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Contract Negotiation – The Devil is in the Detail

24 August, 2018

 

The wording of a single sentence can have major consequences in the negotiation and drafting of a contract. This was the case for a retail shop tenant, who went all the way to the Supreme Court only to find out that a guarantee provided by their landlord was worth less than they anticipated.

NB2 Pty Ltd v PT Ltd [2018] NSWCA 10

The tenant owned a fruit and vegetable shop in the “Fresh Food Precinct” (“the Precinct”) of a shopping mall. The Precinct also had a Franklins supermarket and another fruit and vegetable shop called In Season. Towards the end of the tenant’s lease, In Season ceased trading. During negotiations for a new lease, the landlord argued that the tenant now had a monopoly on specialty fruit and vegetable retail and should therefore pay higher rent. The tenant agreed provided the landlord guaranteed them exclusive right to fruit and vegetable retail in the Precinct.

After some back-and-forth, the landlord responded in the following terms:

“The Lessor agrees to grant the Lessee the right to be the sole independent specialty fruit and vegetable retailer in the Fresh Food Market.”

Unbeknownst to the tenant, the landlord approved a development application from Franklins just before the lease was signed. Part of the development was the addition of a significant fruit and vegetable section. The development concluded around a year into the tenant’s new lease. Because of this extra competition, the tenant’s business began to suffer and their lease eventually was terminated for default on rent.

Once the matter went to court, the tenant claimed that the landlord had engaged in misleading and deceptive conduct. They argued that by promising exclusivity, but failing to disclose Franklins’ proposed fruit and vegetable expansion before the lease was signed, the landlord had engaged in misleading and deceptive conduct.

In essence, the tenant argued that the grant of exclusivity applied to competition from anyone. Unfortunately for the tenant, the Court was not convinced. The use of the word “independent” served to limit the guarantee of exclusivity to non-supermarket chain fruit and vegetable retailers only. As Franklins was part of a supermarket chain, its sale of fruit and vegetables was not inconsistent with the grant of exclusivity.

The moral of the story…

The devil is in the detail! If you’re uncertain about a word or phrase in a contract, seeking advice could save you a lot of trouble down the line.

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