CHOOSE YOUR WORDS CAREFULLY!

By John Morrison and Sebastian Dimarco

The pre-lease negotiation is the foundation upon which the lease stands.  What is said and done by the leasing executive during the pre-lease negotiation is crucial and may result in there not being a binding lease between the parties.  This is not the desired outcome of any negotiation and often results in the parties resorting to litigation that is expensive, undesirable and could have been avoided had the parties conducted the pre-lease negotiations with care, skill and diligence.     

In any negotiation, the retailer wants the best location in the centre that has all of the attributes required to enable the successful running of the business.  The landlord wants to lease the available shops to the best retailers to enhance the product mix and profile of the centre so as to ensure the success of the centre and maximise returns.  Of course, the success of the retailer’s business and the overall success of the centre is in the interest of both parties.   

During the pre-lease negotiation both parties are attempting to maximise the deal in their favour and the retailer will be looking closely at the attributes of the centre through an evaluation of what the retailer has seen, read and heard about the particular centre and its demographics.  It would be difficult, if not impossible for a leasing executive to lease premises without making representations to the prospective retailer in respect of the centre, the proposed shop, the lease or some other relevant aspect of the landlord and tenant relationship.  It is also unlikely that a retailer will enter into a lease without having relied on at least some of the representations made by the leasing executive and at times the retailer may consider a particular representation as being a critical factor or an inducement to enter into the lease.

The parties cannot simply rely on the lease as being the only statement of their rights and obligations.   A Court will look behind the lease and if necessary carry out a critical examination of documents and conversations which contain alleged representations.  A representation may be made orally or in writing, and may at times arise out of silence.  They can be made during the pre-lease negotiation, contained in brochures, plans, specifications, offers to lease, letters of intent, disclosure statements and of course, the lease.  They can be made directly and apply specifically to a particular retailer, or can be made in a document intended for all retailers within the centre on the basis that the retailer in question falls within the class of persons to whom the representation is made.

If the landlord or its leasing executive induces the retailer to enter into the lease by making a representation about the particular shop, the centre, the proposed lease or any other relevant matter upon which the retailer relies and it is later shown that the representation is wrong, the representation may amount to a misrepresentation and the retailer may be entitled to terminate the lease (or other Contract) and/or seek an award of damages. 

Misrepresentation at Common Law

At common law, misrepresentation may be fraudulent, innocent, or negligent. 

  • Fraudulent misrepresentationoccurs where a false statement is made knowing that it is false or the statement is made recklessly.
  • Innocent misrepresentationoccurs where a false statement is made honestly believing it to be true and without being reckless. 
  • Negligent misrepresentationoccurs where there is a special relationship between the parties and it is clear the party seeking important information trusts the other party to exercise a degree of care in providing information that shall be relied and acted upon.  Whilst the misrepresentation may be innocent, it may amount to a negligent misrepresentation.    

A misrepresentation must generally be based on fact.  As a general rule, opinion is not regarded as being a statement of fact.   Similarly, mere puffs or exaggerated sales talk that is understood by a retailer, as not being true will generally not amount to a misrepresentation.  However, an expression of opinion will be critically analysed and if it can be shown that it amounts to a statement of fact based on an implied assertion then it may amount to a misrepresentation.

An intention to do something in the future will generally not be a statement of fact unless it amounts to a warranty, or was made negligently or fraudulently or it is shown that at the time of stating the intention no such intention existed.  At common law, unless it can be shown that there was a duty of disclosure, silence will not amount to a misrepresentation.  However, a half-truth that omits important facts by distorting the true position and falls short of a full and frank disclosure may amount to a misrepresentation. 

Before an alleged misrepresentation is actionable it must be shown that it was material and induced the particular person who relied upon the representation to enter into the lease.  A misrepresentation will amount to a material inducement if it can be shown that it was intended to affect the mind of a reasonable person (in this context, a reasonable retailer) and did affect the judgment of the person to whom the misrepresentation was made.  It is not necessary to prove the misrepresentation was the only inducement, it is sufficient if it is one of the factors that induced the retailer to enter into the lease.  If the retailer cannot establish reliance on the representation then there is no connection between the representation and the alleged consequence.

Whilst certain types of misrepresentation may permit the retailer to rescind (withdraw from) the lease contract, once the retailer is aware of the misrepresentation the retailer is required to make an election to either exercise the right of rescission or affirm the lease by performance of the retailer's obligations pursuant to the lease.  If the retailer affirms the lease then the right of rescission is lost and the retailer’s remedy would then be in damages (a claim for compensation). 

Therefore, if the retailer forms the view that the landlord has engaged in misrepresentation it is critical that the retailer immediately obtain legal advise so as to preserve the right of rescission if that is considered to be the most appropriate course of action taking into account all of the circumstances of the particular case.  This is particularly so in the context of leasing, as the landlord often permits the retailer to enter into possession of the shop prior to execution of the formal lease.  The time to complain about a particular misrepresentation will pass quickly once the retailer is in possession and is performing the lease.

As an alternative to seeking a remedy for misrepresentation at common law, a remedy can be sought under the Trade Practices Act 1974 (Cth) (the "TPA") for breach of section 52 of the Act in respect of "misleading" and "deceptive" conduct.  The TPA has transformed the law of misrepresentation and in particular the limitation of the application of common law misrepresentation in respect of silence and future intentions does not apply under Part V of the Act. 

In contrast to the common law, under the TPA silence may amount to a misrepresentation even though there was no specific duty of disclosure.  The TPA has become so effective in dealing with misrepresentation that most proceedings are now brought under the TPA in preference to the common law.  The TPA provides a number of remedies such as injunction and damages.   There are also discretionary remedies which may be ordered by the Court including restitution, rescission of the lease in whole or part, and prospective or retrospective variation of the terms of the lease.     

Section 52 Trade Practices Act 1974 (Cth) (the "TPA")

Section 52(1) of the TPA provides that a corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive, or that is likely to mislead or deceive.  In bringing proceedings it is necessary to show that the person who engaged in misleading conduct induced an error in the person to whom the conduct was directed and the error contributed to the decision by that person to take certain steps or enter into some arrangement such as a lease. 

The section generally imposes strict liability so it does not matter how a person was misled or what state of mind the person engaging in the conduct was in at the time of the conduct.  Generally, it is not necessary to prove dishonesty, recklessness or negligence.  A party can engage in misleading and deceptive conduct without having formed the intention to deceive.  The focus of section 52 of the TPA is concentrated on the effect the conduct had on the person to whom the conduct was directed. 

The words "misleading" or "deceptive" in section 52 of the TPA are to be given their ordinary meaning.  The question for consideration is whether in the light of all relevant circumstances constituted by acts, omissions, statements, or silence, there has been conduct that is likely to be misleading and deceptive.  In Weitmann -v-Katies Ltd (1977) 29 FLR 336 at 343 it was held that in the context of section 52(1) of the TPA "misleading" means "to lead astray in action or conduct; to lead into error, to cause to err".

Under the TPA misleading and deceptive conduct may arise out of a positive misrepresentation, intentional concealment of important facts, a statement that amounts to a half-truth or the failure to correct an untruthful statement immediately upon it being realised that the original statement was untruthful.  The person to whom the conduct was directed must show the alleged misleading and deceptive conduct led them into error.  Whilst the person who claims to have been misled cannot act in an unreasonable manner based on some unrealistic interpretation of the conduct, the TPA does not apportion responsibility and there is no obligation imposed on the person to take care of their own interests.   

In the context of a commercial negotiation where each party is naturally seeking to negotiate the best deal, remaining silent on an important issue is dangerous and may be construed as a deliberate intention to mislead or deceive.  Another danger is making statements about future intentions, if it can be shown that the statement was made dishonestly or recklessly.   If the person making the statement had no real intention to do what was promised the conduct might amount to misleading and deceptive conduct. 

The problems associated with a statement of future intentions at common law is removed by section 51A(1) of the TPA which provides that where a corporation makes a representation with respect to any future matter and the corporation does not have reasonable grounds for making the representation, the representation shall be taken to be misleading.  Under section 51A(2) of the TPA, the landlord has the onus to prove the alleged misrepresentation was made upon reasonable grounds at the time it was made.

Conduct engaged in by the leasing executive, centre manager, or any agent or employee of the landlord acting within their apparent authority can be attributed as conduct of the corporation pursuant to section 84 of the TPA.  The remedies available against the corporation who engaged in the misleading or deceptive conduct are also available in respect of any person knowingly involved in the contravention of the TPA.  This would include any leasing executive or other individual acting on behalf of the landlord who as defined in section 75B of the TPA aided, abetted, counselled or procured the contravention or induced or was knowingly concerned or a party to the contravention. 

There have been a number of cases involving landlords and retailers in respect of alleged misrepresentations made during the pre-lease negotiation.  These misrepresentations have included the number of shops in a centre that have already been leased, the identity of key retailers, customer traffic and customer flow, and the number of retailers who will be permitted to conduct a business in the centre having an identical or substantially similar permitted use.

In the context of a shopping centre dispute, the misrepresentation may have been made to all or some retailers as a class rather than directly to one or more retailers.  Under Part IVA of the Federal Court of Australia Act 1976 (Cth) proceedings in respect of a cause of action arising after 5 March 1992 involving seven or more persons who each have a claim against the same person arising out of the same or similar circumstances giving rise to a substantial common issue of law or fact may be commenced by one or more of those persons representing some or all of those persons.      

Attempts to Limit Liability under the TPA – the Exclusionary Clause 

An exclusionary clause is a provision in which a party to a contract attempts to exclude liability for circumstances in which a liability may otherwise exist.

Whilst it may be possible to exclude liability for misrepresentation at common law by including a provision in the lease to that effect, it is not possible to exclude liability under section 52 of the TPA by private agreement.  There are a number of cases where a party has unsuccessfully attempted to exclude liability under the TPA for information contained in brochures and other documents by including a disclaimer of liability in the document.  The inclusion of such a clause cannot prevent earlier conduct from being seen as misleading or deceptive.     

An exclusionary clause can be in the form of an express promise that a person has not relied on or been misled by any statements made during the pre-lease negotiation.  It may also seek to exclude certain remedies or impose a pre-lease obligation to disclose representations upon which a person has relied.  In order to limit the effect of section 52(1) of the TPA it is now common practice for the landlord to require the retailer to disclose any representations that the retailer claims to have relied upon in entering into the lease.  In fact, such a requirement is imbedded into retail lease legislation.

An exclusionary clause may require the retailer to acknowledge that the retailer has not been induced to make an offer to lease or enter into a lease by any statement or conduct by the landlord or its agents and representatives and the retailer has not relied upon any brochure or market analysis or other report provided by the landlord.  The retailer may also be required to acknowledge that no representation has been made in respect of a competing business, the tenancy mix, the location of other tenants or some other factor.  In obtaining this acknowledgement the landlord may seek to rely on the acknowledgement as being a representation made by the retailer.       

Whilst it is common practice for most landlords to include an exclusionary provision within the terms of the lease, some landlords have also required retailers to complete a separate document that at times is in the form of a deed.  Even these extremes will not necessarily displace the effect of the TPA.  However, a failure on the part of a retailer to disclose a representation upon which they later attempt to rely may be relevant in assessing the credibility of the retailer's evidence.    

In Keen Mar Corporation Pty Limited -v- Labrador Park Shopping Centre Pty Limited (1989) ATPR (Digest) 46-048 the lessee was required by the landlord to enter into a deed which included the following clause:

'The following statements have been made to the Lessee in relation to the proposed lease by the person or persons named below which statements:

(a)  have induced or influenced the Lessee to decide to enter into the proposed lease or to agree to any or all of its terms; or

(b)  have been relied upon in any way as being accurate by the Lessee for the aforesaid purposes; or

(c) have been warranted to the Lessee as being true; or

(d) have been taken into account by the Lessee as being of any importance whatsoever to the Lessee's decision to enter into theproposed lease or to agree to any or all of its terms."

In the proceedings before the Court the lessee sought to rely on representations and conduct which was not listed or disclosed.   The proceedings bought by the lessee were unsuccessful as the Lessee was unable to prove reliance. 

The Court confirmed that an exclusionary clause in a lease cannot be relied upon by the landlord to answer a cause of action based on section 52 of the TPA.  However, it was held that a well-drafted exclusionary clause drawn to the attention of the lessee who has received legal advice may be evidence relevant to the question of whether or not the representation induced the lessee to enter into the lease.

Of course, even a well-drafted exclusionary deed would have no effect if it can be shown that the retailer was mislead into signing the deed or was denied the opportunity to obtain independent legal advice as to the nature and consequences of the deed.          

Disclosure under the Retail Lease Legislation

In each State and Territory of Australia in which there is an Act or Code governing retail leasing there is a requirement for the landlord to provide the retailer with a disclosure statement prior to the parties entering into the lease.  Whilst the prescribed format differs in each jurisdiction they in one form or another require a detailed disclosure of major aspects of the lease including any agreements or representations made and relied upon during the pre-lease negotiation.

This requirement for the retailer to disclose any representations made by the landlord upon which the retailer has relied permits the landlord to correct any misapprehension on the part of the retailer before the lease is entered into.  The correction of any misapprehension on the part of the retailer by the landlord after the lease has been entered into will have little or no effect on a claim for alleged misrepresentation.  From both parties' perspective, the critical time to document all representations, establish reliance and correct any misapprehension is before the lease is entered into.

In some jurisdictions under the Act or Code each party to a retail shop lease is liable to the other for damage suffered that is attributable to one party entering into the lease as result of a false or misleading statement or representation made by the other party.  Where the disclosure statement is found to contain false or misleading information the lessee in some jurisdictions has a right to terminate the lease within a specified period of time or in some instances apply to the appropriate Court or Tribunal to avoid the lease or seek some other appropriate order.    

Conclusion

It is important that both the landlord and their leasing executive use skill and judgment by giving reasonable and carefully considered answers to questions posed by a retailer and upon which it is clear the retailer shall rely in deciding whether or not to enter into the lease.  Without doubt, the retailer will and is entitled to expect a truthful and frank answer to any question asked of the landlord.  Similarly, it is fair and reasonable for the retailer to rely on statements and claims made in any brochure or other document produced by or on behalf of the landlord.       

The landlord must include Part V of the TPA as part of its TPA compliance program to ensure that its leasing executive and centre managers understand their obligations and do not breach the TPA.  The landlord should not rely on an exclusionary clause or a disclaimer of liability to defend a claim for misrepresentation either at common law or under the TPA.  To ensure the retailer has entered into a binding lease and to maintain compliance with the requirements of the TPA the landlord must:

  • Ensure that statements made orally or in writing by the landlord and its leasing executive to the retailer are true, accurate and based on facts
  • Ensure that any brochure, disclosure statement or other document given by the landlord to the retailer gives a full and frank disclosure of all the relevant facts and circumstances within the knowledge of the landlord which may have an adverse effect on the retailer's business being conducted from the premises
  • Ensure that any statement, action or document given by the landlord to the retailer is not false, fraudulent, misleading or deceptive
  • Ensure that any statement made or document given to the retailer is immediately corrected if it is later found by the landlord to be incorrect, misleading or only partially disclosing all of the facts within the knowledge of the landlord
  • Whilst generally not effective and no substitute for full and frank disclosure, include a provision in the lease which seeks to exclude liability for representations
  • Prior to the retailer entering into the lease, insist the retailer disclose all representations made by the landlord and leasing executive upon which the retailer has relied in making the decision to enter into the lease and if necessary, immediately correct any misunderstanding on the part of the retailer

To ensure there is no evidentiary barrier to a claim for misrepresentation and in particular misleading and deceptive conduct under the TPA the retailer must ensure that all representations be they oral or in writing, made by the leasing executive, the landlord or contained in a leasing brochure are documented in writing and provided to the landlord prior to the retailer entering into the lease or possession of the premises.  It is of paramount importance that the retailer documents and brings to the attention of the landlord all representations upon which the retailer has relied and which induced the retailer to enter into the lease.          

Disclaimer: This article is not intended to be a substitute for obtaining legal or other expert advice and no responsibility is accepted for any action taken as a result of any material in this article.  Additional information and advice may be obtained from Bruce Stewart Dimarco Lawyers.   

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