Australia: Misrepresentation And Unconscionable Conduct Claims Writ Large -Like A ´Red Roll´ To A Bull

The decision in Red Roll Pty Ltd v Multiplex Latitude Retail Landowner Pty Ltd & Ors NSWADT 200 [2008] delivered on 21 July 2008 signals a renewed push by the Administrative Decisions Tribunal in NSW (Tribunal) to put the 'remedial' intention of the Retail Leases Act (Act) at the forefront of the minds of the industry and the courts.

Judicial Member Molloy GB has 'overruled' what he perceives to be the Court of Appeal's overly clinical interpretation of the pre-lease disclosure regime under the Act in the decision of Trust Company of Australia Ltd v Skiwing Pty Ltd [2006] NSWCA387¹, asserting that it "does violence to the protective and purposive intent" of the Act.

The battle in Red Roll concerned a current landlord's exposure to misrepresentations and unconscionable conduct by a predecessor in title. It has serious implications for purchasers of retail shops or retail shopping centres and will either expand the scope of due diligence or give rise to new categories of disclaimers.

Facts

In late July 2005, Red Roll Pty Limited (Tenant) entered into a lease with Multiplex Latitude Retail Landowner Pty Ltd (Multiplex) of a shop (Premises) in World Square, Sydney (Centre). Five days later, Multiplex assigned the lease and sold the Centre to AWPF Management Pty Limited and Multiplex WS Retail Landowner Pty Limited (Landlords).

In December 2007, the Tenant had fallen into arrears of rental payments due under the lease, and the Landlords gave notice of their intention to terminate the lease. The Tenant responded by applying to the Tribunal claiming, among other things, that Multiplex and the Landlords had breached section 10 of the Act in that they had made, or were bound by, false or misleading pre-lease representations.

The Landlords applied for an order that the claims against them by the Tenant be dismissed on the basis that they were not the parties that made the misrepresentations complained of.

Issues raised

Section 10 of the Act relevantly provides:

"(1) A party to a retail shop lease is liable to pay another party to the lease ("the injured party") reasonable compensation for damage suffered by the injured party that is attributable to the injured party's entering into the lease as a result of a false or misleading statement or representation made by the party, or any person acting under the party's authority, with knowledge that it was false and misleading"

The Landlords argued that they could not be liable to the Tenant under section 10 because:

• it imposes liability for conduct that predates the entry of a lease and therefore, an assignee of a lease (who was not party to any pre-lease conduct) cannot be liable; and

• the right to compensation it provides is a right in personam, i.e. a right between parties, rather than a right that 'runs with the land' binding successors in title.

The Tenant argued that its claim against the Landlords ought not be dismissed as the definition of "lessor" in the Act includes "assigns" and the definition of a "party" to a retail lease means a "lessor" or "lessee" and therefore the Landlords, being assignees of Multiplex, were included in the word "lessor" wherever it appears in the Act, including in section 10.

Decision

The Tribunal dismissed the Landlord's application with a decision staunchly proclaiming the 'remedial' purpose of the Act, concluding:

"to interpret s.10 in a straight line avoids the reality of the marketplace and "life"; where properties and businesses change hands, sometimes on more than one occasion during the life of a lease. To restrict s.10 to the original grant of the lease avoids that reality and also avoids the fact that the false or misleading statement or representation may underline or underpin the original grant of the lease and the lease contract itself."

What it means for retail landlords

The Tribunal will continue to interpret the Act with a "generosity of spirit", pushing aside long standing legal principles and judicial authorities perceived to stand in the way of delivering the Act's remedial purpose.

Subject to the outcome of any appeal (none is noted on the Tribunal's website as yet) the decision in Red Roll indicates that retail landlords are exposed to liability for their predecessor's misrepresentations and unconscionable conduct. The Tribunal will presume that an incoming retail landlord is aware of the content of all disclosure statements and has, in resolving to proceed to purchase or acquire the property, taken into account risks arising out of its predecessor's actions or omissions.

Under this regime, considerably more care may be required at the due diligence stage, unless the risk is priced in or perhaps insured. An incoming retail landlord may also consider procuring indemnities or sale warranties from the vendor for liability associated with any representations the vendor (or its predecessor in title) may have made to any retail tenants or courses of conduct that could be found to be unconscionable. In any event, the risk must be considered.

Footnotes

1 Our March 2007 e-update on this decision may be viewed at by clicking here

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.