A case heard in the South Australian Supreme Court, S&A Gallo Pty Ltd & Ors v Hollowood Pty Ltd & Ors [2012] SASC 176, has provided some clarification on what constitutes “interference” to a tenant, and in what circumstances a landlord will be liable to pay compensation for a tenant’s loss arising from such interference.

In Victoria, section 54 of the Retail Leases Act 2003 provides that a landlord is liable to pay a tenant reasonable compensation for loss or damage because the landlord “fails to take reasonable steps to prevent or stop significant disruption within the landlord’s control to the tenant’s trading at the retail premises”.

Facts

The case concerned a retail premises in a shopping centre that traded as a “pizza bar”. It is important to note that the lease specified the use of the premises as a “Takeaway Café”.

The tenant was struggling to pay rent and fell heavily into arrears. The tenant complained to the landlord that it had fallen into arrears because another tenant was trading as a “Bakery” and selling takeaway pizzas in competition with the tenant’s business, which caused damage to its trade and turnover.  The landlord took some steps in an attempt to have the bakery tenant desist from selling pizzas, but without success.

Issues

The tenant argued that the landlord had made pre-contractual promises concerning the exclusivity of the use of the shop (that is, the exclusive right to sell “pizzas”), which induced the tenant to believe that the landlord could and would take steps to prevent competition in the shopping centre.

The tenant also relied on section 38 of the Retail and Commercial Leases Act 1995 (“the SA Act”), which provides that a tenant is entitled to compensation from a landlord if the landlord “fails to take reasonable steps to prevent or put a stop to anything attributable to causes within the lessor’s control that causes significant disruption of, or which has a significant adverse effect on, trading of the lessee in the shop”.

Findings

Nicholson J commented on section 38 of the SA Act and held that the purpose of the section was to target a landlord’s failure to take reasonable steps to prevent or put a stop to anything within the landlord’s control that causes significant disruption of or has a significant adverse effect on trading of the tenant.

Nicholson J made the following comments in light of this section:

1. Section 38 falls under Part 6 of the SA Act which is titled “Alterations and other interferences with the shop”. Therefore, section 38 is intended to address “disturbances and disruptions, usually of a physical nature”.  Although section 38 contains words that may be seen as embracing more than “physical disturbances”, such a reading would not be consistent with the overall context and purpose of the section.
2. Although the lease specified the use of the shop as a “takeaway business”, the tenant operated as a “pizza bar”, which was a more limited purpose than otherwise allowed. In any event, the lease provided that the tenant had no contractual entitlement to exclusive use of the shop in the centre.
3. The obligation to prevent “competition” amongst businesses operating in retail premises is not something that was envisaged by Parliament as an “interference” when the SA Act was passed. His Honour referred to the second reading speech that was made when the legislation was introduced, and noted that the Parliamentarians focused on damage arising as a result of failure to carry out maintenance and repair.
4. Finally, section 38 is not intended to embrace an obligation on a landlord to undertake potentially expensive and unpredictable litigation against another tenant in circumstances where the complaining tenant has no contractual right to complain about what another tenant is doing.

His Honour held that the landlord’s failure to take steps to prevent the bakery tenant from selling pizzas did not constitute a failure to take all reasonable steps.

Lessons

The case highlights the importance of ensuring that lease terms accurately reflect the tenant’s specific intended use of the premises and whether, in the case of retail shopping centres, that use is exclusive to the tenant. The case also clarifies what constitutes “interference” under the SA Act, which is likely to extend to its Victorian counterpart, namely, the Retail Leases Act 2003.

This article is intended to provide general information only and is not a substitute for legal advice. To obtain legal advice tailored to your situation please contact RKL on (03) 9519 9888.