Settlement terms caught by prohibition on payment of “key-money”

Despite the prohibition on the payment of “key-money” landlords persist in seeking the payment of substantial sums of money as the price for granting a lease. A landlord who seeks or accepts “key-money” is liable to pay a penalty under s.23 of the Retail Leases Act 2003.

A provision in a lease that requires the payment of “key-money” is void (s.23(2)). Section 94 of the Act makes a provision in a lease or an agreement is void to the extent that it is contrary to or inconsistent with the Act. Section 23(3) of the Act contains exceptions to the prohibition on payment of "key-money": among other exceptions a landlord may seek and accept to payment for goodwill from the tenant “in relation to the sale of a business that the landlord operated from the retail premises immediately before its sale, if the lease was granted to the tenant in the course of the sale of the business” and for “plant, equipment, fixtures or fittings that are sold by the landlord to the tenant in connection with the lease being granted”. See: ss.23(3)(c) and (f). Because of the Act parties attempt to disguise “key-money” payments as something else. Cases where the payment of “key-money” is alleged usually result in settlement at a mediation. The Supreme Court of Victoria recently determined a case where the parties had settled a dispute concerning the payment of “key-money” and then had a further dispute about whether the settlement provided for the payment of “key –money”. In Spirovksi v Univest Asset Merchants Syndicators Pty Ltd [2013] VSC 728 the landlords sent a draft lease to the tenant who refused to execute the lease on the basis that it did not accurately reflect the parties’ agreement and that the landlord had purported to charge “key-money”. The alleged “key-money” was payable in two instalments; $90,000 was to be paid before the tenant took possession; and $90,000 when the first option to renew the lease was exercised. The parties subsequently attended a mediation under the auspices of the Small Business Commissioner where terms of settlement were signed.

The terms of settlement provided for the landlords to retain $90,000 that had already been paid and that the tenant would pay a further $90,000 on the exercise of the first option. The terms also provided that the landlord would sign a transfer of the lease from the tenant to a new tenant. The parties signed a lease and other documents pursuant to the terms. The first option was exercised. The landlords commenced a proceeding claiming payment of rent arrears and the second instalment of $90,000. VCAT dismissed the landlords’ claim and declared that the terms of settlement were void to the extent that they required the tenant to pay the $90,000 that the landlord had retained and required the second payment of $90,000. VCAT also declared void a contract of sale of business and the lease executed by the parties following execution of the terms of settlement insofar as they required the prohibited payments. The landlords appealed on the basis that the exceptions to the prohibition on the payment of “key-money” contained in ss.23(3)(c) and (f) applied. Section permits a landlord to seek payment for goodwill from the tenant “in relation to the sale of a business that the landlord operated from the retail premises immediately before its sale, if the lease was granted to the tenant in the course of the sale of the business”. Section 23(3)(f) permits the landlord to seek payment for “plant, equipment, fixtures or fittings that are sold by the landlord to the tenant in connection with the lease being granted”. The Tribunal had determined that s.23(3)(c) did not apply because the landlords were not operating a business from the premises and that there was no business to be sold. The Tribunal had also determined that the furniture in the premises was “junk” and “valueless”. Justice Croft dismissed the landlords' appeal holding that there was no error of law in the Tribunal’s findings. His Honour also rejected a claim that the tenants were estopped from claiming the benefit of the prohibition contained in s.23 of the Act. As part of that argument the landlord argued that by the terms of settlement the parties had "put to bed" the issue of "key-money". After an extensive review of the authorities and the provisions of the Act His Honour concluded that it was not possible for the parties to agree to a transaction which breached s.23. The decision contains a detailed discussion about the meaning of "goodwill" and the circumstances in which a party seeking to enforce an agreement the terms of which are prohibited can be precluded from relying on principles of estoppel.