The Landlord’s representative advised the Tenant “that the lease proposal we put forward is fair and reasonable, given you will capture all the business for the fresh food produce.” Further discussions took place where the Landlord’s representative suggested to the Tenant that once they surrender the lease for Shop 2089/2090 they would pick up the total FFV trade in the Precinct.  When pushed by the Tenant for the exclusivity clause again, the Tenant was advised the other end of the Centre may be redeveloping and the Landlords want flexibility to have a FFV operation at that end.  It was then agreed by the parties the exclusivity would be limited to “the sole independent fruit and vegetable [operator] in the Precinct”.

In 2010, the Landlords received notice from Franklins requesting their consent on an application for development consent to “refurbishment” of its existing supermarket in the Precinct. The refurbishment included a FFV area and in March 2011 they commenced trade. The Tenant started to default in rent in 2012.

In 2014, the Landlords terminated the lease due to the Tenant’s default in paying rent. The Landlord brought proceedings against the Tenant (and the guarantors) for recovery of rent and damages.  The Tenant’s defence and cross claim was that during negotiations of the lease, the Tenant relied on Landlord representations which were misleading and deceptive. The Tenant’s defence and cross claim failed in first instance and the Landlord was awarded approximately $3.5m.  The Tenant has now appealed this decision.

Misleading and deceptive conduct

The Tenant claimed that during negotiations, the Landlord engaged in misleading and deceptive conduct or alternatively, acted unconscionably, in contravention of s51AC (which dealt with unconscionable conduct in business transactions) and s52 (dealing with misleading or deceptive conduct) of the Trade Practices Act 1974 (Cth) (the Trade Practices Act 1974 has since been repealed and replaced with the Australian Consumer Law).

During the appeal, the communications between the parties were examined in depth. In short, the discussions were, from the Landlords perspective, that the Tenant should pay increased rent because of its contemplated acquisition of the competing failed “In Season” business leaving the Tenant as the sole FFV operator in the Precinct.  There was no mention regarding any future competition. Although the Tenant requested exclusivity, the Landlords response was only that the Tenants exclusivity was “as the only independent fruit and vegetable operator in the Centre” [emphasis added].  The primary Judge found that the use of the word “independent” confined the possibility of exclusivity for the Tenant to it being the only non-supermarket chain FFV retailer in the Precinct.  His Honour (in first instance) reflected the ordinary meaning of the word “independent” as “is one that is independent of other stores”.  It was found that Franklins was not of that description and was therefore not inconsistent with the exclusivity contemplated by the Landlord.

It was also held that when the Landlords representative sought to support this statement, that upon the Tenant’s acquisition of the “In Season” store, it would be the only FFV retailer in the Precinct, he did not expressly nor impliedly, represent nor promise that that monopoly position would continue for the term of the lease.

His Honour stated that in his view it was not incumbent on the Landlord’s representative to draw the Tenant’s attention to the possibility of Franklins commencing the sale of FFV in the Precinct and having not said anything misleading to the Tenant.  His Honour quoted Gleeson J in Lam v Ausintel Investments Australia Pty Ltd (1990) 97 FLR 458 at 475:

Where parties are dealing at arm’s length in a commercial situation in which they have conflicting interests it will often be the case that one party will be aware of information which, if known to the other, would or might cause that other party to take a different negotiating stance. This does not in itself impose any obligation on the first party to bring the information to the attention of the other party, and failure to do so would not, without more, ordinarily be regarded as dishonesty or even sharp practice.

Representations

The Tenants alleged that the Landlord made the following representations:

  • under the Lease, the lessee would be in a position to capture the whole market for fruit and vegetable retailing in the Fresh Food Precinct of the Centre;
  • under the Lease, the Lessee would be the only retailer of fresh fruit and vegetable produce in the Centre aside from Woolworths [and] aside from any fresh fruit and vegetable operation at the other end of the Centre in respect of which the Lessee had a first right of refusal; and
  • further, or in the alternative, the Lessee would have “the right to be the sole independent specialty fruit and vegetable retailer in the Fresh Food Precinct.

The Tenant’s primary case was that the Landlord made the above representations and that those representations became misleading and deceptive when the Landlord became aware of Franklins intention to retail FFV and did not disclose that knowledge to the Tenant.  His Honour found the case failed due to the first and second alleged representations not being made and the third representation, although made, did not bear the meaning that the Tenant contends it had.  His Honour also held that if the Landlord did not represent to, or promise, the Tenant that it would be the only FFV retailer in the Precinct, there was nothing misleading, deceptive or unconscionable in the Landlord not disclosing to the Tenant their assumed knowledge of Franklins intention.

Damages

The Landlord’s damages included arrears for rent up to termination of the lease, lost rent from that date until a new lease commenced and cost of removing the Tenants fixtures and fittings.

On a side note, in the appeal, the Tenants challenged the primary judge’s assessment of the Landlords damages in that His Honour had erred in not finding that the Landlord had failed to mitigate their loss.  His Honour in the appeal concluded it would have been unfair to permit the Tenants to contend in their closing submissions that that finding should be made as they had not pleaded that the Landlord failed to mitigate their loss and had not earlier made a submission to that effect.

The Tenant’s other challenge regarding damages, was that the claim for loss of rent should have ceased on the date the Landlord entered into an Agreement to Lease with a new tenant. However, His Honour held that the date adopted by the Landlords was correct i.e. the date the new lessee commenced paying rent.

The Tenant’s challenges to the quantum of the damages were rejected.

Gillian Kirwan, Lawyer

Paul Carroll, Partner

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