Sec New Line Pty Ltd v Muffin Break Pty Ltd – Franchisor Obligations and their Impacts on Franchisees
The Supreme Court decision Sec New Line Pty Ltd & Anor v Muffin Break Pty Ltd [2025] VSC 183 sheds light on the limited duties of franchisors to inform franchisees about matters pertaining to their lease. The decision also clarifies the scope of de-fitting obligations under a lease agreement.
Background
Muffin Break Pty Ltd (Muffin Break) is a national restaurant chain under the Foodco Group which operates over 200 stores across Australia. There were two appellants in this matter: Sec New Line Pty Ltd (New Line), being one of Muffin Breaks franchisees, and the second, Dongbiao Su (Mr Su), the sole director and shareholder of New Line.
New Line entered the Muffin Break franchise by opening a store in a food court at the Frankston shopping centre. The franchise agreement was set to expire on 8 September 2020, a day before the lease agreement with the landlord was due to end.
The landlord had plans to redevelop the food court and relocate it, resulting in the non-renewal of Muffin Break’s lease. This development was first communicated to Mr Borsboom, acting for Muffin Break, on 10 January 2020 in response to an inquiry about an early lease renewal. However, Muffin Break did not inform New Line or Mr Su of this decision.
The landlord formally communicated the intent not to renew the lease to Muffin Break through a notice on 2 March 2020, but once again neither New Line, nor Mr Su, were informed. Despite having knowledge that the lease would not be renewed, Muffin Break sent Mr Su an offer to renew the franchise agreement on 6 March 2020, contingent on:
Entering a new or varied lease with the landlord;
The landlord not terminating the existing lease upon its expiration; and
New Line not being in breach of the franchise agreement.
In March 2020, the landlord clarified that the Muffin Break store would be relocated to another level of the shopping centre. Muffin Break informed New Line of the landlord’s intentions six months later, in July 2020, and suggested the relocation would cost between $220,000 and $270,000. Faced with this information, Mr Su decided to close the restaurant.
The lease agreement required New Line to remove its property and restore the premises to its original condition. Since New Line has not made substantial changes to the property, the agreement allowed for alterations to the reinstatement terms through negotiation between the landlord and Muffin Break.
After both the lease and franchise agreement ended in September 2020, Muffin Break negotiated a $14,300 de-fit payment with the landlord. The franchise agreement stipulated that New Line would reimburse Muffin Break for costs incurred in fulfilling the terms of the lease. Muffin Break used New Line’s security guarantee to cover part of the de-fitting costs, however there remained $6,331.16 owed by New Line to Muffin Break. New Line contended that compensation for the de-fitting costs were not included in the terms of the lease, and therefore, they were not liable to compensate Muffin Break for the de-fitting expenses.
New Line and Mr Su initially commenced proceedings against Muffin Break in the Magistrates Court, claiming that the 6 March 2020 offer to renew the franchise amounted to misleading and deceptive conduct as Muffin Break had failed to disclose the landlord’s intention not to renew the lease. Muffin Break filed a counterclaim for outstanding rent and outgoings in relation to the for the outstanding de-fitting costs. The Magistrate ruled in Muffin Break’s favour on both claims.
Court Findings
New Line appealed to the Supreme Court, where two key issues were addressed:
Issue 1: Was offering a franchise renewal while having knowledge of the landlord’s intent not to renew the lease, misleading and deceptive conduct by the franchisor?
New Line and Mr Su argued that offering the franchise renewal without informing them of the landlord’s plans amounted to misleading and deceptive conduct under section 18 of the Australian Consumer Law, which prohibits misleading or deceptive conduct, or conduct that is likely to mislead or deceive, in a trade or commerce context. They claimed that had they known the lease would not be renewed, they would have sold the business in March 2020 to a prospective purchaser.
In the first instance, the Magistrate in reaching their decision, had considered the Federal Court case of Demagogue Pty Ltd v Ramensky (1992), which found that silence will be considered to be misleading and deceptive conduct, where such silence amounts to a reasonable expectation of disclosure.
However, on appeal, the Supreme Court found that Muffin Break’s failure to disclose the landlord’s intention did not constitute misleading and deceptive conduct, namely, that in the context of franchising negotiations, silence about an offer to renew a lease could not cause, or be likely to cause, one to form the impression that the landlord had not given notice to renew the lease. Here, Muffin Break had not made any representation about the likelihood of the lease being renewed.
In its decision, the Court noted that silence alone would not itself constitute misleading and deceptive conduct. It was held that Muffin Break did not engage in misleading and deceptive conduct on the basis that there was no implied intention for the lease to be renewed.
Issue 2: Does reinstating a premises’ condition mean de-fitting?
Muffin Break argued that New Line was required to compensate them for all de-fitting costs, claiming that the franchise agreement required New Line to reimburse Muffin Break for expenses incurred in fulfilling lease obligations, and the lease required the premises to be reinstated to its original condition.
New Line contended that at the commencement of their lease, the premise was already full fitted and as the lease only required the restoration of the premises to its original condition, this did not necessitate de-fitting.
The Court sided with Muffin Break, finding that de-fitting costs were part of the lease obligations resulting from negotiations between Muffin Break and the landlord, as allowed under the lease terms.
Additionally, New Line’s argument of a breach of good faith under the Franchising Code of Conduct was dismissed at first instance, and New Line chose not to appeal this point.
Significance
This decision highlights the importance of clear terms in franchise and lease agreements, especially regarding responsibilities for property restoration. It also draws attention to the limited requirement for transparency between franchisors and franchisees in respect to matters which have the potential to impact the franchise agreement, where negotiations are in place in respect of the agreement.
If you have questions or require further information please contact:
Alasdair Woodford
Principal
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E: awoodford@ha.legal
Joseph Flanagan
Senior Associate
T: 03 5226 8504 | M: 0491 307 550
E: jflanagan@ha.legal
Tayla Berger
Senior Associate
T: 03 5226 8559 | M: 0407 825 365
E: tberger@ha.legal
Madeline Thompson
Law Clerk
mthompson@ha.legal
