Does the sale of items allowed under a lessee’s Permitted Use mean that the tenant is carrying on a compliant use of leased premises?
That was one of the several issues addressed on an appeal by Aventus Property Trust against a court ruling that it had unreasonably refused consent to a sub-lease of part of of a Masters Home Improvement store to a furniture outlet.
The 13,000m2 retail warehouse was one of 63 opened by the Woolworths’ owned business from 2010 until it folded in December 2016 with accumulated losses of $3.2bil.
The 15 yr lease by the Aventus property group of the $27mil purpose-built “home improvement store” in Cranbourne Vic commenced in October 2015 with Woolworths as guarantor.
In November 2018, Masters who by then had been taken over by Home Co – a shopping centre operator whose mission was to re-purpose the Masters’ sites – sub-leased 6000m2 to Amart furniture.
Masters/Home Co’s request for landlord’s consent was refused on the basis that a furniture store was not a Permitted Use; because Home Co-was a competitor; and because it did not fit the tenancy mix of the adjoining shopping centre of which another company in the Aventus group was the proprietor.
The matter came before the Vic Supreme Court where Home Co contended that the landlord’s refusal was unreasonable given Amart’s retail offering comprised items that were allowed to be sold under the Permitted Use.
Further, it argued, Aventus was not entitled to rely on the other matters upon which it purported to justify its consent refusal.
The trial judge agreed.
Asserting that the conduct of a “home improvement store” required the sale of a wide range of goods falling within broad categories that Amart did not offer, Aventus appealed.
In delivering the lead judgement, Justice Kim Hargrave noted – having regard to the enormous floor area and the 35,000 SKUs Masters had boasted – the permitted use could not be met absent an extensive product list.
Amart did not offer “the panoply of things that together make up a home improvement store,” thus its proposed use was not permitted.
“A store that sold only house paint would not be readily considered to be home improvement store,” he observed “although house paint is obviously an item used in home improvement.”
Aventus further argued the sublease of part of the premises would lead to multiple subdivided tenancies – rather than a single retail destination – contrary to what the lease itself envisaged.
While subleases or licences of the trading space was permitted under the lease ie to concessions to branded suppliers, those freestanding businesses – so ran its argument – had to be functionally connected within a single store on the site.
Justice Hargrave agreed.“Viewed objectively, that is the only form of trading that the parties to the Lease had in mind,” he ruled. “The sub-tenancy clause cannot be used to fundamentally alter the nature of the tenancy.”
The proposed sub-lease was therefore ruled impermissible on that ground as well.
What though of the contention that consent had been rightfully refused by reason of the tenant’s breach of its obligation to continue to trade.
Recognising that the obligation to trade was an important covenant, Justice Hargrave went on to say that where – as in this case – a tenant continues to pay rent and outgoings “it is not self-evident that the landlord will sustain any additional loss by the failure of the tenant to trade”.
Aventus already had – after all – a high level of control in its discretion to withhold consent to the sublease itself and any proposed variation of the Permitted Use.
And given that there was no express will requirement in relation to a sublease that the tenant not be in substantial breach of the lease (as there was in the case of a proposed assignment) there was no reason to impose an additional constraint in this case.
The court observed that it was unnecessary to consider or to decide on whether Aventus had been entitled to refuse its consent because Home Co was a competitor or by reason of the tenancy mix in the adjoining centre owned by a related company.
Master/Home Co has a further 10 yrs to rue the haste with which its ill-advised roll out was pursued.
See also another recent lease dispute decision from Victoria where a tenant who carried out major structural works to a rented industrial warehouse without landlord consent was denied the right to exercise an option to renew. The court held had consent been sought within time, and been refused, such refusal would have been unreasonable but that a request after performance of the works was too late to attract the requirement that the consent not be unreasonably refused.