The Importance of Security under Leases

The Importance of Security under Leases

The recent decision in Sentinel Countrywide Retail Ltd v PC Emerald (Qld) Pty Ltd [2015] QSC 348 serves as an important reminder for Commercial Lessors to ensure they obtain sufficient security at the outset from their Commercial Lessees.

Sentinel Countrywide Retail Ltd (“Sentinel“) owned and operated a local shopping centre in Emerald. PC Emerald (Qld) Pty Ltd (“PCE“) tenanted one of the spaces within the centre, operating a Pizza Capers from the premises.  PCE was a shell company, establish for the sole purpose of leasing the premises.

Less than two years into the seven year term of the lease PCE’s business began running at a significant loss.  PCE made the decision to cease trading and told Sentinel that it would be seeking a surrender of lease.

Sentinel then applied to the Court for an order requiring PCE to continue trading during the shopping centre’s trading hours until the lease expired.

On rejecting the application, the Court looked at the following circumstances:

  • PCE’s closure would not significantly impact the number of customers attracted to the shopping centre, particularly during the regular trading hours of the centre because 90% of PCE’s customer purchases occurred outside of those hours;
  • PCE’s operations were commercially unsound and it was therefore a commercial decision to cease trading; and
  • While PCE’s closure would adversely affect the centre’s appeal to consumers of pizza (because there were no other pizza businesses in the centre), it could not be shown that it would affect the centre’s appeal to other customers.

Sentinel argued that PCE should be required to continue trading because compensation would not be recoverable from the shell company.

In rejecting this, the Court found that Sentinel assumed the risk of not being able to recover compensation when it took the benefits and burdens of a lease with a shell company without taking guarantees.

The Court further considered that a sophisticated commercial client like Sentinel should have known that its only remedy would be compensation if PCE breached the contract.

The Court held that to require PCE to undertake a loss-making business would be contrary to the public interest and PCE’s directors’ duties.

What this means for Commercial Lessors

It is important to ensure that commercial lessors undertake sufficient due diligence and that they take sufficient security guarantees where a risk is identified.

Contact our property and leasing lawyers today for further advice on due diligence and leasing.

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