Allens

Real Estate

Focus: Shopping centre representations sink developer

8 October 2012

In brief: A recent decision of the Federal Court in Victoria highlights the risk that representations regarding the future or actual state of affairs relating to leasing up a shopping centre will be found to be misleading and deceptive where there is no evidence to substantiate them. Special Counsel Christine Adamson (view CV) and Law Graduate Andrea Moffatt report on the decision and its implications.

How does it affect you?

  • This is a classic case of what not to do when leasing up a shopping centre. The court found all representations, including the video, brochure and oral representations, were misleading. To the extent they related to future matters, there were no reasonable grounds for them.
    The decision highlights that:
    • great care must be taken in making any representations – it is 'best practice' to have a leasing manual and Q&A dealing with what can/cannot be said;
    • leasing agents should be contractually bound to comply with the leasing manual;
    • while disclaimers will always be of limited value, the use of 'fine print' is a big no-no; and
    • disclosure statements must be accurate. Reference to terms like 'not fully leased' will usually be misleading when there is not a substantial number of leases already entered into.

The facts

Kathleen Miletich, a school teacher, and her son Adrian Miletich, a tradesman plasterer, decided to change career and go into business together as proprietors of a café. In August 2006, they became the sole directors and shareholders of Kalel Enterprises Pty Limited (Kalel), and subsequently a franchisee of Foodco Group Pty Limited (Foodco) to operate a Jamaica Blue café.

83 East Pty Limited (83 East) was the developer of a shopping centre with frontage to Little Collins and Bourke Streets in Melbourne (the Foundry). In June 2006, a representative of Foodco had accompanied Ms and Mr Miletich to a meeting with Mr Donnelly, the sole director of 83 East, and Mr Murchie, its leasing agent.

At the meeting, the Miletichs were shown a variety of promotional material, including:

  • a video with computer-animated segments, which portrayed the nature of each business by a description appearing in large letters, or by a mock business name;
  • a model of the Foundry development;
  • large drawings of plans for four levels of retail premises; and
  • a brochure in the form of a booklet, which contained A3-size coloured plans for each of the four levels. The plans depicted shops (including information indicating the nature of each business), walking areas and travelators. The booklet also contained a disclaimer (in fine print) of all liability and responsibility for the contents of the brochure, and indicated that reliance should not be placed on the contents of the publication without independent advice being obtained from a qualified professional.

During the meeting, representations were made regarding the types of businesses that would occupy the Foundry, and that the site for the Jamaica Blue café was well placed due to its proximity to the travelators. After the meeting, the Miletichs were taken on a tour of part of the Foundry by Mr Ponozzo, the site manager employed by 83 East. During the tour, Mr Ponozzo pointed out where specific shops would be located, and described the nature of each of them.

A disclosure statement provided by the leasing agent to the Miletichs estimated that 40 premises would be available for leasing in the Foundry, with a broad mix of tenants. Significantly the statement indicated that 'The Centre is... not fully leased.' In fact, at the time of the representations, no other leases had been entered into.

Subsequently, the franchise and licensing agreements were finalised, and the Jamaica Blue café in the Foundry opened in August 2007. However, at that time the development was unfinished, with few shops open, all shop premises unlit, access to the building impeded, a lack of heating, a lack of customer toilets, dusty conditions, infrequently operating travelators and other conditions that were not conducive to good trade. As a result of a lack of business, the café was never able to make a profit, and closed in October 2007.

The applicants commenced proceedings in June 2010, claiming misleading and deceptive conduct on the part of the developer and leasing agent under the Trade Practices Act 1974 (Cth) (the TPA) and the Fair Trading Act 1999 (Vic) by way of representations made regarding the extent and nature of the tenancies of the Foundry, and predictions about the level of patronage.

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The law

The TPA and the Fair Trading Act have since been replaced by the Australian Consumer Law (ACL), which contains provisions equivalent to those considered by the Federal Court.

Under the TPA, a corporation must not, in trade or commerce, engage in conduct that is misleading or deceptive. Where two or more persons have engaged in misleading or deceptive conduct, the liability can be apportioned between them. Further, if representations are made about future matters (ie future proposed leasings), there must be reasonable grounds for them.

It is common for developers of shopping centres to provide prospective tenants with information on a development that may include expectations as to the number and type of tenancies and level of expected patronage, before the opening of the centre. However, as mentioned, there must be reasonable grounds for making such representations.

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The decision

Justice Gray of the Federal Court found that the representations in the brochure and video and at the meeting in June 2006 regarding the Foundry's tenancies and patronage were representations as to future matters. As the agent and the developer were unable to provide any evidence that they had reasonable grounds for making the representations, these were deemed to be misleading and deceptive.1 

Importantly, the disclaimer in the brochure did not prevent the representations made in it from being misleading and deceptive. In addition, even though the applicants did not take the opportunity to fill in a form, given to them by the leasing agent about what representations were made to them, this did not affect their claim.

His Honour also found that the Miletichs were misled and deceived by the representations made in the disclosure statement regarding the tenancy mix and partial leasing of shop premises in the Foundry.

It was held that they were induced by the representations to enter into the Jamaica Blue café franchise agreement and a licence to occupy an area in the Foundry with Foodco.

Justice Gray found that the loss suffered by the Miletichs that was attributable to the agent and developer amounted to nearly $400,000. The court rejected submissions that the applicants had contributed to their loss through inexperience or insufficient working capital.

His Honour gave judgment against the developer (and, specifically, a director of the developer), and awarded interest from October 2007 until date of judgment (a settlement agreement with the leasing agent respondents having been entered into during the course of the trial). A costs order in favour of the applicants was also proposed.

Footnotes
  1. Miletich v Murchie [2012] FCA 1013 (judgment date 17/09/2012).

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