The recent Federal Court decision of Miletich v Murchie provides a clear illustration of the need for developers and their agents to exercise caution in relation to representations made both verbally and contained in marketing material to prospective lessees or purchasers in order to induce them into leasing or purchasing property.

The decision in Miletich v Murchie makes it clear that advertising material presented to prospective lessees or purchasers must be accurate with forecasts about future matters (including, but not limited to, traffic volume, earnings and tenancy mix) being based on reasonable grounds. Otherwise, developers, their agents or individuals knowingly concerned in the conduct (including employees and directors) leave themselves exposed to potential legal action for misleading and deceptive conduct under the Consumer and Competition Act 2010 (Cth) (“the Act”), and potentially liable for damages suffered by the lessee or purchaser in relation to the misleading or deceptive representations.

The Facts

Thecase concerned the marketing of the Melbourne CBD development, The Foundry. TheApplicants, Kathleen Miletich and her son, Adrian Miletich, were the operators of a Jamaica Blue café franchise. The franchisor was Foodco Group Pty Ltd (“Foodco”).

Foodco introduced the Miletichs to the developer of The Foundry with regard to potentially leasing a site at The Foundry in which to operate a Jamaica Blue café.

In June 2006, the Miletichs were invited to The Foundry site to attend a meeting with the the agent and the director of the developer, where they were shown a variety of marketing materials, including:

  • A computer animated video showing all shops occupied by specific, trading businesses;
  • A model of the development;
  • Drawings and plans for the retail premises; and
  • A brochure depicting coloured plans of the four levels, together with an artist’s impression of the development. The brochure contained a disclaimer providing that the contents of the publication should not be relied upon.

During the meeting, various representations were made by the director of the developer regarding the quality, number and specific types of tenants that would be operating businesses in The Foundry, with specific reference being made to a Drummond Golf Store, a sporting complex and an Irish bar.

Buoyed by the notion of the commercial opportunity presented at the meeting, the Miletichs agreed to enter into a franchise agreement with Foodco and Foodco agreed to lease a site at The Foundry from which the Miletichs could operate the franchise. Foodco were presented with a disclosure statement, which stated that The Foundry would commence operating in June 2007. The disclosure statement also made reference to the fact that, “The centre is… not fully leased”. In reality by December 2006, unbeknown to Foodco and the Miletichs, no other leases had been entered into.

The Jamaica Blue café commenced trading in August 2007. At the time, the development remained virtually untenanted, the travelators did not work, access to the building was impeded and there was a lack of sufficient heating and customer toilets. Furthermore, there was no Drummond Golf Store, sporting complex or Irish bar. At no stage did the Miletichs’ business make a trading profit,and in October 2007 the Miletichs were forced to close the Jamaica Blue café.

The development company subsequently went into liquidation.

The Proceedings

The Miletichs commenced Federal Court proceedings in June 2010. They claimed misleading and deceptive conduct under the Trade Practices Act 1974 (which was replaced by the Act, on 1 January 2010),based on the leasing agent and developer’s representations concerning the extent of patronage, level of tenancy and tenancy mix at The Foundry.

The Court considered the following issues:

  • Did the brochure and video constitute representations as to future matters, or were they mere advertising puffery;
  • If they were representations as to futurematters, were they misleading and deceptive;
  • Did the Miletichs rely on the misleading and deceptive representations upon entering into the lease;
  • Could the disclaimer contained in the brochure be relied upon by the developer to limit the developer’s liability?; and
  • Was the director of the developer knowingly concerned in, or party to the contraventions of the Trade Practices Act 1974?

Decision

Justice Gray held as follows:

  • That the brochure, video and other marketing material did indeed constitute representations as to future matters, as they were “representations to the effect that there would be tenants in all or most of the 40 shop premises in The Foundry, carrying on business of the type depicted in the pictures”;
  • As the leasing agent and developer were not able to produce evidence that they had reasonable grounds upon which to base their representations, the representations extended beyond mere advertising puffery (to which no significance could be attached), but rather constituted misleading and deceptive conduct;
  • The Miletichs clearly believed the marketing and oral representations which were made to them by both the agent and developer. As a result, the Miletichs were misled and deceived;
  • The disclaimer contained in the brochure ould not be relied upon to negate liability for statements found elsewhere in the document. A fine print disclaimer adopting “formulaic and legal language” does not prevent the material from being anything but misleading and deceptive, and is unlikely to dispel the overall effect of the brochure; and
  • The director of the developer was found to have knowledge of the content of the representations made to Miletichs, and of the fact that they were intended to be delivered to prospective tenants of the Foundry. He also had knowledge of the true state of leasing of the Foundry at all times. As a result, he had knowledge of the circumstances of the contravention of the Trade Practices Act 1974, and was found to be knowingly concerned in or party to the contraventions.

Practical Implications

The case highlights the importance for a clear distinction between marketing material which is mere advertising puffery, as opposed to material which is misleading or deceptive or likely to mislead or deceive.

Developers and their agents need to ensure that marketing material and oral representations are accurate and have a reasonable factual basis. If the representations are not accurate and there is not a reasonable factual basis for making those representations, then developers and their agents leave themselves exposed to potential legal action under the Act for misleading and deceptive conduct. This liability may also extend to persons knowingly concerned in the conduct such as individual employees of the developer or agent and directors.

Please contact Rebecca Lees if you would like further information in relation to this issue.

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