A High Court Decision

A High Court Decision

A High Court Decision – that could have serious ramifications for Clubs & Hotels with contracted/sub contracted- caterers, restaurants/kitchens or sub leased premises

CLUBS CONTINUE TO GET CAUGHT OUT BY LEASING LEGISLATION

The High Court case of Gnych v Polish Club Ltd is a reminder of the risks of allowing a tenant, or a caterer, to occupy premises before it has signed a lease. In particular, that a tenant may be entitled to a minimum 5 year lease if that right is not waived prior to the tenant occupying the premises.

Background
The Polish Club Ltd (‘the Club’) is a registered club which operates licensed premises in Ashfield, Sydney. Mr and Mrs Gnych (‘the Caterer’) offered to operate a Polish restaurant and organise functions for members and patrons of the club in an area within the club.

The Club sent the Caterer a lengthy proposal stipulating that the Caterer would be engaged as the exclusive contractors for catering services for the club.

The Caterer responded by proposing a lease agreement for the restaurant area and a non-exclusive licence to use a room adjoining the restaurant area, called the mirror room, on Fridays, Saturdays or Sundays when extra seating capacity was required.

A written lease for the restaurant area and a written licence for the mirror room were submitted to the Club for execution. However, no written agreements were ever finalised or signed.

The Caterer took possession of the premises and commenced trading in the restaurant area and using the mirror room from time to time for functions. The Caterer started paying rent in accordance with the unsigned documents.

In relation to the sale of alcohol, the Caterer’s staff would place orders at the bar on behalf of the patrons and deliver, or arrange for the bar staff to deliver, the drinks to the tables in the restaurant.

Although the restaurant was operating successfully, relations between the Caterer and the Club deteriorated. The Caterer had been trading for over a year when the Club demanded that the Caterer vacate the premises.

The Caterer relied on its rights under the leasing legislation and refused to leave. In response, the Club locked the Caterer out of the club.

The Club appears to have made the common error of failing to recognise that a caterer which operates within club premises will usually receive the benefit of the protections afforded to tenants under leasing legislation.

The Court’s View
The Caterer commenced proceedings in the NSW Supreme Court for a declaration that it was entitled to a 5 year lease of the restaurant area and the mirror room.

The Club argued that the leasing legislation did not apply because the Caterer was conducting the restaurant on behalf of the Club.

The court did not accept the Club’s argument. Although the restaurant was within the club and served Polish food to the Club’s members, the Caterer was responsible for all aspects of the business and took the benefit or loss of the financials of the business. The court found that the business was not conducted on behalf of the Club.

Accordingly, the court held that the Caterer was entitled to a lease for 5 years for the restaurant area and a 5 year licence of the mirror room commencing on the date it took occupation.

The Club also argued that the lease was void because it was illegal under the Liquor Act. The court also rejected this argument. The court agreed that there was a breach of the Liquor Act in relation to the lease of the restaurant area but said that did not invalidate the lease.

The court’s decision was appealed to the Court of Appeal, and then the High Court. The High Court found that the Club’s breach of the Liquor Act did not invalidate the lease.

How does it affect you? 
Whilst this decision was in relation to the provisions of the NSW leasing legislation, the case also has implications for the ACT and other jurisdictions. The courts consistently held that that even though there was no concluded agreement between the parties, the Caterer was entitled to a lease of 5 years under the leasing legislation. A tenant in the ACT and other jurisdictions may be able to rely on similar rights.

Some key points arising from these cases are:

  • The leasing legislation will apply to most agreements that grant a right to occupy premises including for the purpose of a restaurant, coffee lounge, food court or other shop premises located in a club, such as golf equipment shops. This may also capture club catering contracts.
  • An agreement should be signed before the tenant or caterer takes occupation or starts paying any rent or licence fee.
  • The leasing legislation can apply even if there is no written agreement and no right of exclusive possession is granted.
  • Clubs and property owners generally need to be aware of their obligations and the rights given to the tenant under the relevant legislation.

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