Mischaracterisation of early termination clause in lease – Retail Shops Act

The recent case of Hay & Colin Pty Ltd v West End Hospitality Pty Ltd [2021] WASC 458 (published on 14 December 2021) considered whether a clause in a retail shop lease with the heading “Redevelopment” giving the landlord a right to terminate the lease, with no right to relocate the tenant to alternative premises, was in fact only an early termination clause and not a relocation clause.
 
Under the Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA) (Retail Shops Act), in respect of leases of more than six months, a tenant has the right to a minimum five years tenancy.
 
Pursuant to s. 13(7) of the Retail Shops Act, the State Administrative Tribunal (SAT) may approve a clause that allows the landlord to determine the lease earlier than the five years if it is satisfied that special circumstances exist.  

Background

The dispute concerned a retail shop lease between Hay & Colin Pty Ltd (Landlord) and West End Hospitality Pty Ltd (Tenant) in respect of premises located at 1222 Hay Street, Perth WA 6000.

The Landlord had sought SAT approval of a proposed redevelopment clause in a lease of additional area, variation of lease and extension of lease (Lease). 
 
Under the redevelopment clause the Landlord was entitled to terminate the Lease, subject to any restrictions contained in the Lease. The redevelopment clause included compensation provisions.
 
The SAT application for approval to the clause was made pursuant to s. 13(7) of the Retail Shops Act.
 
SAT dismissed the application on the basis that it had no jurisdiction to approve the application under s. 13(7) of the Retail Shops Act.
 
The Sessional Member:

• found that the application was dealing with the possible redevelopment of the Premises which would necessitate relocation of the tenant’s business to alternative premises; and
• noted that the redevelopment clause was in the nature of a relocation clause for the purposes of s. 14A of the Retail Shops Act.

The Landlord appealed to the Supreme Court of Western Australia.

Clause

The relevant clause provided: 

“Redevelopment

(a)    … if at any time the Lessor desires to develop or redevelop the Additional Area and/or Alfresco Licensed Area or a substantial part thereof, the Lessor by not less than 12 months’ notice in writing to the Lessee may terminate the lease of the Additional Area and the licence of the Alfresco Licensed Area, and such lease and licence shall automatically terminate on the date specified in that notice …
 
(e)    For the avoidance of doubt:

(i)    this clause is only an early termination clause and nothing in this clause [6] entitles the Lessor to relocate the Lessee to an alternative premises; and …"¹ 

The unmodified earlier lease contained a redevelopment clause in similar terms to the proposed redevelopment clause, which had been approved by the SAT. The proposed alfresco licence also contained a similarly approved redevelopment clause by the SAT.

It is noted that s. 14A of the Retail Shops Act provides that “A provision of a retail shop lease about the relocation of the tenant’s business is void unless …” (emphasis added).

Appeal

In his evaluation, Martin J stated that:
 
“It is apparent that the proposed redevelopment clause says nothing at all about relocation by the lessee. Instead, it deals entirely with the question of a potential early termination of the lease …”²
 
 Martin J held that the proposed redevelopment clause carried no features at all warranting its characterisation as a relocation clause. The SAT did have the jurisdiction to consider the application under s. 13(7) of the Retail Shops Act, and should have done so.

Special circumstances

Martin J went on to consider whether special circumstances existed which would warrant the approval of the clause under s. 13(7) had SAT proceeded to consider the application. 

In considering the matter, Martin J was guided by an earlier decision of Curthoys J, in 480 Hay Street Pty Ltd v Irwin St Lower Pty Ltd [2020] WASC 59, which provided:
 
“In the context of costs the term ‘special circumstances’ has been held to mean ‘circumstances that are out of the ordinary, but without having to be extraordinary or exceptional”.³ 
  
Martin J determined that the five factors identified by the Landlord were special circumstances warranting approval of the proposed redevelopment clause, namely:

1. the proposed lease was of an additional area and the existing lease was already the subject of an approved redevelopment clause allowing for redevelopment;
2. the Landlord’s building was old and may need to be redeveloped in the next five years; 
3.  all of the leases of premises within the Landlord’s building had an equivalent redevelopment clause approved by the SAT;
4. in the event of early termination, the Tenant would be entitled to significant compensation for the early termination, calculated as set out in the proposed redevelopment clause; and 
5. a 12 month notice period was required.

In addition to the fact that the arrangements appeared to be commercially fair and presented “as a legitimately reached bargain as between commercial parties in a leasing transaction”⁴, including that the tenant supported the application. 

Decision

Martin J decided that there had been a clear error of law in construing an early termination clause as a relocation clause, and special circumstances warranting approval of the clause had been shown. The appeal was allowed and the clause was approved.

Key takeaways

• On an application for approval to a termination clause, the Tribunal should have regard to the special circumstances of the matter.
• Special circumstances are likely to include the commercial arrangements between the parties, and the Tribunal should have due regard to those.
• Section 14A of the Retail Shops Act applies only to relocation clauses and not termination clauses generally. 

If you require any further information or assistance in relation to a retail or commercial lease, contact one of the members of the Property team. 

Footnotes

¹ [para 17] 
 
² [para 19]
 
³ [para 31]

⁴[para 37]