When retail centres undertake redevelopment that restricts trading, is a franchisee able to claim compensation?
According to Toby Boys, partner at national law firm Holding Redlich, legislation in Victoria, NSW and Queensland provides tenants with avenues to seek compensation from landlords for losses caused by certain types of interruptions during a redevelopment.
“For example, a landlord may be required to pay a tenant reasonable compensation if the redevelopment substantially restricts access to the premises for customers, staff and potential customers,” says Boys.
A retail franchisee may also be entitled to compensation if the landlord does anything which physically interferes with the leased premises or the retail centre in which the franchisee is trading , as the restriction of access will usually have the effect of inhibiting the flow of potential customers to a shop.
However, this is only enforceable if the landlord does not take all “reasonable steps” to prevent or stop significant disruption within its control.
Cases such as the NSW case of O’Heir and anor v Kennedy Plaza Pty Ltd [2008] illustrate that a tenant is entitled to compensation when access to the tenant’s shop is substantially restricted. In the O’Heir and anor case this included entry to the shop being blocked for 11 days, security fencing directly in front of the shop and around most of the centre; the closure of a shopping centre entrance adjacent to the tenant’s shop; and a ‘For lease’ sign in front of the tenant’s shop prohibiting view of the signage displaying details of the shop, preventing customers from knowing the shop was operating.
Significant disruption to trading
The O’Heir case is an example of “significant disruption” to trading, however, not all claims will fit into this category and to receive compensation the disruption must be significant, says Boys.
“Interference on its own will not be enough to demonstrate a contravention of the Retail Shop Leases Act 1994 (Qld) (RSLA),” he says. “The intent of the legislation is to preclude claims for compensation which are based on trivial, insubstantial or fanciful grievances by tenant’s disappointed by their businesses profits.”
For example, the addition of kiosks in retail centres has been found in two separate cases to not constitute a significant disruption. In the cases of Susanna and John Pty Ltd v Trident Ashgrove JV Pty Ltd as trustee and Tribune Properties Pty Ltd [2011] and Spuds Surf Chatswood Pty Ltd v Pty Ltd (No 2) PT Ltd [2001] the court found that while the kiosks may have interfered in the sight lines of the tenant’s shop, the hindrance was not significant enough to require the landlord to provide compensation under the RSLA.
Similarly, in the case of Beyond Furniture (Australia) Pty Limited v Virj [2008], the court found that water leaking into the applicants premises after substantial rain, caused disruption, but this disruption was not “significant”.
_Boys adds: “The cases indicate that the threshold of what constitutes ‘significant disruption’ is high; however it is likely that any redevelopment works which result in a tenant’s business having to cease trading for a period will be liable for compensation.”
Rectifying as soon as practicable
As well as being liable for interruptions caused to a tenant’s premise, landlords will also be liable if they fail to rectify a defect to any equipment that is under their care or maintenance “as soon as practicable”, according to Holding Redlich lawyer Abbey Richards.
The extent of equipment that is under a landlord’s care and maintenance will vary depending on the retail centre but will include all machinery in common areas, for example, air conditioning, lighting and heating.
In the case of Pincott and Pincott v Metro Maroochydore Pty Ltd [2007], the tribunal found that the landlord’s failure to repair a collapsed ceiling outside Pincott’s shop for 18 months was unacceptable and the maintenance was below that which the landlord was required to carry out.
But in the Beyond Furniture case the court looked favourably on the landlord for “acting with promptitude” in attempting to secure tradesman to rectify a leaking roof.
Evidence of a disruption
When disruptions or defects affect a lessee it is very important for all parties to document correspondence regarding defaults between the tenant and landlord, as well as the maintenance providers, in case a disruption claim does arise.
“Disruption claims often turn on the evidence that each party can produce to support their assertion,” states Richards. “Therefore, to ensure that a disruption claim can be defended adequately, it is important to keep and maintain documentary evidence to support your assertions.”
So it’s advisable to keep copies of all documents and all correspondence including emails, and file notes of telephone calls and all other conversations with the landlord.
To avoid a costly dispute, engage with the landlord at an early stage to try and resolve the situation without resorting to legal action.