Landlords Unreasonably Withholding Consent to Sub-Lease: Masters Home Improvement v Aventus

By Krisha Reddy, Law Clerk, and Alicia Hill, Principal, MST Lawyers

Most franchise systems that have franchisees operating a retail site will be subject to State based retail shop leases legislation.  Masters Home Improvement Australia Pty Ltd v Aventus Cranbourne Thompson Road Pty Ltd [2019] VSC 428 is a recent Victorian Supreme Court decision regarding a landlord withholding consent to grant a sublease over part of an empty retail space subject to the retail shop leases legislation in Victoria. Justice Croft found in favour of the tenant, Masters, and held that the commercial interests claimed by the landlord, Aventus Cranbourne, to justify the refusal to consent to the sublease were unreasonable.

Background

In 2011, Woolworths established Masters Home Improvement (Masters) in Australia in an attempt to wrest some control of the retail hardware market away from Wesfarmers and Bunnings Warehouse, which has historically been the dominant force in the sector. Aventus Cranbourne is a subsidiary of the Aventus Retail Property Fund (Aventus) which is Australia’s largest fully-integrated owner, manager and developer of large format retail centres.

The retail space in question is located at the Cranbourne Home Improvement Centre and was built specifically for Masters, reflecting the long-term commitment between the parties (Premises). On 1 October 2015, Masters entered into a 15-year lease with Aventus Cranbourne (Lease) and began trading from the Premises.

However, soon after in January 2016, Woolworths announced that its Masters venture had been a failure with losses of over $3.2 billion and that it would be closing and selling off stores. Masters stopped operating in December 2016, and since then the Premises has remained empty.

Masters has continued to pay rent, and from the perspective of Aventus, the Lease is guaranteed by Woolworths, so issues regarding unpaid rent do not arise. Practically, Masters had both purchased and leased large retail spaces which in turn had to be sold or repurposed by Woolworths. In October 2017, Home Consortium, which is a large format retail chain and a competitor of Aventus, became the parent company of Masters.

During initial negotiations regarding the terms of the Lease, Aventus Cranbourne objected to a subletting clause that would have allowed Masters to sublet or grant licenses to any part of the Premises without their consent.

Instead, the executed lease contained the following proviso:

Clause 8.2

(b) Despite paragraph (a), the Tenant may not without the Landlord’s prior written consent (which consent must not be unreasonably withheld or delayed), sublet, grant licenses or concessions which (in aggregate) exceed:

(iii) 20% of the trading area of the Premises in total.

In mid-2018, Masters commenced negotiations with Amart Furniture to alter and then sublease part of the Premises.

Aventus refused to permit the sublease and Masters brought proceedings claiming that Aventus was unreasonably withholding its consent in breach of obligations under the Lease.

Arguments From Masters

Masters argued that Amart Furniture was a suitable tenant for the Premises and would not compete with other retail tenants. This was supported by the fact that Aventus itself has approached Amart to propose a lease for a newly built store, not the existing Premises, which would be located on surplus land within the Cranbourne Home Improvement Centre.

Arguments from Aventus

Aventus argued that in withholding consent it was entitled to take into account the broader commercial and economic interests of the Aventus Group as a whole, which included the interests of stakeholders. Aventus claimed that control of the Premises was a fundamental part of its business model. In general, Aventus does not allow subleases to be granted which enables them to maintain control over the tenancy mix and direct relationships with tenants. Aventus’ CEO described this as “a guiding principle, and that’s part of why we’re able to achieve strong returns for our unitholders”.

Aventus also argued that consenting to the sublease would mean that it would lose control over that portion of the Cranbourne Home Improvement Centre and that this would be the first step in Masters’ new parent company, Home Consortium, further subletting the Premises in a way that would directly compete with Aventus. Home Consortium would effectively become a de facto landlord of the Premises within the larger Centre. There were also arguments that an increase in supply of space would lead to a downward pressure on rent.

Findings

Justice Croft examined the relevant authority in the area and found that while a landlord may regard its property interests in deciding whether to give consent, such as diminution in rental value or competition between tenants, these must be immediate factors facing the landlord and “does not extend to broader commercial factors which are extraneous to that particular landlord and its property”.

Justice Croft rejected Aventus’ submission regarding consideration of the interests of Aventus Group as a whole. His Honour found that Aventus could only take into account its interests regarding the subject matter of the Lease in question and perhaps adjoining property that it owned. There was no authority on allowing a broader assessment of interests. His Honour warned that accepting Aventus’ argument would result in an “ill-defined and virtually unlimited range of commercial interests upon which a landlord could call upon as a basis for refusal of consent”.

Justice Croft also dismissed the other arguments raised by Aventus. His Honour found that there was no basis for Aventus to believe that it would lose control over the Premises.

Masters was merely asking for one sublease to Amart Furniture and Clause 8.2 would continue to operate meaning that Masters would still need to seek further consent for any other subtenants. Home Consortium would not become a de facto landlord and Aventus could maintain control. There was no reasonable basis to believe that Aventus would suffer from decreased rent given the strong demand for space within the Cranbourne Home Improvement Centre.

The refusal to consent was therefore unreasonable, and Masters was awarded declaratory relief so that Aventus was ordered to execute the required documents to give effect to the sub-lease.

Lessons To Learn

This decision illustrates the commercial issues that a Court will consider when deciding whether or not a landlord has unreasonably withheld consent to a sublease.

A landlord cannot cite broader and commercial reasons not specific to the property in question.

This case is useful for any franchisor or franchisee tenants, named on a lease, and are having difficulty obtaining approval and believe that their landlord does not have a justifiable reason in withholding consent.

If you have any questions regarding this decision or any matters it raises, please feel free to email Alicia Hill or call +61 3 8540 0200.