Unconscionable, Misleading and Deceptive Conduct in Retail Leases

There are many things landlords are prohibited from doing in terms of how they may conduct themselves with their tenants or potential tenants in a retail premises lease. Areas of contention include the concept of unconscionable behaviour or a party acting in a misleading or deceptive way either as part of lease negotiations or post-contractual conduct.

After a brief overview of the legislation under which conduct relevant to retail leases can be challenged, two contrasting cases will be considered and the lessons that can be drawn from them.

Retail leases and unacceptable conduct

Australian Consumer Law (ACL) provides that a person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive. Further, persons should not engage in conduct that is unconscionable. The law is not limited to consumer transactions or dealings despite its name.

Statutory provisions applying specifically to retail leases in NSW are set out in the Retail Leases Act 1994. This Act provides, for example, that a landlord or tenant must not engage in conduct that is, in all the circumstances, unconscionable. A party that suffers a loss or damage by reason of unconscionable conduct may claim to recover the amount of the loss or damage.

Moreover, a party to a retail shop lease must not engage in conduct that is misleading or deceptive in respect of another party to the lease that is likely to mislead or deceive. A party that suffers due to such conduct may recover the amount of the loss or damage. 

In negotiations, misrepresentation or silence about important facts pertaining to the lease are often pleaded as the cause of the unacceptable conduct. Representations can be statements about present facts or future matters. Examples in the context of negotiating a retail lease, as will be seen, would be a representation that a tenant would be the only trader of a particular category of goods in a shopping centre. Another might be that when a shopping centre is opened to the public, all the shops would be let and open for business.

Case study 1: unconscionable conduct claim under NSW Retail Leases Act 1994 upheld

Spuds Surf Chatswood Pty Ltd v PT Ltd (No4) (2015) is an example of unconscionable conduct of a landlord. The case concerned a dispute over the placement of kiosks in Westfield’s shopping centre in Chatswood, Sydney. The landlord permitted the construction of kiosks in part of the shopping centre, which it knew would make it difficult for potential customers to see the store. The tenant commenced legal action against the landlord claiming damages or, alternatively, rent relief.

The Court of Appeal found that the landlord’s conduct breached its own guidelines governing the dimensions of kiosks. No timely steps were taken to enforce the guidelines, which would have solved the problem. The tenant had raised early concerns about the kiosks, but the landlord used its stronger bargaining power to adopt an uncompromising position in the negotiations. 

It was held that the landlord had engaged in unconscionable conduct in contravention of section 62B of the Retail Leases Act. It was subsequently decided that the tenant was entitled to rent relief.

The concept of statutory unconscionability is not defined in the Act but it seems that it requires something more than simply being unreasonable or unfair and requires a degree of unethical behaviour.

Case study 2: misleading or deceptive conduct claim under the ACL dismissed

In NB2 Pty Ltd v PT Ltd (2018), the tenant (NB2) argued that representations had been made by the landlord to the effect that they would have the exclusive rights to sell fresh fruit and vegetables in the Westfield shopping centre in Miranda, Sydney. The tenant and two director guarantors challenged a NSW Supreme Court decision to award damages of over $3.5m to their former landlord.

The tenant had negotiated a lease for a fruit and vegetable store in the Fresh Food Precinct. During negotiations, the tenant asked for exclusivity. The landlord agreed to a clause in the lease that the exclusivity would extend only to the Fresh Food Precinct part of the shopping centre and the tenant being the only independent fruit and vegetable retailer. Shortly afterwards, the landlord consented to renovations submitted by the Franklins supermarket group that included the sale of fruit and vegetables that would compete with the tenant. This detrimentally affected the tenant’s business, and it stopped paying the rent. In response, the landlord terminated the lease. 

The tenant argued that the landlord had breached the former Trade Practices Act 1974, since repealed and replaced by the ACL, relating to both unconscionable conduct and misleading and deceptive conduct.

The Court of Appeal determined the tenant had not established that the alleged representations had been made and there had been no misleading or deceptive conduct. The landlord had not represented that the tenant would have complete exclusivity to sell fresh fruit and vegetables. As such, there could be no misleading or deceptive conduct. Moreover, the landlord was under no obligation to disclose to the tenant that a (non-independent) competitor would be opening in the centre. Consequently, there was no unconscionable conduct. The tenant had entered the lease misunderstanding the agreed lease terms.

The decision is a reminder that the final agreed lease needs to adequately reflect a party’s own commercial understanding of the agreement.  When negotiating the terms of a lease there is no obligation on either party to disclose commercial information that may impact the entering of that contract.

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