Prior to entering into a Lease and/or a Franchise many “back and forth” negotiations are made. Sometimes parties may forget what has been agreed upon and what hasn’t. It is important that your documents include all commercial arrangements that have been agreed upon, or if necessary excludes things that have not been agreed upon.
A recent Victorian case resulted in a landlord and developer having to pay almost $400,000 in damages because of representations made to tenants in regard to other potential tenants in the complex, locations of other shops and foot traffic past the proposed premises. The Applicants in the case were purchasing a Jamaica Blue franchise and simultaneously entering into a lease of premises from which to run the franchise business. Various representations were made to them in regard to the premises, leading them to believe that their premises would be in a thoroughfare area within the complex and that the complex would include other quality shops and businesses that would attract buyers to the complex as a whole (and subsequently the Applicant’s shop). This belief was furthered by statements in a brochure provided by the developer and the Lessor’s Disclosure Statement. However both included disclaimers with the brochure stating that it could not be relied upon and the disclosure statement indicating that the expectations as to the other tenants within the complex could change.
The Applicants entered into the Lease and the Franchise Agreement, and did the fit out of the premises. When they opened for business there were very few other shops and businesses in the complex open, and the complex was not fully completed or operational. After some time of not making any profit, they closed their business and brought action against the complex owner and the developer for misleading and deceptive conduct. As part of their claim, they claimed a loss for set up and operating costs and a loss of income. Notwithstanding the disclaimers, the court found in the Applicants’ favour. The court reduced the Applicant’s claim for loss of income finding that they had not tried to find alternative employment quickly enough.
This case could have been avoided if the Lease was properly documented and dealt with the representations that had been made. If there are problems, see your legal advisor as soon as possible to work out your options.
If you are a landlord or a franchisor, you must be very careful about what representations you (or those negotiating on your behalf) make in regard to the premises, the surrounding leases or the franchise business. You should give your legal advisor copies of all of the brochures and advertising that you have used in securing the tenant.
If you are a tenant or a franchisee you must give your legal advisor copies of all the advertising you have relied on, and details of any representations made. Your legal advisor can ensure, if necessary, that both documents give you the necessary “out” clauses if those representations don’t eventuate.
To make sure that your documents cover your commercial arrangements, contact our experienced Commercial Business & Property Team.