Crema Espresso Leasing Pty Ltd v Grocorp Developments Pty Ltd [2023] QCAT 281
The case of Crema Espresso Leasing Pty Ltd (‘Crema’ or ‘the tenant’) vs Grocorp Developments Pty Ltd (‘Grocorp’ or the ‘landlord’) recently decided by the Queensland Civil and Administrative Tribunal has considered important legal concepts in retail shop leases, and particularly considered exclusivity rights and termination of leases that all businesses should be aware of when negotiating and terminating retail shop leases.
What you need to know
Leases containing exclusivity clauses should be carefully negotiated before lawyers put pen to paper to ensure there is a commercial meeting of the minds as to the scope of the exclusivity.
Terminations of leases can occur under the Property Law Act or under common law.
Care should be taken to ensure procedural processes are followed strictly and there is a clear legal basis for the termination.
When issuing a notice to remedy breach, parties should carefully consider what a reasonable timeframe to remedy is. This will depend on the factual particulars of the breach and the lease conditions.
Failing to provide the tenant with a reasonable notice period to remedy the breach can subsequently invalidate a purported termination of the lease.
Context
This dispute centred around a retail shop lease concerning a multi-tenanted site in Bundall, Queensland. Grocorp entered into a 20-year lease with Crema for a drive-through coffee shop and on that same day also entered a 15-year lease with Freedom Fuels for a service station at the same property. The lease agreements were intended to govern the operation of these businesses in proximity to each other.
During negotiations for the lease, Crema wanted exclusivity provisions to prohibit or limit the sale of coffee by other tenants at the Bundall site. Grocorp agreed at some level to this request, but wanted to allow other tenants to offer coffee products as a subsidiary part of their service offering. It was on this basis that the lease was entered into. Not long into the lease term, Crema objected to the sale of barista-made coffee by the neighbouring service station, claiming a breach of the lease provisions with Grocorp. Crema went further to contend that Grocorp had made false or misleading statements and misrepresentations during the lease negotiations, which induced Crema to enter the lease or amounted to unconscionable conduct. It was apparent on the facts that Crema expected the service station to only offer for sale ‘push button coffee’, when in fact the service station ended up supplying barista style coffee.
Crema subsequently ceased paying rent and outgoings. Grocorp then issued a notice to remedy breach to Crema in relation to arrears of rent and outgoings, leading ultimately to Grocorp taking re-entering and taking possession of the property. Grocorp sought compensation for loss of rent. Crema claimed that the re-entry and termination of the lease by Grocorp was invalid because the notice to remedy period was unreasonable.
Exclusivity
The centre of the dispute was the exclusivity provision in Crema’s lease in relation to the sale of barista made coffee. That clause was as follows (our emphasis):
25.1 Exclusivity
(a) While the Tenant is a Crema Espresso Entity, the Landlord must not grant any lease, licence or other right of occupation in the Building or on the Land where the predominant purpose of the business is the sale of barista made coffee.
(b) Nothing in this clause is intended to preclude the Landlord from granting to other tenants of the Complex uses which may involve the sale of coffee products as part of their business, including for example, a service station.
Crema’s contention was that to be consistent with 25.1(a), clause 25.1(b) of the lease should be interpreted by the tribunal as if it read:
(b) Nothing in this clause is intended to preclude the Landlord from granting to other tenants of the Complex uses which may involve the sale of coffee products other than barista made coffee as part of their business, including for example, a service station.
Findings on exclusivity
The tribunal found that there was no inconsistency in the exclusivity provisions of 25.1(a) and clause 25.1(b). Therefore, the sale of barista coffee by Freedom did not give rise to a breach of clause 25.1 of the lease. If the selling of barista coffee were to have been the predominate purpose of Freedom’s business, then it would have been likely that the tribunal would have agreed with Crema regarding the breach of exclusivity. However, in this case the plain reading of the clause did not prohibit the sale of barista made coffee so long as it was not the predominant purpose of the business (which was clearly the sale of fuel).
The tribunal also found the Crema did not enter into the lease on the basis of any reliance of any false or misleading representations. Nor did the tribunal find that Grocorp had engaged in any unconscionable conduct such that Crema should receive a payment of damages from Grocorp.[1]
Termination of the lease – termination by Grocorp was ineffective under Property Law Act
The tribunal determined that the termination of the lease by Grocorp was ineffective under the Property Law Act1974 (Qld) (PLA). The tribunal considered two key factors of the termination. The first was whether the termination was in the approved form 7 required under section 124(8) of the PLA. In this circumstance, the submitted form was missing the word “forfeiture” from the notice. The second and more salient aspect of the termination was whether the tenant had been given a ‘reasonable time’ after service of the notice to remedy the breach as required under section 124 of the PLA.
In finding that Crema had not been afforded a reasonable time to remedy the breach, the tribunal gave weight to the following factors:
- The lease had 27 years remaining;
- The remedy period afforded to Crema was only one week;
- Crema was eight months in arrears in rent and outgoings ($160,000) and Grocorp had not previously issued a remedy notice to Crema; and
- Crema had invested over a half a million dollars in fitout costs.
The tribunal did not offer insight into what it may have considered a reasonable time in this context.
Termination of the lease – common law
It is commonly accepted that it is possible to terminate a lease at common law without issuing a notice to remedy breach based upon a lessee’s repudiation of a lease.[1] Relevantly, this circumstance can arise where there an anticipatory breach or a renunciation of the lease, such that it is not practical for the landlord to meet the notice requirements of section 124 of the PLA.
The tribunal found that Crema’s failure to pay rent was an actual breach of an essential term, and as such it was not permissible for the landlord to avoid the requirements of section 124 of the PLA. If it were possible to simply rely on common law breach of a condition of a contract and proceed to terminate without reference to the PLA, then the provisions of the PLA relating to notice requirements would be rendered optional and avoidable.
Termination of the Lease – termination by the tenant though landlord’s repudiation
The solicitors for Crema subsequently sent a letter to the landlord purporting to terminate the lease in response to the re-entry by the landlord and accepting the repudiation of the landlord. Their motivation for doing so was to preserve a right to seek damages, principally in respect of the fitout costs.
The tribunal found that the purported termination by Crema was ineffective and therefore Crema was not entitled to damages.
In finding that Crema’s termination for repudiation was not effective, the tribunal gave weight to the following factors:
Crema was eight months in arrears in rent and outgoings (approx. $160,000);
Payment of rent was an essential term of the lease;
Therefore, at the time of the re-entry by the landlord, it was in fact Crema who had repudiated the lease;
While the Landlord did not effectively terminate the lease in accordance with the requirements of the PLA, the failure to validly terminate did not disturb the circumstance that Crema was in breach to such an extent that its failure to pay rent evinced an unwillingness or an inability to be bound by the contractual obligations of the lease; and
A party unwilling or unable to be bound by contractual obligations to the extent of repudiation of contract is unable to terminate a contract in reliance on a breach of an essential term by an opposing party.[1]
How then did the lease end?
The tribunal, while acknowledging that both parties’ attempts at termination were not effective, did conclude that the lease was in fact terminated by abandonment. That is, both parties treated the lease as at an end. There were no steps taken by either party to attempt to continue with the lease and the lease was therefore discharged. The tribunal noted that an abandonment does not affect accrued rights and, as such, the landlord remained entitled to the unpaid rent and outgoings.
Key takeaways
We summarise below our key takeaways from the decision:
Exclusivity Clause | A 30-year lease was lost due to a lack of clarity around the exclusivity clause. Lawyers for both sides negotiated the legal drafting diligently but there was no meeting of the minds between the landlord and tenant, which ultimately culminated in a dispute and lost commercial opportunity. | It goes without saying that clear and unambiguous language in the drafting is essential. However, hard discussions should be had at the commercial level around expectations for exclusivity. Parties should be very clear around expectations of any exclusivity in a lease prior to entering into the lease. |
Notice to remedy breach | The tribunal observed that the notice to remedy breach was not in correct form and did not afford the tenant a reasonable time to rectify the breach. These two failures lead to the tribunal finding that the landlord’s termination was ineffective. This decision highlights the importance that proper process and regard must be had to the requirements of the PLA before issuing a notice to remedy and certainty before terminating the lease. | In finding that the lease was not effectively terminated, it could have led to significant adverse findings against the landlord had the tribunal not found the lease to have been abandoned. |
Repudiation and lease termination | The tribunal determined that Crema's attempted termination of the lease was ineffective due to its earlier repudiation of the lease. | This finding underscores the critical nature of contractual obligations and the potential consequences of repudiatory actions. Before enforcing any rights under a lease or seeking to terminate, it is essential that the party wanting to terminate is also not in repudiatory breach of contract. All contractual obligations must be fulfilled (including payment of rent) before any termination action is pursued. |
Scott MacNeill – Managing Director Gibson MacNeill Lawyers
[1] Relying on Allphones Retail Pty Ltd v Hoy Mobile Pty Ltd [2009] FCAFC 85.
[1] Macquarie International Health Clinic Pty Ltd v Sydney Local Health District (2020) 103 NSWLR 443 at 326 – 340
[1] The Tribunal usefully summaries the matters it may have regard to in awarding damages for unconscionable conduct in connection with a retail shop lease [refer paras 40 – 42 of the decision]. We have not considered this aspect of this decision for the purposes of this client alert.