Lease or Licence? Management Agreement or Lease? If it quacks like a duck ...
- by George Konidaris
- Nov 11, 2016
- 4 min read
Whilst there can be legitimate commercial reasons for parties to enter licence agreements instead of lease agreements to reflect an occupancy arrangement, often a Licensor/Landlord insists that the Licensee/Tenant enter a "Licence Agreement" for reasons that perhaps have more more to do with avoiding obligations and restrictions imposed upon Landlords under the Retail Leases Act 2 003 and the Property Law Act 1958 than anything else.
This is particularly common with Franchise Agreements where the Franchisor, usually through an associated company, takes a head lease of the store and then grants the Franchisee the right to occupy the premises by way of a "Licence Agreement" instead of a Sub-Lease. It is also common for Franchise Agreements to contain an Arbitration clause whereby the parties are compelled to resolve their disputes by Arbitration instead of the Courts (or VCAT).
In the past, Arbitration clauses were quite unfriendly to Franchisees and made it particularly difficult for Franchisees to pursue their claims. It was not uncommon for instance, for Franchisors to compel Franchisees to arbitrate all Franchise Disputes in an international forum such as in the United States of America which was the case for Zoran Timic in Timic v Hammock which concerned an Arbitration clause in a Subway Franchise Agreement.
Under the 2014 amendments to the Franchise Code of Conduct, that came into effect in January 2015, Franchise Agreements which have Arbitration clauses are required to be conduct the mediation and Arbitration in the state or territory in which the franchise business is located.
In the VCAT decision of Ireland v Subway Systems Australia Pty Ltd, VCAT held that Subway's standard occupancy agreement which was labeled a "License Agreement", was in fact a Lease (Sub-Lease).
This meant that the Irelands dispute with the Franchisor, which was also a Retail Lease Dispute was required to be determined in VCAT which has exclusive jurisdiction to deal with Retail Lease Disputes which arise in Victoria as defined under the Retail Leases Act 2003.
Unsurprisingly, Subway appealed the VCAT decision on grounds that did not concern the Lease v License decision so insofar as the Lease v Licence decision is concerned, the VCAT decision still stands.
The case was also important for other reasons concerning the validity of the Arbitration clause in the Franchise Agreement and whether VCAT was in fact a "court" for the purpose of the Commercial Arbitration Act 2011. Read more here.
If a Franchisee has a dispute with the Franchisor and it relates to a Retail Lease which is covered by the Retail Leases Act 2003, then despite there being an Arbitration clause in the Franchise Agreement, the dispute may need to be referred to VCAT instead of private arbitration.
Problems may arise where the dispute is both a Retail Lease Dispute and a Franchise Dispute and how the issues in dispute are required to be agitated (determined) in different forums.
The Commercial Arbitration Act 2011 which governs how arbitrations are to conducted in Australia and Victoria following the outcome of the Ireland v Subway Appeals, is currently under review and it will be interesting to see whether any amendments will follow.
VCAT and the compulsory mediation conducted by the Small Business Commissioner's office which is heavily subsidised by the taxpayer, may be a cheaper and more suitable forum for some Franchisees, than Arbitration.
Management Agreement or Lease
In another VCAT case of Awad v Conell, the Tenant had (as it turns out) sub-leased its tenancy to a "Manager" under a document labeled "Management Agreement" without seeking the Landlord's consent.
The Lease between the Landlord and the Tenant (as is common in most Commercial Property Leases) prohibited the Tenant from sub-leasing or parting with possession of the premises without the Landlord's prior written consent.
VCAT Senior Member R. Walker held that the "Management Agreement" was in fact a Lease (Sub-Lease) and that the Tenant by entering the "Management Agreement" without seeking the Landlord's prior written consent, had in fact breached the terms of the Lease.
The case was also important for other reasons concerning the minimum 5 year lease rule provisions of the Retail Leases Act 2003. Read more here.
Airbnb - Lease or License?
In a recent Supreme Court Decision Swan v Uecker, Justice Croft overturned a VCAT decision which held that a short term stay Airbnb guest, was not a license but in fact a Lease (Sub-Lease). This was despite the Airbnb website and subsequent Agreement between the Host (The Tenant) and the Guest claiming that the Agreement or right to occupy was in fact a License and not a Lease.
As a result, the Tenants who were hosting Airbnb guests without the Landlord's permission, were found to have breached their Lease and were accordingly evicted.
Read here for more about Airbnb and Short Term Stays,
Conclusion
Landlords and Tenants need to be careful when entering occupancy agreements relating to commercial or retail premises to ensure their agreements are binding and valid and do not create unintended consequences.
VCAT (and the Courts) will look behind the label the parties place on the occupancy agreement to determine whether or not in substance, it is a Lease.
If the occupancy agreement is in substance a Lease, then the provisions of the Retail Leases Act 2003 including disclosure requirements and the alternate dispute resolution requirements set out in the Act are likely to apply.
Advice should therefore be sought before entering into any arrangement whether verbal, written or otherwise, where it involves the use or occupation of retail or commercial premises. This is particularly important for Landlords.
For more information concerning the above cases or if you require advice concerning your occupancy agreement or arrangement, please do not hesitate to contact us.
