A valuable decision about a landlord’s power to withhold consent to an assignment of a NSW retail shop lease was handed down recently in the Supreme Court of New South Wales.
In the matter of Bar Machiavelli Pty Ltd (Administrator Appointed) [2018] NSWSC 1395 (10 September 2018), Brereton JA gave judgment for the Tenant, declaring that the Landlord was not entitled to withhold consent to the assignment and ordering the Landlord to grant consent.
What happened?
WFM Motors Pty Ltd (Landlord) owned commercial premises at Rushcutters Bay, New South Wales. The premises were leased to Bar Machiavelli Pty Ltd (Tenant) from which a restaurant business (Business) was conducted.
The lease was categorised as a “retail shop lease” within the meaning of the Retail Leases Act 1994 (NSW) (Act).
Ms Paola Toppi (Toppi) was a shareholder, the sole director of the Tenant and responsible for the daily operations of the Business.
The Tenant was placed in voluntary administration on the ground that it was, or was likely to become, insolvent, which had the legal effect of suspending Toppi’s powers as the Tenant’s director. The administrator immediately suspended the Tenant’s operation of the Business. However, the administrator then licensed the Business to another company (Licensee) (of which Toppi was a director) so that the Business could continue to operate from the premises.
Deeds of company arrangement were proposed for the benefit of the Tenant’s creditors. These involved assigning the lease to other entities. One of the deeds proposed an assignment of the lease to Bicher & Son Pty Ltd (Bicher). Bicher owned and operated an Italian restaurant in Sydney’s central business district and was a profitable company trading successfully.
In August 2018, the administrator sent an email to the Landlord advising that Bicher (and two other companies that were creditors of the Tenant (Creditor Companies) sought the Landlord’s consent to an assignment of the lease to Bicher. Attached to the administrator’s email was a letter from Bicher requesting consent to an assignment and enclosing a number of financial and other documents in support of that request. The administrator’s email also said: “If [the lessor requires] any further information, please let us know”.
The Landlord made no request for any further information about Bicher.
In the event that the lease was assigned to Bicher, Bicher intended to appoint Ms Rosanna Riccio (Riccio) to operate and manage the business.
Grounds on which consent to assignment can be withheld
Section 39 of the Act outlines the grounds on which consent to assignment can be withheld. Click here the read the act.
Approximately three weeks after receiving the administrator’s email, the Landlord wrote to Bicher and the administrator advising that it would not be consenting to an assignment of the lease to Bicher. The Landlord’s basis for refusing consent was because:
- “the retailing skills of [Bicher] are inferior to those of [the lessee]/Ms Toppi; and
- the lessee has not complied with section 41 of the [Act] as it has not provided the lessor with such information as the lessor reasonably requires to be satisfied that the financial resources and retailing skills of the proposed assignee are not inferior to those of the lessee”.
Bicher and the Creditor Companies commenced proceedings against the Landlord in the Supreme Court of New South Wales (Court) seeking an order that the Landlord consent to the assignment of the lease to Bicher.
Landlord’s argument
The Landlord argued:
- in relation to s 39(1)(b) of the Act, that Bicher’s retailing skills were inferior to those of the Tenant because Toppi was a more experienced and skilful restaurant manager than Riccio; and
- in relation to s 39(1)(c) and 41(b) of the Act, that even though the Landlord had not requested further information about Bicher’s financial resources and retailing skills, the information that was supplied was insufficient and that was enough to qualify as a breach of s 41(b) — warranting consent to be withheld under s 39(1)(c).
The Court’s decision
Brereton JA gave judgment for Bicher, declaring that the Landlord was not entitled to withhold consent to the assignment and ordering the Landlord to grant consent.
Circumstances for withholding consent and onus of proof
Brereton JA began by pointing out that the circumstances listed in s 39 that permit a landlord to withhold consent to an assignment are not circumstances that exist in the landlord’s opinion (whether reasonable or otherwise). It is not a landlord’s opinion that determines whether the circumstances have been made out but rather the circumstances are based on objective facts. Accordingly, the question whether one or more of the circumstances exist “is ultimately one for determination by the Court, on the evidence before the Court”.
His Honour then explained that, because s 39 permits a landlord to withhold consent if any of the listed circumstances exist, the onus of proof lay with Bicher to prove that none of the circumstances existed in the present case.
Here, the only relevant circumstances were those in s 39(1)(b) and (c). Therefore, Bicher had to prove: (1) that its financial resources and retailing skills were not inferior to those of the Tenant — (even though the Landlord, in refusing to grant consent, only alleged that Bicher’s retailing skills were inferior and made no complaint about Bicher’s financial resources), and (2) that it had not failed to comply with s 41 of the Act.
In relation to s 39(1)(b), his Honour said that the relevant time for comparing the financial resources and retailing skills of a tenant and proposed assignee is at the time of the assignment.
Financial resources and retailing skills
Bicher was successful in proving that its financial resources were not inferior to those of the Tenant. It was simple – Bicher was profitable whereas the Tenant was insolvent.
As to retailing skills, even if Toppi’s skills were superior to those of Riccio, that was not the relevant comparison. The relevant comparison was between the retailing skills of Bicher and those of the Tenant. Despite Toppi, at the time of the assignment, continuing to control and operate the Business, she was not doing so in her capacity as a director or employee of the Tenant as the effect of the administration meant that her powers as the Tenant’s director had been suspended and her skills could no longer be attributable to the Tenant. Instead, Toppi was deploying her skills in the Business as a director of the Licensee. Therefore, his Honour found that “[t]he company, in its current and prospective condition, [had] no retailing skills as a restaurateur. Such skills of Bicher [were] manifestly superior”.
Compliance with s 41 — provision of information
Brereton JA did not accept the Landlord’s submission that a tenant’s failure to provide sufficient information about a proposed assignee’s financial resources and retailing skills without a prior request for information from a landlord was enough to qualify as a breach of s 41(b) of the Act and, therefore, a justification for withholding consent under s 39(1)(c). His Honour said that s 41(b) requires: (1) a landlord to make a reasonable requirement for information in order to be satisfied about the financial resources and retailing skills of a proposed assignee, and (2) a tenant to fail to provide the required information. ‘There must first be a “requirement”, and it must be a “reasonable” one, and [then] a failure to comply with it, before s 39(1)(c) is engaged.’
More relevantly, Brereton JA said:
‘[the] lessor made no relevant “requirement” after receipt of the request for consent to the proposed assignment… The significance of this is accentuated by the fact that [the administrator’s email] seeking consent expressly invited the [l]essor to “please let us know”… “if you… require any further information”, yet no such request or requirement was ever made. No such request having been made, the… lessee came under no obligation to furnish further information, and in those circumstances, there was no failure on the part of the [lessee] to provide the lessor with such information as the lessor may reasonably require to be satisfied that the financial resources and retailing skills of the proposed assignee are not inferior to those of the lessee. Section 39(1)(c) is therefore not engaged.’
Key takeaways
The key takeaways of this case include the following:
- if a tenant or proposed assignee wishes to challenge a landlord’s refusal to grant consent, they must prove that none of the circumstances in s 39(1) exist;
- the existence of a circumstance is an objective fact and is not dependant on a landlord’s opinion as to is existence. Accordingly, the Court is free to determine whether the circumstance exists;
- when comparing a proposed assignee’s financial resources and retailing skills to those of a tenant (to determine whether the former are inferior to the latter), a tenant’s financial resources and retailing skills are those that exist at the time of the proposed assignment; and
- in relation to the circumstance in s 39(1)(c), which is a failure on the part of a tenant to comply with s 41(b) — to comply with a “requirement” from a landlord to provide information about a proposed assignee — there has to be the making of a “requirement” first. It is not a breach of s 41(b), entitling a landlord to withhold consent, if a tenant has volunteered information to a landlord at the outset of the process which a landlord decides is insufficient. In fact, there is actually no obligation on a tenant to provide any information to a landlord about a proposed assignee unless a landlord requests it.
Conclusion
If a tenant is very weak financially, the circumstance in s 39(1)(b) (inferior financial resources and retailing skills) is unlikely to be triggered and a landlord will not be able to withhold consent on that ground. This case clearly demonstrated that, the Tenant’s intention to assign because it was insolvent meant that it was very simple to establish that the proposed assignee’s financial resources were not inferior. Accordingly, the Landlord’s capacity to withhold consent was effectively negated.
