Commercial Property Blog

Legal Tips and Traps

Safeguarding Your Position During Lease Negotiations

Posted by Dean Claughton on 24 Jul 2018

Assisted by Natasha Mustac

When going through the negotiation process associated with signing a new lease term, it is of crucial importance that parties to the lease take adequate steps to effectively safeguard their position.  The recent case of NB2 Pty Ltd v P/T/ Ltd [2018] presents a prime example of a party to a lease (in this case, the lessee) not only losing business, but rapidly going into debt as a result of failing to protect their position within the new lease.

Facts of the case

In this case, the lease in dispute was between the lessor, a shopping centre, and the lessee, Panetta Mercato (also known as Panetta Fruits) who apart from one other shop, essentially held a monopoly as the only fresh fruit and vegetable shop located within the centre's 'Fresh Food Precinct'.  When the existing lease expired in 2009, the lessors sought a significantly higher rent as part of the new lease.  This higher rent was agreed to on the basis that the lessee would continue to enjoy the monopoly of being "the sole independent fresh fruit and vegetable operator in the precinct".  

However, after the commencement of the new lease, a new supermarket entered the 'fresh food precinct' of the shopping centre.  The sudden increase in competition associated with this second supermarket moving into the precinct resulted in the deterioration of the lessee's turnover, a default in rent, and eventually, the loss of the lease.

What was the primary issue?

The lessor commenced proceedings against the lessee in the Supreme Court of NSW for arrears of rent and damages.  In turn, the Lessee made a cross claim alleging that the lessors had breached the Retail Leases Act 1994 (NSW) with regard to the practice of misleading or deceptive conduct or unconscionable conduct.  The lessee claimed that it had entered into the new lease with a reliance on representations made by the lessor to the lessee during the negotiations for the new lease.  

The specific issue was that these representations had led the lessee to believe that they would have the right to be the sole, independent, specialty fresh fruit and vegetable retailer in the centre.  

What was the court's decision?

Both the Supreme Court and the Court of Appeal handed down decisions in favour of the Lessor.  The court found that the use of the word "independent" specifically referred to stores which were independent of other stores, meaning that those which were part of a chain would not be deemed independent, and herein would not be covered by the exclusivity to which the lessors referred.

Unfortunately for the lessee, the new supermarket which had opened in direct competition of their business was part of the Franklins chain of supermarkets.

What you need to know

This case provides a perfect example of just how crucial it is to ensure that any and all terms are clearly negotiated before a lease is signed by each party.  Similarly, as was the downfall of the lessee in this particular instance, it is just as important for both parties to have a full and clear understanding of the terms that they are agreeing to when entering into a lease.  

In order to avoid facing any potential issues that may arise from future negotiations, it is imperative to seek professional legal advice when entering into any sort of lease agreement.  If you have a query relating to any of the information in this article, or you would like to speak with a lawyer in Coleman Greig's Commercial Property Law team, please don't hesitate to get in touch with: