When Masters Home Improvement hit the Australian market, there were ambitious plans to open 150 stores in five years and give tall poppy Bunnings something to worry about.
But the hardware behemoth threw a spanner in Masters’ works and gave it a hammering. Forced to close in December 2016, Masters found itself red faced and saddled with leases.
One of these was held with Aventus, owner of the Cranbourne Home Centre. Masters organised to sublease to Amart Furniture. Although perfectly within its rights to offer Amart the premises, Aventus dug its heels in. Three months of to-ing and fro-ing meant Masters now risked losing a deal worth $1.5m in annual rent. Angry, they took Aventus to the Victorian Supreme Court claiming the landlord had breached their lease conditions by ‘unreasonably withholding consent’.
The Victorian Supreme Court found in favour of Masters…
What’s the law on all this?
Historically, judges have held that a landlord can refuse a sublease request if:
- it’s for a rival
- it’s for someone who’ll compete with existing tenants
- it’ll reduce the property’s rental value.
Allowing sub-tenants would reduce Aventus’ influence over factors like tenancy mix and rents, weakening its centre-wide decision making power. With site development being considered, full control was vital.
Amart was a welcome tenant but not in the Masters premises. Aventus said sub-leasing fell outside of Master’ lease rights. It feared Masters might repurpose the premises as a ‘shopping centre within a shopping centre’, breaching the lease’s permitted use clause, which said:
‘Home Improvement Store including household goods and appliances, building, hardware, timber and nursery products or materials’
If Masters subleased to Amart, Masters could do similar deals. Aventus had financial concerns such as:
- The sublease would increase available tenancies, putting downward pressure on centre rents. The laws of supply and demand wait for no one!
- Masters had offered Amart some great incentives which could also devalue centre rents and negatively impact Aventus’ development plans.
- Subleasing could badly affect the centre’s valuation.
- Masters would be competing with Aventus for future tenants.
What the Court decided
The Victorian Supreme Court was unconvinced by Aventus’ claims and found in Masters’ favour because:
- worry about a landlord’s broader commercial interests is no reason to withhold consent
- Aventus and Masters weren’t in competition
- the Amart sublease was unlikely to damage centre income
- Aventus did not provide any real evidence of plans for site development
- the lease allowed Masters’ plans for the premises.
So, where does this leave landlords?
It just got harder to reject a sublease request. If you’re leaning toward ‘No’, you’ll need to justify your refusal with serious evidence of any negative impacts.
What’s our advice?
Make sure the ‘permitted use’ clause in your lease gets extra careful legal attention.
This article was written by Lawyer, Evelyn Zeglinas.
DISCLAIMER: We accept no responsibility for any action taken after reading this article. It is intended as a guide only and is not a substitute for the expert legal advice you can get from marshalls+dent+wilmoth and other relevant experts.