By Chris Brodrick, Partner
VCAT’s very recent decision concerning two leases over the Carlton North property famously known as the San Remo Ballroom, provides some guidance when assessing whether shareholder changes within a Tenant company trigger ‘change of control’ provisions of a lease.
In this case, the sale of one shareholder’s 51% shareholding in the Tenant company to the 49% shareholder was found not to trigger the change of control provision in the lease.
The Applicant Tenant had operated the business since 2010. Since 2015, the business had been managed by Ms Caldoni. Her business partner Mr Hirsh had withdrawn from management of the business due to health reasons in 2014/15.
Ms Caldoni held 49% of the shares in the Tenant via her company Buca Investments Pty Ltd (Buca). Mr Hirsh held the balance and majority shareholding through his company Kalubon Pty Ltd (Kalubon). In December 2022, Kalubon transferred its shares to Buca. Mr Hirsh passed away shortly thereafter.
The Tenant did not undertake the protocols set out in the change of control provision of the leases. The Respondent Landlord issued notices of default. Despite efforts, the parties could not resolve their differences. The Tenant applied to VCAT for declarations that the transfer of shares did not trigger the change of control provision in the lease and therefore no breach had been committed.
The relevant clause in each of the leases read:
Where
(A) the Lessee is a body corporate
(B) A change occurs during the Term in:
(I) The membership of the body corporate or any holding company of the body corporate
(II) The beneficial ownership of any shares in the capital of the body corporate, or
(III) The beneficial ownership of the business or assets of the body corporate
(C) As a result of that change, the body corporate or the business of the body corporate is after the change effectively controlled by a person or persons who at the Commencement Date did not effectively control the body corporate or the business of the body corporate,
the Lessee shall, unless the prior written consent of the Lessor has been obtained to the change, be deemed to have assigned the Lease.
The Tribunal had to determine the meaning of “change of control” in this context. In doing so, it sought to determine the natural and ordinary meaning of the words in the context of the agreement as a whole and having regard to its commercial purpose (at 35).
In its analysis, the Tribunal focussed on the concept of actual practical control. Basing its views on the concepts contained in s50AA of the Corporations Act and Victorian Supreme Court authority, the Tribunal determined that:
“Having regard to these principles, a ‘change of control’ under clause 1(t)(iii) must involve a substantive shift in the power to direct the Tenant’s operations or business affairs. It is not enough that there be an internal reorganisation or a mere change in the shareholding structure if effective control remains with the same person or group.” (at 40)
It went on to say:
“[The] authorities support the approach that where a lease does not define ‘control’ in strictly legal or mechanical terms, its interpretation should be informed by commercial realities and practical arrangements. It follows that external definitions such as s 50AA may serve a useful interpretive role, although the controlling factor remains the text of the lease which is read in context.” (at 45)
The Tribunal determined on the facts that the change in shareholding resulted in no “effective change in who controlled the management of the Tenant’s business” and therefore the shareholding did not trigger the tenant’s obligations under the change of control clause in the leases.
The Tribunal has clearly adopted a practical approach to the concept of control. Though its ruling in this case shows that each instance will be fact specific. The case might have a different outcome if, for example:
In the above example, despite an internal reshuffle as occurred in the San Remo case, the reshuffle has in fact resulted in a legal and practical change in control in the sense adopted by the Tribunal. That is, there has been a “substantive shift in the power to direct the Tenant’s operations or business affairs.”
While certainty for lease parties might come from defining “control” in the lease, this case highlights the need for gathering facts and giving them careful consideration in light of the of rights and obligations of the parties under the lease when shareholder change occurs. As the subject case highlights, that task may not be an easy one.
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