The 10 April 2025 Victorian Supreme Court decision of Sec New Line Pty Ltd & Anor v Muffin Break Pty Ltd[1] highlights the limited obligations of franchisors to communicate lease issues to their franchisees. Additionally, the judgement clarifies the extent to which de-fitting a premises will be required under a lease agreement.

Background

Muffin Break Pty Ltd (Muffin Break) is a restaurant chain under the Foodco Group, with over 200 stores across Australia. One of its franchisees was the appellant in this matter: Sec New Line Pty Ltd (New Line). The second appellant, Dongbiao Su, is the sole director and shareholder of New Line.

Under the franchising agreement between the parties, New Line bought into the Muffin Break franchise and opened a restaurant in a food court at a Frankston shopping centre. The franchising agreement was to expire on 8 September 2020, one day prior to the lease agreement with the landlord terminating.

As part of redevelopment plans of the landlord, the food court was to be relocated, and the lease agreement with Muffin Break accordingly would not be renewed to facilitate this transition. This intention was communicated to Mr Borsboom, acting on behalf of Muffin Break on 10 January 2020, in response to a request for an early lease renewal. Importantly, Muffin Break did not inform New Line or Mr Su of the request denial.

Similarly, confirmation of the landlord’s intentions was communicated to Muffin Break through a notice of intent not to renew the lease dated 2 March 2020. Again, this was not communicated to the New Line nor Mr Su.

Despite Muffin Breaks’ knowledge that the lease would not be renewed, on 6 March 2020, Muffin Break sent Mr Su a letter offering to renew the franchise agreement subject to:

Muffin Break entering into a new or varied lease with the landlord;
The landlord not terminating the lease upon its expiration; and
New Line not being in breach of any conditions under the franchising agreement.

On 18 March 2020, the landlord sent Mr Borsboom a letter clarifying that they intended for the Muffin Break site to be relocated to a different level of the shopping centre.

Six months after initially being made aware of the landlord’s intent not to renew the lease, Muffin Break informed New Line of the situation on 7 July 2020. In the same correspondence, it was suggested that the restaurant could be relocated for a cost of $220,000 to $270,000. In light of this information, Mr Su informed Muffin Break that he would close the restaurant altogether.

The lease agreement provided that the tenant, New Line, was to remove the their property from the site and reinstate the condition of the premises so that it was in the same state that it was upon the commencement of the lease. No substantial fittings had been added to the premises by New Line since the commencement of the lease. However the agreement additionally provided for alteration of the reinstatement requirements through negotiation between the landlord and the Muffin Break.

After the expiration of both the lease and the franchising agreement in September 2020, Muffin Break negotiated a de-fit payment with the landlord for $14,300. The franchising agreement provided that New Line would reimburse Muffin Break for all costs it was to incur in the completion of the lease agreement. The cost of de-fitting was taken by Muffin Break from a security guarantee given by New Line, with a residual $6,331.16 de-fit cost incurred by Muffin Break. New Line argued that compensation for de-fitting was not a term of the lease, and that New Line was thus not liable to compensate Muffin Break for de-fitting.

New Line and Mr Su initially filed against Muffin Break in the Magistrates’ Court on the basis that the 6 March 2020 re-franchise offer amounted to misleading and deceptive conduct given that Muffin Break had withheld its knowledge regarding the intent of the landlord not to renew the lease agreement. In response, Muffin Break filed a counterclaim for outstanding rent and outgoings in relation to the unpaid $6,331.16 for de-fitting costs.

At first instance, the presiding Magistrate held in favour of Muffin Break on both claims.

Court Findings

New Line then appealed to the Supreme Court.

The issues dealt with by the Supreme court in this case were:

Issue 1: Whether offering a franchise renewal whilst withholding knowledge of the intent not to renew the lease agreement amounted to misleading and deceptive conduct?

New Line and Mr Su alleged that the offering of a franchise renewal agreement without having informed the franchisees of the landlord’s intent not to renew the lease amounted to misleading and deceptive conduct, in breach of section 18 of the Australian Consumer Law.

This section relevantly provides that:

(1) A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

New Line and Mr Su claimed that, had they been aware of the landlord’s intention not to renew the lease, the business would have been sold to Mr Chang, a prospective purchaser in March 2020, at the point of the landlord’s notice.

At first instance, the Magistrate considered the Federal Court judgement in Demagogue Pty Ltd v Ramensky (1992), which held that silence will amount to misleading and deceptive content where the relevant circumstances are such that they give rise to the reasonable expectation of disclosure of certain information.

On appeal, the Supreme Court held that silence about an offer for the renewal of a lease agreement in the context of franchising negotiations could not cause or be likely to cause one to be of the impression that the landlord has not given a notice to not renew the lease. This was particularly the case given that the Muffin Break had not made any representations about the prospect of a lease renewal.

In determining whether a party has engaged in misleading and deceptive conduct, silence alone is not determinative, but rather it is a relevant circumstance to consider.

Considering this, the court held in favour of Muffin Break; the silence on the state of the lease did not amount to misleading and deceptive conduct given that it did not imply an intention of the landlord to renew the lease.

Issue 2: Whether an agreement to reinstate the condition of a premises mandates de-fitting the property?

Muffin Break alleged that New Line was obligated to compensate it for the costs associated with de-fitting the rented premises.

The grounds of this claim were that the franchise agreement provided that New Lineis to compensate Muffin Break for all financial encumbrances incurred in the process of fulfilling the terms of the lease. Thus, it was alleged that the de-fitting cost incurred by Muffin Break was subject to the lease agreement, which provided for the premises to be reinstated to the condition it was in prior to settlement.

New Line argued that all that they were required to do under the lease was reinstate the condition of the premises, which, at the time of commencement of the lease, was already fully fitted.

The court again held in favour of Muffin Break, finding that there would need to be payment made by the lessee for the de-fitting and that this payment had been negotiated between Muffin Break and the landlord as permitted under the lease.

Significance

This matter highlights to franchisees and franchisors alike the requirements, or lack thereof, for transparency between parties on matters potentially affecting the franchise agreement, where that agreement is being renegotiated. This is an important consideration for all people negotiating commercial transactions.

In addition, it is important to note that New Line argued a breach of good faith under the Franchising Code of Conduct at first instance and lost. New Line elected not to appeal on this point.

If you wish to discuss this further, please contact:

Alicia Hill
Principal
T: +61 3 9611 0180 | M: +61 484 313 865
E: ahill@sladen.com.au

Charlie Cooper
Law Clerk
E: ccooper@sladen.com.au

[1] [2025] VSC 183