Australia: Retail Lease Disputes: Full Time Looming in Sarker and Skiwing
Retail Leasing Update

The recent decisions in World Best Holdings Ltd v Sarker [2010] NSWCA 24 and Skiwing Pty Ltd v Trust Company of Australia Limited [2010] NSWADT should bring to an end two of the longest running retail lease disputes of recent times. Borrowing some of the language of the World Cup, the stacked defences run by the tenant Sarker on the one hand and by the landlord Trust Company on the other have proved impossible to break down.

Both decisions contain points of law that will be of interest to retail landlords and provide an important reminder of the time and money that can be saved by resolving a dispute before legal costs have accrued past the point where they drive the parties to round after round of bitterly contested litigation.

Facts and issues of Sarker

The facts of the Sarker claim are covered in our July 2008 update, which can be viewed here. Essentially this dispute, having run for 6 years, concerned whether the landlord World Best Holdings had validly terminated Sarker's lease. The Tribunal found that the termination was invalid and held that the landlord was liable to pay the tenant damages assessed on a 'reliance' basis, rather than on a 'loss of profits' basis.

The landlord appealed to the Tribunal's Appeal Panel on a number of questions of law, but was unsuccessful. The Appeal Panel's decision was then appealed to the Court of Appeal. The main questions for consideration were:

• Was the tenant's trade in Indian groceries contrary to the permitted use of an 'Asian Supermarket'?
• Were the landlord's notices of termination invalid?
• Had the landlord repudiated the lease?
• Was the tenant entitled to 'reliance based' damages, i.e. compensation for the 'set-up' costs of establishing his business, rather than damages based on loss of profits, (as the limited trading information available was not a reliable basis for assessing the profit, if any, the tenant would have made)?

Decision of Sarker

The Court of Appeal found that the Appeal Panel had made some interesting 'black letter law' errors in relation to its interpretation of the permitted use clause, but found that these errors were not material. The following points are noteworthy:

• When asked to interpret a particular clause in a lease, courts and tribunals should be very reluctant to look at anything but the language used in the clause. The conduct of the parties after the lease is granted is irrelevant and should not be taken into account. Similarly, evidence of surrounding circumstances prior to the grant of the lease should generally be excluded, the only exception being for evidence that relates to facts known to both parties in circumstances where the language of the clause being considered is prima facie ambiguous.
• The landlord's argument that the normal use of the term 'Asian' produce in Australia referred to south-east Asian produce (and not to Indian produce) was slide-tackled by the Appeal Panel, which considered that 'Asia' includes the Indian sub-continent, given the plain meaning of the term and by applying the contra proferentum principle. The landlord had had an opportunity to narrow the meaning of 'Asian' when it drafted the permitted use clause in the lease but had failed to take it.
• A notice under section 129 of the Conveyancing Act is not a necessary pre-requisite to a landlord terminating the lease based on a tenant's repudiation, as opposed to a breach, of the lease.
• An acceptance of a repudiation of a lease does not require any particular form of communication and will be sufficient if it clearly conveys that the aggrieved party is treating the lease as at an end.
• The landlord will bear at least an evidentiary onus of proving that damages for the tenant's full reliance loss should not be awarded.

Facts and issues of Skiwing

The Skiwing matter has also run for over six years. It centres on a dispute as to whether an amount of outgoings is payable by the tenant. Indeed the litigation outlives the premises, with the Imperial Arcade having been demolished a year ago. The latest instalment is the Tribunal's decision following on from the Court of Appeal's notable decision in Trust Company of Australia Ltd v Skiwing Pty Ltd [2006] NSWCA 387 (our update for which can be viewed here).

The primary issue remitted back to the Tribunal for resolution was whether items of expenditure in the relevant annual outgoings statement were expenses 'properly and reasonably incurred' by the landlord in payment of the outgoings for the relevant year.

Decision of Skiwing

The Tribunal concluded that the expenditure in the relevant outgoings statement was properly and reasonably incurred on the following grounds:

• The question whether an item of outgoing fails to meet the requirement of 'properly and reasonably' incurred is a question of fact that must be objectively assessed.
• An audited outgoings statement prepared by an independent auditor in accordance with paragraphs 28(1)(e) and (f) of the Retail Leases Act 1994 should be presumed to be a correct statement of all outgoings expenses 'properly and reasonably incurred'.
• This presumption can be rebutted, but the onus is on the tenant to establish, on objective material, a reasonable basis for the Tribunal to go behind an audited statement.
• It was not appropriate for the Tribunal to order production of all documents underlying the outgoings statement as the tenant Skiwing did not put on any material that put the audited outgoings statement in question.

What it means for retail landlords

The Sarker saga is now well into injury time, with the full time whistle imminent and little chance of qualifying for a berth in the final. The landlord's only avenue of appeal is to the High Court (which is unlikely to grant leave to do so).

By contrast, the Skiwing saga will progress to the finals, as it has now been appealed. The basis of the appeal is not known, but given the various red cards awarded, the prospects of this last attacking raid by the tenant must questionable.

So, while the players in both will no doubt cling on to hope until the moment the final whistles are blown, the scorelines suggest one victory for a tenant, and one likely victory for a landlord.

As the crowds walk away from the grounds there is little doubt the main point of discussion will be the 'own goals' of unrecoverable legal costs. Indeed, such costs are likely to be many times the value of the underlying disputes. Such long running cases underscore the benefits for both retail landlords and tenants of early mediation and compromise in what are essentially commercial disputes. Other key lessons that retail landlords can take away are:

• When defining a tenant's permitted use (or with any other clause of the lease) landlords' should be extremely careful to use terms that have a plain, clear meaning and to expressly set out any uses that they want excluded.
• The amount of damages payable to a tenant arising from early termination of a lease is not always based on loss of profits – the possibility of an award for 'reliance' damages should be considered before arguing that the tenant would not have made a profit if the lease had continued and so is not entitled to any amount for damages.
• An audited outgoings statement will be good proof of the amount of outgoings properly claimable in the absence of any evidence led by a tenant to put it in question.

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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.