Is it really chicken! VCAT says no, confirming Landlords are entitled to withhold consent to an assignment of lease

A recent VCAT decision, Southern Restaurants Pty Ltd v United Petroleum Pty Ltd [2022] VCAT 666, has confirmed that an objective test applies under Section 60(1)(a) of the Retail Leases Act 2003 (Vic) when landlords are looking to refuse consent to an assignment of a lease on the basis that an assignee proposes to use premises in a way that is inconsistent with the permitted use of the lease.

Background

A brief overview of the facts of the case is as follows:

• United Petroleum Pty Ltd (Landlord) leased premises to Southern Restaurants Pty Ltd (Tenant), under which the Tenant (franchisee) proposed to operate a KFC outlet pursuant to a franchise agreement with the KFC franchisor (Lease). The Retail Leases Act 2003 (Vic) (RLA) applied to the Lease.
• The Landlord operated a petrol station and fast food outlet at the site pursuant to a head lease and sublet other parts of the site to other fast food operators, including the Tenant.
• After entering into the Lease and fitting out the premises, the Tenant was ultimately unsuccessful in obtaining the KFC franchisor’s consent to operate a KFC outlet from the premises. Unable to operate a KFC outlet from the premises, the Tenant sought the Landlord’s consent to assign the Lease to Oporto Leasing Pty Ltd (Assignee) who proposed to operate an Oporto fast food outlet from the premises.
• In addition to seeking the Landlord’s consent to assign the Lease, the Tenant / Assignee sought a number of variations to the Lease, including a proposed variation to the permitted use under the Lease so that it would be varied as follows:

‘Restaurant and takeaway food outlet with associated car parks, drive thru, loading bay and yard, including all ancillary retail and service offering developed by the Tenant. The preparation, retail sale and home delivery of (as eat in and takeaway) food items usually sold in a KFC outlet from time to time. The menu shall otherwise include all items at KFC items throughout Australia from time to time, including special promotion items.’

• The Landlord rejected the Tenant’s request to assign and vary the Lease on the basis that the Assignee proposed to operate an Oporto fast food outlet from the premises and not a KFC outlet as was stipulated in the permitted use.
• The Landlord relied on one of the four grounds on which a landlord may refuse consent to an assignment of a retail lease under Section 60(1) of the Retail Leases Act 2003 (Vic) as the basis for withholding consent – that the proposed assignee proposed to use the premises in a way that was not permitted under the Lease.[1]
• The Tenant brought proceedings against the Landlord seeking an order requiring the Landlord to consent to the proposed assignment. The Tenant claimed that the Landlord was unable to withhold consent for the following reasons (among others):
  • the permitted use under the Lease, and in particular the words shown struck out above, were inconsistent with Section 60(1)(a) of the RLA because it prevented the Tenant from freely dealing with the Lease and are therefore void; and
  • the Landlord was subject to an implied obligation to act reasonably in withholding consent under Section 60(1)(a) of the RLA and failed to do so because the Landlord withheld consent to benefit the other businesses it operated at the site.

VCAT’s findings

VCAT held in favour of the Landlord finding that the permitted use was not inconsistent with the RLA and that Section 60(1)(a) did not imply any obligation to act reasonably when withholding consent to an assignment.

The VCAT Member acknowledged that the RLA was remedial in nature (in favour of tenants) but held that “such protection does not extend to depriving the Landlord of the entitlement to determine the permitted use to which any lessee puts the leased premises or to ensure its interest in the premises is protected.”[2]

In other decisions considering grounds for refusing consent to an assignment under Section 60(1)(b) of the RLA, the Tribunal has found that a landlord does have an implied obligation to act reasonably when considering the business experience and financial resources of the assignee[3], however the Tribunal held that this obligation does not extend to Section 60(1)(a) when considering a change to the permitted use.

On whether an assignee proposes to use premises in a way that is not permitted under the lease, the Tribunal held that “[t]his is not a matter which the question of reasonableness need moderate. Rather it is a simple objective question of whether the incoming tenant intends to comply with the terms of the lease. If not, the landlord may refuse consent to the assignment.”[4]

Conclusions

This decision highlights the importance of a properly drafted permitted use clause in a retail lease. Here, the permitted use was sufficiently narrow ultimately giving the Landlord control over the tenancy mix at the site. The permitted use wording is almost always finalised at the letter of offer/ heads of agreement stage. As shown above, the clauses are important but can often be overlooked at the commercial negotiation stage.

VCAT have also clarified that a black letter law approach is to be adopted in applying Section 60(1)(a) of the RLA, in that if an assignee proposes to use premises in a way that is not permitted under the lease, then the landlord can confidently refuse consent to an assignment.

Although not a main discussion point, for franchisees this decision also highlights the need to ensure lease documents are entered into with or subject to franchisor approval.

Gadens are well equipped to help clients navigate their rights and obligations under RLA in relation to a proposed assignment of lease. Please do not hesitate to contact us if you have any questions.

If you found this insight article useful and you would like to subscribe to Gadens’ updates, click here.

Authored by:

Lui Scipioni, Partner
Michael Mercier, Senior Associate

[1] Retail Leases Act 2003 (Vic), Section 60(1)(a).

[2] Southern Restaurants Pty Ltd v United Petroleum Pty Ltd [2022] VCAT 666, [30].

[3] AAMR Hospitality Group Pty Ltd v Goodar Pty Ltd & Anor (Retail Tenancies) [2009] VCAT 2782.

[4] Southern Restaurants Pty Ltd v United Petroleum Pty Ltd [2022] VCAT 666, 62.