Melbourne prepares for the Commonwealth Games
The scene is Melbourne, Australia, the venue for the Commonwealth Games, to be held in March 2006. Up to 1 September 2005, companies owned by Mr Zampelis were tenants of two restaurants in the Melbourne Casino and Entertainment Complex. In early 2005 Mr Zampelis and the landlord, Crown Melbourne Limited, started negotiations for new leases to be granted to another of Mr Zampelis’ companies, Cosmopolitan Hotel, from 1 September 2005. Mr Zampelis intended to spend about AUS$ 5 million in refurbishing the restaurants.
The tenant did not have statutory security of tenure. The landlord offered leases for terms of five years from 1 September 2005.
It was a condition of the draft leases that the tenant undertake a major refurbishment of the premises.
Each contained a clause in terms that at least six months prior to expiry the landlord would serve notice on the tenant stating whether the landlord would:
- renew the lease and on what terms;
- allow the tenant to occupy the premises on a monthly basis after the expiry date; or
- require the tenant to vacate the Premises by the expiry date.
During the negotiations the landlords had represented that if the tenant spent the money on refurbishment it would be “looked after at renewal time”.
The leases were completed.
In December 2009 the landlord gave notice requiring the tenants to vacate the premises at the expiration of the leases, 31 August 2010.
The tenant brought proceedings (Crown Melbourne Limited Limited v Cosmopolitan Hotel (Vic) Pty Ltd  HCA 26) alleging that the landlord’s representation that the tenant would be “looked after at renewal time” gave the tenant the right to sue for losses caused by not being able to renew.
That dispute came before a 7 judge panel of the High Court of Australia. The court asked how was the tenant to be “looked after at renewal time”?
The judges split into two groups. One group said this was a contractual promise, relied on by the proposed tenant, consistent with the leases and not illusory. It was a real deal. The landlord had committed to give the tenant a notice offering to renew the leases. It was an agreement to offer.
The other group said that the statement that the tenant would be looked after at renewal time could not have been understood as a contractual commitment. It was no more than “vaguely encouraging”.
Deal or no deal?
A majority of 5 judges to 2 said there was no deal. There can be no enforceable agreement to renew a lease unless at least the essential terms of the lease had been agreed upon. The contract on which the tenant sought to rely was illusory. It left the selection of the terms and conditions of the renewed lease entirely to the landlord’s discretion.
The tenant was not entitled to claim damages from the landlord.
This case took 6 years to reach its final decision. The landlord was vindicated but no doubt at some irrecoverable cost and loss of management time. Litigation is a distraction from the business as usual. So think twice before giving vague encouragement to the other party to your negotiations.
This case also shows how lease drafting to provide for contractual renewal rather statutory rights can be contentious.
If you want to discuss how to structure expiry terms in a commercial lease, please contact me at email@example.com