Retail Tenants Be Aware: Understanding Demolition Clauses in Retail Leases

Background

A demolition clause is a clause in a retail lease that provides that the lease can be terminated early by the landlord if it decides to demolish, or substantially renovate, a property. As long as the landlord complies with the requirements of section 35 of the Retail Lease Act 1994 (NSW) they are entitled to terminate the lease and only pay a limited amount in respect of the tenant's fit-out costs but not, for example, the costs of moving, loss of profits, or any subsequent increase in rent.

In the recent case, Wynne Avenue Property Pty Ltd v MJHQ Pty Ltd (2019) NSWCATAP 14, the NSW Civil and Administrative Tribunal's (NCAT) Appeals Panel overturned a decision of the Tribunal regarding the termination of a retail lease in Burwood Plaza, in the Sydney suburb, on the grounds of demolition. In doing so, the decision examined the requirements of s 35 as to whether a" genuine proposal" for demolition existed.

Key Issues

Under s35 of the Retail Leases Act, a demolition clause in a lease means that termination of the lease can be made on the grounds of a proposed demolition of the building, or any part of it, as long as:

• the tenant has been given sufficient information to indicate a “genuine proposal” to demolish the building within a reasonably practicable time period;
• the demolition cannot be carried out without vacant possession; and
• at least six months written notice is provided.

If notice has been given to the tenant, the tenant has the option to terminate the lease by giving the landlord seven days written notice within six months before the termination date given by the landlord. If the lease is for twelve months or less, the notice period reduces from six months to three months.

Should the demolition not occur within a reasonable time after the termination, the landlord could be liable to pay compensatory damages to the tenant.

If the tenant was expected to fit out the shop under the lease terms, the landlord is liable to pay compensation whether the demolition is carried out or not.

The term demolition includes renovating, reconstructing, and repairing. Most states and territories have similar, though not necessarily identical, provisions.

Key Facts

The landlord, Wynne Avenue Property, leased premises in the retail complex at Burwood Plaza to the tenant, MJHQ. The landlord decided to terminate the lease relying on the lease’s demolition clause and gave notice to the tenant. The proposal envisioned an amalgamation of the premises occupied by the tenant with two other properties. The enlarged premises were then to be leased to T K Maxx on terms said to be “commercially advantageous” to Wynne Avenue Property.

MJHQ argued that the demolition notice was invalid, as it did not comply with the requirement of s35 in that it did not indicate "a genuine proposal for demolition within a reasonably practical time after the lease was terminated". The tenant applied to the NCAT for a determination as the landlord only wanted to attract a more commercially advantageous tenant which, they argued, indicated it was not a genuine demolition proposal.

Initially, NCAT found for the tenant and that the landlord’s actions were in bad faith.  This decision seemed to suggest that the Tribunal could impose a limit on the landlord's right to terminate a lease where the motivation was not in good faith to the effect that the landlord might not be able to terminate using the demolition clause.

However, the Appeals Panel overturned the decision and held that the demolition notice was valid. The motivation of the landlord is irrelevant to a determination as to whether a demolition plan is “genuine”.  The proposal had been genuine and it was not relevant that the purpose of demolition was to advance the landlord’s commercial interests.  Importantly, the Panel considered the factors that would determine what constitutes a “genuine proposal”.

What is a “genuine proposal”?

In order to constitute a “genuine proposal” for demolition:

• there must be sufficient details but not necessarily every detail of the proposed demolition;
• it is not necessary to specify the exact date, but it must take place within a reasonably practicable time period.

Failure to do this means the tenant may be able to claim damages;

• the commercial motivation of a landlord is irrelevant in determining whether a plan is indeed genuine.

What does it mean?

Both landlords and tenants need to be aware of the operation of a demolition clause in a lease. The lease can only be terminated where there is a genuine proposal, vacant possession is essential to the proposal, and the correct period of notice is provided.

A notice of determination does not need to contain specific detail of the demolition and need not indicate a specific timeframe for completion. However, the evidence must provide enough information about the proposed work to demonstrate that the proposal is genuine and that the work will commence and be completed within a reasonably practicable time span.

A landlord may validly rely on a demolition clause to force a tenant to vacate premises notwithstanding the motivation.

Prospective tenants need to obtain legal advice from an experienced lawyer before signing a lease to ensure being fully aware of these issues. Tenants are not entitled to any compensation if a landlord terminates a lease under a demolition clause other than compensation for the fit-out that cannot be moved to new premises.

A tenant may consider asking the landlord to remove the clause, or agree an amount of compensation if the landlord does terminate, to avoid disputes over the amount of compensation the tenant will be entitled to.

Contact our Commercial Property Dispute Lawyers, Sydney, NSW

If you require further information on any of the matters raised, or in respect of any matters involving commercial leases, please contact Szabo & Associates Solicitors on (02) 9158 6333 or fill in our online enquiry form.