Shopping centre landlord acted unconscionably

The NSW case of Spuds Surf Chatswood Pty Ltd v PT Ltd has considered whether a tenant can claim damages or rent relief when a shopping centre landlord has interfered with the tenant’s trade from its premises.

The case considers principles which are relevant to landlords and tenants of shopping centres in both NSW and the ACT.

What happened?

Spuds Surf Chatswood Pty Ltd (‘Spuds’) leased three shops in a prime area of Westfield Shoppingtown Chatswood, Sydney from PT Ltd (‘the Landlord’). Spuds, who had leased shops 415 and 416 since 1999, took a new lease of shops 415 and 416 as well as shop 417 (‘the Premises’) in July 2002 (‘the Lease’).

At the time of entering into the Lease, Spuds raised concerns about the sightlines to the Premises being obstructed by kiosks and requested a clause protecting its interests be included in the Lease. The Landlord did not agree to this request.

Between November 2002 and February 2005, the Landlord entered into leases of three new kiosks which were positioned in the walkway in front of the Premises. For each of the kiosks, the Landlord approved signage which exceeded the maximum height restrictions imposed by the fitout guidelines for the centre. Spuds conveyed to the Landlord its concerns about the contravention of the guidelines and the affect that would have on the sightlines to the Premises. However, the Landlord refused to grant rent relief. In January 2005, the Landlord amended the fitout guidelines for the centre so that, from the date of amendment, the signage for each of the kiosks became compliant with the amended guidelines. Spuds’ sales revenue declined and consequently it took action against the Landlord. The Landlord also took action against Spuds for rent arrears.

Unconscionable conduct

Under the relevant leasing legislation in NSW and the ACT a party to a lease must not engage in unconscionable conduct.[2] In the initial decision between Spuds and the Landlord,[3] it was held that the Landlord had engaged in unconscionable conduct by:

  • approving kiosk signage that exceeded the height restrictions imposed by the fitout guidelines
  • failing to notify Spuds of approval and installation of the non-compliant signage
  • using unfair tactics by relying on the greatly liberalised version of the guidelines amended in January 2005 to ensure artificial compliance with the height restrictions and
  • utilising the Landlord’s superior bargaining position to block any attempt by Spuds to obtain acknowledgement of the Landlord’s error and its true impact on Spuds.

The Landlord’s conduct was described by the court as highly unethical and had a sufficient degree of moral tainting for the court to find that the Landlord had engaged in unconscionable conduct. [4]

Was the tenant entitled to damages?

The question to be decided in the most recent case was whether Spuds was entitled to damages for loss of profits and lost value of business due to the Landlord’s unconscionable conduct.

The court found that Spuds failed to show that the Landlord’s unconscionable conduct had an immediate and continuing impact on the revenue generated at the Premises. The court noted that Spuds’ sales revenue did not begin to decline until a substantial time after the erection of each the kiosks. Further, evidence suggested that other factors may have contributed to a decline in Spuds profits. Accordingly, Spuds was not entitled to damages.

However, the court noted that damages were not the only remedy available to Spuds. It also considered equitable remedies and found that Spuds was entitled to rent relief as the Landlord had been enriched, at the expense of Spuds, by its unconscionable conduct. Although this was a win for Spuds, the rent relief granted by the court was less than the rent arrears.

What are the implications?

Landlords: When landlords of shopping centres are erecting kiosks or other similar free standing mall tenancies they should keep in mind that it may be considered unconscionable conduct if they approve signage or other components of the kiosk which are not in compliance with fitout guidelines and which may obstruct the sightlines of other tenants.

Tenants: Tenants considering whether to pursue a landlord for damages for unconscionable conduct should be aware that, in order to receive an award for damages, a tenant must be able to show the conduct had an immediate and continuing impact on the tenant’s business. A general decrease in profits over time is not enough to establish a claim for damages, especially if there are other factors to consider.

What should landlords do?

It is best practice to ensure that all approvals are given in accordance with fitout guidelines. It is not sufficient for a landlord to subsequently amend its fitout guidelines in an attempt to avoid a complaint by another tenant. However, there may be other options available to a landlord. For example, the court suggested that if the Landlord had granted Spuds rent relief, then the court may not have found that the Landlord engaged in unconscionable conduct. Landlords should consider offering new signage or other promotional activities to an existing tenant who may be impacted by a new kiosk, in order to minimise the effect of the new kiosk on that tenant’s business.

For more information contact the Property, Commercial and Finance Team:

Christine Murray — Partner — Property, Commercial and Finance Team
(02) 6279 4402
christine.murray@mvlawyers.com.au

Jennifer Jaeschke — Senior Lawyer — Property, Commercial and Finance Team
(02) 6279 4361
jennifer.jaeschke@mvlawyers.com.au