Case studies

Always check the retail lease before you sign on the dotted line

The situation: A tenant has rented retail premises from a landlord to open a spa business. After signing the lease the tenant realises the premises don’t have the appropriate plumbing to operate a spa business.

The process: The landlord requests the tenant gets advice from a registered plumber and supplies a plumbing report to show if a spa business can be operated from the premises.

The resolution: The tenant presents a plumber’s report to the landlord stating the retail space’s plumbing is not appropriate for operating a spa business. The landlord agrees to relieve the tenant of the lease and any financial costs.

Negotiating a win-win for a security deposit (bond) refund

The situation: A retail lease has expired. The landlord’s agent has refused to refund the security deposit because the tenant needs to reinstate the premises to their original condition.

The process: The tenant provides reasons why the security deposit (bond) is being withheld. The agent has advised the tenant that repairs need to be done to restore the premises to its original condition. The tenant calls the VSBC for advice and speaks to a Dispute Resolution Officer for preliminary assistance.

The resolution: The tenant reviews the list of repairs to be done. The tenant believes many of these repairs are from normal wear and tear. The tenant and landlord agree to split the repair costs. The tenant is refunded half the original security deposit (bond).

Thinking outside the square when negotiating rent

The situation: A tenant has an initial three-year lease with options for two further terms for her small accounting practice. At the end of the first three-year term, the tenant exercises her option for the second lease term.

Under the terms of the lease, the rent for the new term is to be determined by a market rent review.

The landlord wants to increase the rent, while the tenant believes it should remain the same. The parties are at a stalemate as neither party can agree, nor can they agree on a valuer to independently determine the rent. The landlord makes an application to the VSBC to appoint an independent specialist retail valuer (SRV).

The process: The VBSC asks either the Australian Property Institute (API) or the Real Estate Institute of Victoria (REIV) to nominate a valuer to determine the rent. The landlord and tenant are advised of the valuer’s details and pay the costs of the rent determination in equal shares and sign terms of appointment. In some cases the VSBC will appoint the valuer even though the parties have not signed the valuer’s terms of appointment.

The resolution: Once the valuer has been formally appointed they have 45 days to complete the rent determination, unless time is extended by the landlord and tenant, or the VSBC. The valuer may ask the landlord and tenant for information or a submission to assist in reaching a determination. Once the determination is made by the valuer the determined rent becomes the new rent for the premises.

A win-win rather than a $2 million relocation bill

The situation: A tenant runs a business with a substantial turnover on a very large land area. There has been no lease renewal since the original lease expired in the early 2000s.

The landlord has approached the tenant to negotiate a new lease at double the rent being paid – which had not changed for many years.

The process: The tenant refuses to pay the increased rent and lodges a dispute application with the VSBC.

At mediation, during a private session, it becomes clear that it would cost the tenant more than $2 million to relocate the business, assuming an alternative site could be found, and at an unknown rent. A long-term lease on reasonable terms is in the tenant’s best interests.

The landlord is aggrieved that the rent has not increased in many years but may experience difficulties finding an alternative tenant for the land and premises.

The resolution: The parties reach a settlement whereby the terms of a new lease provide for four three-year terms, a starting rent of between the current and the asking rent, a specified percentage increase each year, and a market rent review at each option.

The tenant gains a lengthy security of tenure – albeit paying a more market-based rent – while the landlord secures an ongoing tenant with a lower than requested starting rent, but with reasonable rent increases and regular rent reviews.

Make good after a long-term month-to-month tenancy ends

The situation: Two adjoining premises (Suite A and Suite B) are owned by the same landlord. The tenants were on a month-to-month tenancy for many years but have left both premises. The parties are in dispute over the ‘make-good’ of the premises.

The landlord had required that partitions installed in each of the premises be removed, while the tenants maintained that the agent, who inspected the premises before the tenants left, had indicated that the partitions could remain as they might assist in re-letting the premises. The agent denies this. The amount in dispute is around $4000.

The process: The landlord refers the matter to the VSBC and the parties agree to mediate. At mediation, it emerges that the tenants had occupied the premises for more than 30 years.

They had initially entered into fixed-term leases, but these had expired many years ago after which the tenant continued in the premises on a month-to-month basis.

The person attending the mediation is representing the tenants of both premises. In his view, the tenants have no obligation to remove the partitions as there is no certainty about when they were erected. He maintains that the agent had agreed that the partitions could remain.

The agent maintains that the partitions were only allowed to remain if they assisted in re-letting the two suites but, since the suites have not been re-let since the tenants left 12 months before, the partitions now need to be removed at the tenants’ expense.

The resolution: The likelihood of the Victorian Civil Administrative Tribunal deciding against the tenants, given the circumstances and the amount of uncertainty, is raised during mediation.

The expense and difficulty of such litigation is discussed by the parties and they reach agreement to share the cost of removing the partitions equally as full and final resolution of the matter.

Questioning the permitted use of a premises

The situation: The tenant claims that his lease allows for the sale of nuts in his retail food business, based on assurances made by the leasing agent.

After the tenant has fitted out the premises at significant expense, including a special nut stand, the leasing agent tells the tenant that the landlord has advised that nuts should not be sold at the premises, based on the permitted use of the premises in the lease.

The process: The tenant refers the matter to the VSBC and mediation is held.

The discussion at mediation revolves around the question of whether the permitted use of the premises in the lease adequately covers the intended purposes of the business. It also covers what oral assurances have been made by the leasing agent or the landlord to the tenant.

The resolution: After much discussion, the matter is settled, with the landlord agreeing that nuts can be sold, provided an agreed percentage of the floor space display is not exceeded, and that local health regulations are observed.

Refusing to consent to an assignment of a lease

The situation: The current tenant, a private company, is selling its business on the condition that the lease is transferred to the purchaser upon settlement. The tenant’s company directors had personally guaranteed the tenant’s obligations under the existing lease.

As required under the Retail Leases Act, the current tenant provided a copy of the disclosure statement to the proposed tenant and the landlord, seeking the landlord’s consent to the transfer. In doing so, the tenant and its guarantors were released from any of the proposed tenant’s obligations under the lease.

The proposed tenant is also a private company, but its directors do not have the same assets behind them as the current tenant. As such, the landlord refuses to consent to the assignment on the basis that the proposed tenant does not have sufficient financial resources to meet the obligations of the lease.

The process: The dispute is referred to the VSBC for mediation involving the three parties – the landlord, the current and the proposed tenant.

The resolution: Settlement is reached, with the landlord consenting to the assignment on the basis that the:

• security deposit be increased from 1 months rent to 6 months rent, via a bank guarantee
• current tenant agrees to pay the cost of preparing the bank guarantee, as the sale of business was based on an unchanged lease.

Interpreting a messy assignment clause in a retail lease

The situation: A tenant (who runs a pharmacy) has been leasing a building for many years and wants to continue. There is a clause in her lease for two further options to renew the lease, but only if she sells the business or assigns (transfers) the lease.

Prior to the current lease coming to an end, the tenant had sought to transfer the lease to a related company, saying that, in doing so, she had activated the relevant lease clause giving her the two extra options.

The landlord disputes this because the tenant hasn’t sold her business and there is no reason or basis for transferring the lease. The landlord thinks the tenant is taking advantage of the clause so she can stay in the premises.

The landlord is also concerned that, if the options to renew the lease are extended, a market rent review may result in a significant rent reduction from the current rent.

The tenant acknowledges that the only reason for transferring the lease is to get the two options to renew, but says the clause in the lease allows her to do this.

The process: The landlord refers the matter to the VSBC and the parties agree to mediate. During mediation it becomes clear that the tenant owns both the business and the pharmacy licence, and is a director of both companies. As such there would be no change in business operator.

The parties reach agreement that the tenant could transfer the lease from one company to another.

The issue remains as to whether a transfer, which would be solely for the purpose of the tenant gaining the two options to renew the lease activates the clause in the lease and creates an entitlement to these additional terms.

The resolution: During mediation, the landlord agrees to grant the tenant a new three-year lease with a three-year option at a particular rent.

After some negotiation, the tenant agrees to the rent requested and to provide a security deposit equivalent to two months rent as consideration for the new lease. The parties also take the opportunity to replace the old, messy and disjointed lease, with a new standard form lease.

Both parties are happy with the outcome:

• the tenant gets the lease term she wanted
• the landlord gets the rent he wanted, as well as a security deposit that the old lease hadn’t provided for
• both parties get a contemporary lease document
• both parties save a substantial sum of money, which they otherwise would have spent on litigation and a market rent determination.

Fixing a problem with the air conditioning

The situation: The tenants run a business involving the operation of expensive equipment and complain they are being affected by the lack of fully functioning air conditioning.

They had sourced their own portable air conditioning units as a temporary solution because the landlord refused to fix the problem.

With summer approaching, the tenants are concerned about the pressing need for an operating air conditioning unit. The existing air conditioning unit then fails completely.

The process: The tenants make an application for dispute resolution with the VSBC. A dispute resolution officer discusses the issues with both parties over a series of phone calls, with the landlord agreeing to install a new air conditioner in the premises.

Although pleased the landlord is going to address the air conditioning issue, the tenants still want to mediate the matter to claim compensation under the Retail Leases Act 2003 (RLA) for the losses they had suffered, including the cost of the temporary units, temporary relocation of their activities and lost wages.

The resolution: At mediation, the parties reach a compromise on these issues and this includes the payment of a fixed sum by the landlord to the tenants as full settlement of the issues.

Repairing the relationship between tenant and landlord

The situation: A tenant has leased premises for several years. They use the space to produce cakes and bakery products.. The premises include a cool room that is critical to the operation of the business.

The compressor to the cool room has stops working. A technician told the tenant that the compressor was beyond repair and would cost $7000 to replace. The tenant agreed, and a new compressor was installed.

The tenant seeks full reimbursement from the landlord. The landlord refuses, arguing it is the tenant’s responsibility to maintain and repair the compressor.

The process: The dispute progresses to mediation with the VSBC. At first, both parties refuse to budge: The tenant wants to be repaid in full. Meanwhile, the landlord argues that the compressor had not been kept in good repair.

It emerges during mediation that the compressor is more than 20 years old and at the end of its functioning life. The landlord offers to pay the tenant $5000.

The tenant is willing to accept $6000 to end the matter. But neither party will budge further.

The resolution: The mediator proposes an option whereby the landlord offers the tenant a rent-free period, with a value of $6000, by way of reimbursement. Both parties agree.

The tenant is happy with a $6000 reduction in rent, and the landlord recognises that, after tax, the amount is less than the $5000 the landlord was prepared to pay.

Tenant disputes outgoings estimate

The situation: Before the lease commenced, the landlord provided the tenant with an estimate of outgoings. The estimate was $7000 for outgoings per annum.

Within the following year and after paying all the invoices, the tenant realised they were paying far more than the estimate provided.

The process: The landlord agreed they had underestimated the amount for outgoings per annum.

The solution: Through negotiating with the help of a VSBC Dispute Resolution Officer, the landlord agreed to cap the outgoings at $7000 for that year only. The landlord also agreed to use their best efforts to provide estimates reflecting increases in costs (noting that certain cost increases, such as for insurance, can be difficult to estimate).

Dispute over market rent

The situation: As per the lease, the rent for the renewed lease term was to be based on a market rent review.

The process: The tenant and landlord tried to negotiate but failed to agree on market rent. The tenant and landlord agreed that an independent specialist retail valuer should determine the market rent. They could not, however, agree on a valuer.

The solution: The tenant made an application to VSBC to appoint a specialist retail valuer (SRV). The VSBC appointed a SRV who determined a rental.

A franchise dispute

The situation: A franchisee entered into a contract with a franchisor for a business. The franchisee alleged she has relied on information from the franchisor about the earning capacity of a franchise store, the cost of goods sold and fit-out commitments.

Those expectations have not been met, and the franchisee is seeking substantial damages, including a return of the franchise purchase price and trading losses.

The process: The franchisee lodges a dispute application against the franchisor with the Victorian Small Business Commission. Both parties agree to attend mediation and to bring legal representation.

The resolution: Following the mediation, both parties agree to a settlement. Key terms of the settlement include:

• waiving the monthly franchise fee and monthly marketing fee for specified periods
• progressive repayment of outstanding rent by the franchisee to the franchisor until arrears are cleared
• the franchisor (as head tenant) agreeing to endeavour to negotiate further rent relief from the head lessor
• the franchisor, at its cost, undertaking or completing designated fit-out works
• the franchisor assisting the franchisee to sell the franchised business at fair market value within a specified period of time by providing specific assistance.

Missing out on a tender process

The situation: The applicant had a cleaning contract with the respondent to clean several suburban buildings. After several years, the arrangement was terminated in accordance with the contract

The respondent put the cleaning job out for tender, which resulted in the appointment of a new cleaning firm.

The applicant, who had not been approached to re-tender for the contract, was upset about this. The respondent acknowledged that the applicant had not been approached to tender.

However, as a new contract had been signed with another firm, nothing could be done.

The process: The applicant contacted the VSBC to understand their rights and obligations in the dispute.

The resolution: The VSBC negotiates with all parties to arrive at a satisfactory resolution. In this case, the applicant is engaged by the new contractor as an employee, with the agreement of all parties.

Dealing with a dispute through preliminary assistance

The situation: A small business (the applicant) complains to the VSBC about a commercial dispute with an oil company. The business is concerned that it had been paying too much for services, compared to competitors who were receiving a discounted rate.

The process: The small business applies to the VSBC for assistance. The VSBC contacts the oil company (the respondent), who refers the matter to its solicitors. The oil company’s solicitors provide a formal response, which indicates that their client had sought to resolve the matter, however, the applicant had refused to compromise. The respondent’s solicitors have therefore advised their client to refuse to attend VSBC mediation.

The resolution: The applicant advises the VSBC that the respondent has contacted them directly to resolve the dispute The two parties reached an agreement between themselves.

Fixing a problem with the supply of farm equipment

The situation: A farmer had purchased a new tractor. After delivery the farmer discovered that poor assembly of the tractor had led to a number of apparent defects, including nuts and bolts being lost, the keys not fitting the doors (preventing the tractor from being locked) and cracked mirrors.

The farmer contacted the supplier about the issues, and was assured that these matters would be addressed, but nothing happened for two months.

When the farmer engaged the tractor in 4WD for the first time and after only 19 hours’ use, oil leaked from a broken transfer box. He ordered a replacement transfer box, which took two months to be delivered.

Following receipt and installation, the same problem occurred when the tractor was put into 4WD, suggesting a fault elsewhere in the tractor. The supplier subsequently refused to discuss the matter with the farmer.

The process: The farmer lodged an application with the VSBC, seeking a $30,000 refund or a replacement tractor. When contacted by the VSBC, the supplier agreed to attend mediation.

The resolution: Mediation is successful, and the supplier agrees to take back the tractor at its expense. It also agrees to supply a new tractor with warranties, paper work and assurances of follow-up service if necessary.

Addressing wholesale supply issues

The situation: The applicant is a business that provides a range of complete products to the building and home renovation sector. These products utilise components from another business.

The applicant claims that the supplier has over-charged and double-charged for orders, has not met size specifications, and has then charged again when the supply of the components has been corrected.

Despite assurances that these matters would be addressed, the latest invoice from the supplier makes no adjustments to the outstanding amount.

The supplier addresses some issues by credit note, but rejects other claims of over-charging, double-charging and incorrect provision of components. The supplier maintains that the current outstanding amount is around $15,000 and is threatening legal action if the account isn’t paid.

The process: The parties agree to mediate. Both parties provide a large number of documents to the VSBC to justify their positions.

The resolution: The parties settle their dispute at mediation. The applicant agreeing to pay the supplier $10,000 in full and final settlement of all matters in dispute

We help businesses of all sizes

The situation: The applicant, a major facilities management company, was supplied with two fans for its large premises based on a quote detailing the cost and capacity of the fans.

The fans were custom-built by a manufacturer and distributed by a supplier. Upon delivery it was discovered the wrong fans had been provided, but the supplier, a small to medium-sized Victorian business, refused to accept the return of the fans.

It was later discovered that the quoted technical specification for the fans was incorrect and the fans were too heavy for the roof of the premises to withstand. The supplier nonetheless is seeking payment of an invoice of $14,000.

The process: The VSBC usually receives commercial complaints from smaller businesses. However, in this case, the applicant was a much larger business than the supplier. There is no legislative constraint on the VSBC to accept complaints by the size of a company — instead the prospect of a mediated outcome that avoids litigation for both companies is consistent with the objectives of the VSBC.

In this case the applicant and the supplier (the respondent) both agree to mediation.

The resolution: The customised nature of the fans means that the supplier cannot accept their return. The mediator proposes contacting the manufacturer of the fans. Although the manufacturer is not a party to the mediation, the parties agree to this proposal. The mediator speaks with the manufacturer by telephone, explains the situation and seeks assistance (without any suggestion of liability) from the manufacturer in helping to resolve the dispute.

The manufacturer is unwilling to provide a full refund for the fans as they have been custom-built, but is willing to take the fans back to extract parts that could be re-used (the fans are still in their original packaging). The manufacturer offers to provide a credit note to the supplier of $4000, and this is confirmed by email.

With the outstanding matter in dispute now $10,000, the mediator notes that both the applicant and the supplier had contributed in some way to the dispute arising, and the parties agree to split the difference. The applicant agrees to pay $5000 to the supplier and transport the fans at its own cost to the supplier’s premises.

Resolving a trade breach

The situation: The applicant bought an importing business from the respondent’s company. The contract of sale provided that the respondent was not allowed to trade in a similar business in Australia for a period of four years.

The respondent continued to work in the import business as a contractor for three-and-a-half years, initially in a full-time capacity and then part time.

The applicant became aware that the respondent, while contracting part time, had travelled overseas to promote the applicant’s products to prospective customers, but that he was also discussing the production of similar products with prospective suppliers.

Furthermore, a current supplier advised the applicant that the respondent had ordered three 40-foot containers of products from that supplier for the respondent’s own business.

The process: The applicant seeks compensation of $60,000 in loss of sales and breach of contract. The matter is referred to the VSBC for dispute resolution. The respondent agrees to mediation

The resolution: With the mediator’s help, the parties reach a settlement whereby the respondent agrees to pay the applicant $25,000 to put an end to the dispute.

Mediating a shareholder dispute

The situation: There was a major falling out between one of the shareholders of a private company (the shareholder) and the other shareholders (the remainder).

To complicate matters, the shareholders were made up of companies, as well as individuals, and shareholdings were not uniform. After the company was established, a shareholders’ agreement was prepared, but it was never executed.

The shareholder had worked at the company as an employee after it began trading, but the company had terminated his employment due to alleged breaches of a number of the company’s policies.

The shareholder was one of the initial directors of the company but had since resigned this position. He was, however, the sole guarantor of the retail lease entered into by the company.

The process: The shareholder and the remainder were in dispute about a number of issues including shareholdings and share entitlements; employee entitlements and conduct; valuation of the business, the sole guarantor role of the shareholder; alleged loans and allegations of defamatory comments and threatening behaviour.

Solicitors for both the shareholder and the remainder requested mediation through the VSBC to resolve these issues without litigation.

The mediation is attended by all shareholders or their authorised nominees, and both sides have solicitors present.

The resolution: The mediator assists the parties to reach a settlement, which results in the shareholder agreeing to sell his shares to the remainder in equal amounts, for a specified sum, within 30 days.

The company agrees to approach the landlord of the retail premises to remove the shareholder as guarantor, replacing him with either: a substantial additional security deposit provided by the remainder, joint and several guarantees by the remainder, or indemnities by the remainder to the shareholder if the landlord will not amend the lease guarantee.

All employment and loan related matters are agreed to be settled with no further action by any party.

Finally, each party withdraws allegations of impropriety, and all parties agree not to make disparaging comments in any form about the other party or the business. The shareholder agrees he would not make any representations that he was associated with the company.

A small business to government dispute

The situation

A small business was in dispute with a government department over the provision of its services. The business had invoiced the department for work provided, however, the department refused to pay, as it was not satisfied with the service provided. The business lodged an application with the VSBC under the Small Business Commission Act 2017 (SBCA) (the Act) and requested low cost mediation to resolve the matter.

The process

The department engaged lawyers to respond to the VSBC. The lawyers claimed the small business should comply with the dispute resolution procedure agreed to in the written contract. The business sought VSBC mediation instead because the contractual process was expensive and time consuming. It wanted to resolve the dispute quickly, pragmatically and at a low cost. The respondent agreed to VSBC mediation.

The resolution

The VSBC organised mediation and the parties reached a commercial settlement. This case demonstrates the importance of a pre-agreed dispute resolution procedure that is fair to both parties to a contract.