Recent decision on demolition clauses in retail lease raises concerns for retail tenants
If you are a tenant leasing a retail space, particularly in a major retail complex, chances are your lease contains what is referred to as a ‘demolition’ clause. Clauses of these nature allow a landlord to terminate a retail lease in order to undertake demolition or substantial refurbishments/renovations to the retail premises. These clauses may contain provisions for the tenant to be moved to an alternate space, however they may simply bring the tenancy to an end upon the expiration of a requisite period of notice.
The operation of demolition clauses are governed by the provisions of the relevant lease together with section 35 of the Retail Leases Act 1994 (provided the lease is a retail lease). Section 35 provides that if the lease includes a ‘demolition’ clause, the said clause is deemed to include the following terms [emphasis added]:
(a) The lease cannot be terminated on that ground unless and until the lessor has provided the lessee with details of the proposed demolition sufficient to indicate a genuine proposal for demolition within a reasonably practicable time after the lease is to be terminated.
(a1) The lease cannot be terminated by the lessor on that ground unless the proposed demolition cannot be carried out practicably without vacant possession of the shop.
(b) The lease cannot be terminated by the lessor on that ground without at least 6 months written notice of termination.
The requirement that a landlord may only terminate a lease provided that they indicate to the tenant there is in place a ‘genuine proposal for demolition within a reasonably practicable time after the lease has been terminated’ is a tenant’s main protection against a landlord terminating their lease to pursue their own self interest under the guise of a proposed ‘demolition.’
However, a recent decision of the NSW Civil and Administrative Tribunal’s (NCAT) Appeals Panel brings into question this protection. The Appeals Panel in Wynne Avenue Property Pty Limited v MJHQ Pty Limited [2019] NSWCATAP 14 overturned a prior decision of NCAT in respect of the purported termination of a retail lease in Burwood Plaza on the grounds of demolition.
Facts
The landlord owned the retail complex known as Burwood Plaza in NSW, and leased a premises in the Plaza to the tenant. The landlord then purported to terminate the lease pursuant to a demolition clause.
It was the intention of the lessor to vacate the premises leased by the tenant (together with two adjoining premises), remove the dividing walls (amongst other renovations) and create one larger premises. The landlord then intended to lease the larger premises to a major tenant. In fact, the landlord was in negotiations with TK Maxx and had even signed a Heads of Agreement to subsequently enter into a lease.
The tenant applied to the NCAT for a determination that the demolition notice issued by the landlord was invalid on the basis that the intention of the landlord was only to attract a ‘more commercially advantageous tenant’ and did not indicate a ‘genuine proposal for demolition.’
The NCAT made a determination in favour of the tenant, indicating that the Heads of Agreement between the landlord and TJ Maxx (which was entered into prior to the demolition notice was issued) demonstrated that the lessor’s motivation was to grant a new lease, and not merely to convert the premises to attract a mini major tenant. The actions of the landlord, in the opinion of the NCAT, were in bad faith and indicated that they did not have a genuine proposal to undertake refurbishment works
Decision
The Appeals Panel however overturned the decision of NCAT. By applying the previous decision of Blacker v Felpure Pty Limited [1999] NSWSC 958, the Appeals Panel provided that the motivation of the landlord is irrelevant in determining whether a demolition plan is a ‘genuine proposal.’ Just because the intention is to attract a commercial advantageous tenant does not invalidate the demolition notice.
The demolition notice will be valid if it includes sufficient details to suggest that there is a ‘strong possibility’ a proposal exists to demolish/renovate the premises.
Tenants of a retail lease that contains a demolition clause will therefore need to be aware that a lessor may validly terminate their lease under a demolition clause even if the sole motivation is to secure a more advantageous tenant, provided that the transaction as a whole involves a genuine refurbishment or demolition of the tenant’s premises.
If you have any concerns in respect of your retail lease, or wish to obtain further information or advice on your rights as a tenant or landlord, please contact our Property Department on (02) 4626 5077 to discuss further.
The contents of this publication are for reference purposes only. This publication does not constitute legal advice and should not be relied upon as legal advice. Specific legal advice should always be sought separately before taking any action based on this publication.
