The Victorian Supreme Court decision of Spirovski v Univest Assett Merchants Syndicators Pty Ltd & Anor [2013] VSC 728, illustrates that the provisions of the Victorian Retail Leases Act 2003 prohibiting the payment of key-money will be rigidly enforced by the courts. Attempts to work around the provisions by disguising the payment of key money in a sham business sale contract or other agreement will not be successful.

The decision makes it clear that the prohibition covers all situations where key-money is paid, and does not just protect small tenants who would otherwise be forced to accept unfair lease terms and conditions.

Facts

The landlord owned premises known as the Rob Roy Hotel in Victoria. Prior to the lease being signed, the tenant agreed to pay the landlord 2 instalments of $90,000 each.

The $90,000 payments were structured so as to constitute the consideration for the transfer of certain plant and equipment situated at the premises that was left there by the previous operator of the hotel, and as a payment for the “goodwill” associated with the business that had previously operated from the premises. The tenant argued that the payments constituted “key-money” contrary to the provisions of the Retail Leases Act 2003.

However ss 23(3)(c) and (f) of the Retail Leases Act provide exceptions to the general prohibition on a landlord accepting “key-money” where the landlord is:

“(c) claiming goodwill from the tenant in relation to the sale of a business that the landlord operated from the retail premises immediately before its sale, if the lease was granted to the tenant in the course of the sale of the business; or

…

(f) seeking and accepting payment for plant, equipment, fixtures or fittings that are sold by the landlord to the tenant in connection with the lease being granted”.

 

Prior to the lease being signed, the parties attended mediation where the tenant (after receiving legal advice) agreed to make the two payments in return for the landlord executing the lease. The tenant had already spent a significant amount on renovations to the premises and asserted that it felt pressured into agreeing to the mediation agreement in return for the lease being granted. However the Victorian Civil and Administrative Tribunal subsequently found that the agreement was a sham that was designed to avoid the key-money provisions of the Act.

Decision

The Supreme Court agreed with the Tribunal that the evidence indicated that the landlord was not operating a business from the premises immediately before the business was sold to the tenant. This was because (inter alia) the liquor licence was suspended at this time and the hotel could not therefore have been in operation (unless the landlord was in serious breach of the liquor licensing laws). The goodwill exception under s 23(3)(c) of the Act was not therefore applicable.

The court also found that the Tribunal was correct in finding that the second payment was not for “plant, equipment, fixtures or fittings that are sold by the landlord to the tenant in connection with the lease” as per the exception in 23(3)(f). While it was not in dispute that there were various items of furniture, bedding and other assorted pieces of equipment left behind by the previous operator of the hotel, there was no mention of chattels being sold in the business sale contract nor a monetary amount provided for any stock, plant or equipment. There was also nothing in the evidence to disturb the Tribunal’s finding that the items were “junk, destined for the tip”.

Additionally the court found that the Tribunal was correct in finding that the tenant was not estopped from making a claim in regard to the $180,0000. The court noted that the unequivocal nature of the language used in the actual wording of s 23 makes it clear that the protection is to be afforded to retail tenants in any situation that may involve a landlord requesting, receiving or retaining any payment of money that is key-money save for the exceptions specified in s 23(3). The court noted that the landlord in raising the estoppel claim was effectively attempting to expand this list of specified exceptions to include situations where the tenant is experienced in business or alternatively, has been provided with legal advice.

However the court found that if Parliament had intended such an exception, it is reasonable to expect that it would have legislated for it in the Act. Further, such an exception would have the potential for creating significant uncertainty and would invite investigation of the business experience of parties and the fact and possibly the content of advice given, all of which carries the real potential for expense and delay. Additionally the court noted that the key-money provisions carry a substantial sanction for their breach so it is hardly likely that Parliament would have intended their application to be shrouded with such potential uncertainty.

This decision will be reported shortly in CCH’s Victorian Conveyancing Law and Practice.