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Nov. 14, 2013: When a licence becomes a lease

The franchisee (Ireland) and the franchisor (Subway) disputed whether a lease or a licence existed between them. Subway held the Head Lease and attempted to grant a licence to the franchisee to use the premises to operate the Subway franchise. This is a very common set up for many franchise systems in Australia.

The parties were referred to as licensee and licensor in the Agreement. The Victorian Civil and Administrative Tribunal (‘VCAT’) reaffirmed the established legal principle that ‘labelling’ an agreement as a licence is not enough to ensure that it is in fact a licence rather than a lease.

The agreement must contain provisions that reflect licence or lease obligations. The requirements of a lease are very different to those of a licence, namely that a lease grants an exclusive proprietary interest to the lessee which allows significantly more rights than a licence. A licence merely gives a licensee permission to use the property for a specific purpose or purposes. 

VCAT also held that the express declaration in the Agreement to the effect that Subway was not providing an exclusive proprietary interest in the premises to the franchisee was not enough to prevent the interest being created.

There were conflicting clauses throughout the Agreement. Some clauses would try to ensure a licence resulted however, many clauses were indicative of a lease. To illustrate, a clause detailed when the Agreement was terminated, Subway would re-possess the property without the risk of any trespass claim. This type of clause is not required in a licence agreement because the property is always the property of the licensor and no proprietary interest is ever granted to the licensee, as such there is no risk of trespass occurring.

Another conflicting clause was where it stated that the licensee was not to mortgage, assign, transfer or sublet the licence without the permission of the landlord. Once again these are actions that are only possible if a sub-lease had been granted.

Subway argued that the Head Lease did not allow the premises to be sub-let and a licence was the only option. VCAT held that this does not mean a sub-lease was not created, rather that it was a sub-lease which then breached the conditions of the Head Lease. There was also a covering letter attaching the Agreement that referred to it as a lease.

VCAT found a lease to be in existence as the overall circumstances and provisions of the Agreement meant that a lease was formed.

This case highlights a great threat to franchisors who currently hold a head lease with inadequately drafted licence agreements. Franchisors should obtain advice in relation to any new licence agreements they create to ensure that they are consistent with the purpose and intention of the parties.

The full case notation for the case is Ireland v Subway Systems Australia Pty Ltd & Anor (Retail Tenancies) [2012] VCAT 1061 (20 July 2012)