Leasing Insider | AVC Operations Pty Ltd v Teley Pty Ltd (Building and Property) – [2018] VCAT 931

AVC Operations Pty Ltd (the Tenant) entered into an asset sale agreement with Wheatland Hotels Toorak Pty Ltd (the Assignee) for the sale of the “Bush Inn” business operated from a premises on Malvern Road, Toorak.

The Tenant sought the consent of Teley Pty Ltd (the Landlord) to assign the lease for the business to the Assignee but the Landlord refused on the basis that it did not believe the Assignee had sufficient financial resources to meet the obligations under the lease.

Although the Assignee entity was newly established to operate the Bush Inn and had no trading experience, its directors were experienced publicans and were directors of Wheatland Hotels Pty Ltd which company operated other successful hotels. The Landlord did not take issue with the business experience of the Assignee, the question of adequate financial resources was the only point of contention between the parties.

VCAT cited AAMR Hospitality Group Pty Ltd v Goodpar Pty Ltd [2009] VCAT 2782 and insisted that the Landlord must act reasonably when assessing the financial resources of the Assignee. In reaching its determination, VCAT considered:

• the current term of the lease was due to expire relatively soon, less than 4 years after the proposed assignment date;
• the annual rent of approximately $192,800 plus GST;
• the Assignee was to provide security equal to 9 months’ rent plus GST;
• personal guarantees from the directors of the Assignee were offered (though the personal assets of those directors were limited);
• a corporate guarantee from Wheatland Hotels Pty Ltd was offered (the company had nominal paid up capital and unsecured loans exceeding its net equity); and
• the Assignee’s business plan for the Bush Inn projected a 40% increase in takings but required $500,000 to effect improvements proposed in the plan.

Decision

VCAT concluded that the Landlord was not entitled to withhold consent to the assignment of lease and found that “financial resources” may also comprise financial backing from associated entities or individuals.

In reaching its conclusion, VCAT gave weight to the projected revenue set out in the Assignee’s business plan. It confirmed the plan was not unrealistic and was supported by the favourable performance of Wheatland Hotels Pty Ltd, finding the performance was indicative of the business acumen of the individuals managing that enterprise.

VCAT also valued the offer of personal guarantees from the directors of the Assignee despite having no significant assets:

“[He did not] consider that one can overlook the personal guarantees offered by the directors of [the Assignee], merely because those persons have no personal assets. Those guarantors potentially stand to have judgment entered against them should [the Assignee] fail to meet its obligations under the lease. It is reasonable to assume that business people, especially publicans in control of licensed premises, would take considerable steps to avoid such an outcome.”

The offer of a corporate guarantee had value for similar reasons.

Key takeaways

A landlord may only refuse consent to the assignment of a retail lease on the basis of the matters set out in section 60 of the Act. Its reasons for refusing consent must be reasonably held.

Whether a decision to refuse consent is reasonable will be assessed on a case by case basis. This decision highlights the broad scope of matters which may be relevant to this decision, including the business acumen and financial resources of associated entities or individuals backing a proposed assignee.

This decision continues a long line of authorities regarding a landlord’s ability to withhold consent to an assignment of a retail premises lease. Unless the circumstances are extreme or a change to the permitted use is proposed, landlords should consider granting their consent but must ensure that adequate security is in place, noting that tenants can be released from ongoing liability with relative ease under section 62 of the Retail Legislation.

Jurisdiction: Victoria
Date delivered: 10 August 2018
Property type: Retail

Authored by:
Alexandra Walker, Special Counsel