A landlord is almost certain to lose a case if they seek to force a loss-making tenant to trade. Courts consider such an order:
- imposes unhelpful court supervision on the business;
- forces the tenant to incur further debt (eg to staff, suppliers and the ATO) that it may not be able to pay; and
- is against public policy.
Landlord's Remedies – Specific Performance v Damages
If a tenant breaches a lease, after making the appropriate demand that the breach be remedied, the landlord may terminate the lease and claim damages. In some circumstances, the landlord may instead seek an order for specific performance.
An order of specific performance is an order from a court directing the tenant to either do something, or to cease doing something. For example, a tenant not complying with its permitted use by selling take away coffee (when it is only permitted to sell to patrons at tables) may be ordered by the court to stop selling take away coffee. Such an order is 'specific performance'.
Generally, specific performance will not be awarded if a court considers that damages will be an adequate remedy. The onus to prove that damages will not be adequate is on the party seeking the order of specific performance.
Courts are more reluctant to order specific performance in circumstances that would involve the court interfering with how someone runs their business – it is a "settled practice that courts never grant mandatory injunctions requiring persons to carry on business" (Lord Hoffman).
Courts are very reluctant to order a tenant to recommence trading if they have vacated the premises. An order for specific performance to re-commence trading will not be granted unless there are exceptional circumstances.
A Recent Case
Recently a landlord in Queensland (the Emerald Village Centre) applied to the Queensland Supreme Court for an order forcing a pizza shop to keep the shop open during the trading hours as required in the lease.
The landlord argued that a closed shop would encourage shoppers to go to another centre, and that the damage caused by the closed shop would be difficult to quantify. The court acknowledged that "a fully-tenanted centre attracts more customers and that a partially empty centre is less appealing", but found that the damage (if any) could be quantified and proved. (In the case, no evidence was available to prove this damage.)
The pizza shop did not slip out in the night – it notified the landlord of its intention and sought to negotiate a surrender of lease. It continued to pay the rent after ceasing to trade.
The Court did not want to direct the pizza shop to recommence trading, because to do so could make the shop incur further debts to employees, suppliers and the ATO. The pizza shop had made a decision that the business was not viable in Emerald Village Centre. The court would not interfere with that business decision unless the landlord could show exceptional circumstances.
The landlord could not prove to the court that there were exceptional circumstances justifying an order for specific performance in this case.
What could be exceptional circumstances?
An Older Case
In an older case about the Jewel Food Store and Petrol Station at Werribee Village Shopping Centre, the landlord did prove exceptional circumstances.
Jewel operated the grocery store and the petrol station. Jewel sold the grocery store (and assigned that lease) to Sims, and also wanted to sell the petrol station to Sims. Negotiations for that part of the sale had not concluded. Without notice, Jewel closed the petrol station.
The judgment includes more of the 'settled practice' quote from Lord Hoffman: "I can envisage cases of gross breach of personal faith, or attempts to use the threat of non-performance as blackmail, in which the needs of justice will override all the considerations which support the settled practice."
The evidence led by the landlord showed that:
- the petrol station always ran at a loss – Jewel knew this;
- no works were required to re-open the petrol station;
- the petrol station was relative simple to operate; and
- there was a prospect that Jewel could sell the petrol station (potentially to Sims)
The court found that:
- the petrol station was an anchor tenant – it played a significant role in attracting customers to the centre;
- the petrol station and the grocery store together were a viable business, and the decision to sell the grocery store on its own was a management decision – Jewel were not forced into that sale;
- there were good prospects for selling the petrol station; and
- Jewel did not notify the landlord of its intention to close the petrol station.
The closure of the petrol station had a significant financial effect on the centre and the other tenants within the centre, including Sims, who had purchased the grocery store from Jewel and who was in negotiations to purchase the petrol station. Perhaps the closure of the Petrol station was related to the on-going negotiations with Sims: the grocery store without the petrol station was proving not to be a good business.
This is a rare case where the court found exceptional circumstances justified an order for specific performance. In most cases, the lessor should terminate the lease, seek a replacement tenant and claim damages.
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.