Unconscionable conduct under the Commercial Tenancy (Retail Shops) Agreements Act 1985

The recent decision of Nhung Huy Duong and Coventry Village Pty Ltd[1] provides a useful example of the type of arguments that a tenant may advance to seek to terminate a lease or claim for damages under the Commercial Tenancy (Retail Shops) Agreements Act 1985 (Act).  In particular, the case demonstrates arguments that can be advanced by a tenant based upon the broad concept of “unconscionability” and as a result of a failure to comply with statutory disclosure requirements.

The Facts

In 2011, the tenant was granted a lease (First Lease) to operate an Asian grocery store at Coventry Market Gardens (Market). The permitted use under the First Lease was ‘Asian grocery, fruit and vegetables’.

During the term of the First Lease another grocery store commenced trading in the Market and sold some of the same products as the tenant.

Between June 2012 and April 2014 the landlord sent the tenant approximately 27 reminders that rent was overdue and on 8 occasions sent a second reminder to pay the overdue rent.  On 8 April 2014 the landlord served on the tenant a ‘Notice of Breach of Lease’ after the tenant did not pay rent on the first day of the month as required under the First Lease.  The tenant did not pay the rent and on 14 April 2014 the landlord terminated the First Lease due to non-payment of rent.

Immediately after termination of the First Lease, the landlord offered the tenant a new lease of different premises within the Market (Second Lease). The Second Lease was executed on 15 April 2014. The tenant sought to terminate the Second Lease on 22 April 2014.

The tenant disputed the landlord’s entitlement to terminate the First Lease and the landlord disputed the tenant’s entitlement to terminate the Second Lease.

The Issues

Numerous arguments were advanced by the landlord and the tenant. This article focuses on the following issues in dispute:

• was the landlord’s termination of the First Lease unlawful because:

• the landlord was, by its conduct in accepting late payment of rent over a lengthy period, estopped from relying on its legal right to terminate; and/or

• the landlord had acted unconscionably in exercising its legal right to terminate.

• was the tenant entitled to terminate the Second Lease because the landlord had not provided the tenant with a disclosure statement and tenant guide before the Second Lease was signed.

The decision

Was the Landlord’s termination of the First Lease unlawful?

Unconscionable conduct

Section 15C of the Act prohibits landlords engaging in unconscionable conduct. This section includes a detailed (but non- exhaustive) list of matters that the Tribunal may take into account in determining whether a landlord’s conduct is unconscionable. The list includes the relative bargaining position of the parties, any unfair tactics engaged in by the landlord, discriminatory conduct of the landlord and the extent to which the landlord has acted in good faith.

The tenant argued that the landlord had acted unconscionably in a number of respects:

• by devising a scheme to terminate the lease to enable another tenant to expand into the premises;
• by discriminating against the tenant by exercising its right of termination under the First Lease but not in respect of other tenancies in the Market; and
• by exercising a right to terminate without including specific disclosure in its breach notice that the landlord may exercise a right to terminate if the tenant did not comply with the breach notice.

The Tribunal rejected the tenant’s arguments:

• the Tribunal found that the landlord had not acted unconscionably by having discussions with other tenants about taking over the area of the First Lease should the tenant default and the premises become available.  This did not evidence any ‘devious scheme’ and was simply the conduct of a ‘responsible owner’ and a ‘commercial reality’. The landlord had no obligation to disclose its future plans regarding re-letting of the premises to the tenant;
• the Tribunal did not accept that the landlord had discriminated against the tenant as compared to other tenants in the Market. The tenant’s only evidence of discrimination was an arrears payment schedule for the month of May 2014. The Tribunal found that the status of arrears for one month was of little relevance and was insufficient to draw any conclusion of discrimination, particularly in circumstances where the tenant had defaulted over an extended period; and
• the Tribunal considered it unnecessary for the notice of breach to outline the potential consequences of the failure to pay rent. The issue of a notice of breach, as compared to previous informal “rent reminders”, should have sufficiently forewarned the tenant of the seriousness of failing to comply. The terms of the lease were clear that non-payment of rent could give rise to a right to terminate.

Estoppel

The tenant also argued that the landlord was estopped from relying on its legal right to terminate as a result of its conduct in accepting late payment of rent over a lengthy period. According to the tenant, this conduct induced the tenant to believe that the First Lease would not be terminated for late payment of rent provided the rent was paid in the same month within which it first became due.

The Tribunal rejected this argument. The Tribunal placed weight on the fact that the landlord was vigilant in following up the tenant for overdue rent each month; conduct that was consistent with the landlord requiring compliance with the terms of the lease.  The Tribunal found that nothing that the landlord did should have created the assumption in the tenant’s mind that the landlord was waiving its rights under the lease. To the extent that such an assumption did exist in the mind of the tenant, it was unreasonable and had not been induced by any act of the landlord.

As the Tribunal said “the proverbial ‘Good Samaritan’ cannot be blamed if, after multiple efforts to secure timely payment of rent, it resorts to enforcement of its contractual rights”.

Was the Tenant entitled to avoid the Second Lease?

The Tribunal accepted the tenant’s argument that it was entitled to avoid the Second Lease because the landlord had not provided a disclosure statement or a tenant guide (Disclosure) to the tenant prior to signing the Second Lease as required under the Act.

The landlord argued that it was not required to provide the Disclosure for two reasons:

• the Second Lease was properly characterised as a variation of the First Lease and not a new lease. Disclosure does not need to be provided before a variation of lease is signed; and
• even if the Second Lease was a new lease, once a lease has been signed in a retail shopping centre, no further Disclosure needs to be provided to a tenant for a new lease in the same retail shopping centre.

The Tribunal was quick to dismiss both arguments. The Tribunal found that the Second Lease was clearly a new lease and not a variation of lease given:

• the First Lease was expressly terminated by the landlord. It could not be revived so as to be varied; and
• the terms of the Second Lease were so materially different from the First Lease, most importantly, as to the location/size of the premises and the commencement date.

The Tribunal also found that there was nothing in the Act that exempted a landlord from providing Disclosure to a tenant that had previously leased within the retail shopping centre.

Lavan Legal comment

This case serves as a reminder to landlords of the type of conduct that can be characterised as “unconscionable” under the Act and as to the importance of strictly complying with disclosure requirements in the Act.

Although the tenant’s unconscionability arguments were unsuccessful in this case, the Tribunal acknowledged that section 15C of the Act limits the manner in which a landlord may exercise its contractual rights. Accordingly, landlords should keep in mind that their conduct in dealing with a defaulting retail tenant can be the subject of a high level of scrutiny and take appropriate steps to ensure that their conduct cannot be reasonably criticised.

One of the main reasons the landlord was able to succeed on the issues of the tenant’s failure to pay the rent was the fact that the landlord had acted consistently with the terms of the lease.   If the landlord had not acted consistently with the terms of the lease, there would have been a basis for arguing that the terms of the lease had been varied by that conduct.  It is, therefore, critically important that parties act consistently with the terms of the lease.

Please do not hesitate to contact us if you require any advice in respect of defaulting tenants or other lease disputes.