Retail leases often contain demolition clauses giving a landlord the right to terminate the lease and demolish a premises if they want to carry out substantial repairs, renovation or reconstruction.

Understanding the effect of demolition clauses can be important, as they can leave a tenant without a premises and with very limited compensation.

Application of the Retail Leases Act

Section 35 of the Retail Leases Act 1994 sets out the:

1. scope of what constitutes a “demolition” – including repair, renovation and reconstruction of part of a building;
2. limited circumstances in which a landlord must pay a tenant compensation; and
3. preconditions to termination for proposed demolition.

When can a landlord terminate a lease for proposed demolition?

The Act provides that a landlord can only terminate a lease under a demolition clause if the:

1. landlord can demonstrate to the tenant that it has a ‘genuine proposal’ to demolish the premises within a reasonable time before termination;
2. proposed demolition cannot be carried out without vacant possession of the premises; and
3. landlord gives the tenant at least 6 months written notice (except where the lease term is up to 12 months, which reduces the period to 3 months).

What is a ‘genuine proposal’?

In the case of Wynne Avenue Property Pty Ltd v MJHQ Pty Ltd (2019) NSWCATAP 14, the panel considered what factors constitute a ‘genuine proposal’ for demolition, determining that:

1. there must be sufficient details, but not necessarily every detail, of the proposed demolition;
2. the exact demolition date need not be specified, but it must take place within a reasonably practicable period;
3. the commercial motivation of the landlord for demolition is irrelevant in determining whether the proposal is genuine.

Early termination by tenant

A tenant who has received a demolition notice can choose to terminate the lease earlier by giving the landlord at least 7 days written notice within 6 months before the proposed termination date. Otherwise the lease will terminate on the date specified in the landlord’s demolition notice.

Payment of Compensation

Usually, where a lease is terminated on the grounds of demolition, tenants are not entitled to any compensation except in the limited circumstances as set out under the Retail Leases Act. They are:-

1. if the landlord terminates the lease but does not carry out the demolition within a reasonably practicable time, they must pay reasonable compensation for damage the tenant suffered as a result of the early termination, unless the landlord can prove that when notice was given there was a genuine proposal to demolish within that time (section 35(3));
2. if the tenant was required under the lease to fitout the retail shop, the landlord must compensate for the fitout costs, whether or not the proposed demolition is carried out (section 35(3A)).

Compensation for fitout

Despite section 35(3A) of the Act, a tenant will only be entitled to compensation for fitout costs if the items cannot be removed, reinstalled or sold and as a consequence the tenant suffers a loss.

In Tabbouche Enterprises Pty Ltd v Cromwell Seven Hills Pty Ltd [2016] NSWCATCD 51, Softwash Castle Towers Pty Ltd v Queensland Investment Corporation was considered in determining the compensation payable for fitout. Harrison J determined that the value of parts of the fitout would be the value given to those parts in the tenant’s financial, accounting and taxation records. The tenant will not be entitled to any compensation if the fitout can be removed and reinstalled or sold and they do not suffer a loss.

Disclosure of demolition in disclosure statement

The lessor’s disclosure statement must disclose whether or not a proposed lease will contain a demolition clause.

If there are proposals to demolish the premises when the disclosure statement is prepared, the landlord must disclose this information to the tenant in the statement.

However, although a landlord may not have any current plans to demolish premises, a demolition proposal can arise at any time, even after the lease has been entered into.

Takeaways for tenants

Tenants should always check for and obtain legal advice regarding demolition clauses before entering into a lease, regardless of whether the landlord plans to redevelop the premises.

Tenants should also be aware that, if demolition is proposed, circumstances for compensation are very limited, and they may be left without compensation and without premises.

Clauses dealing with demolition, notice periods, and agreed compensation in the event of demolition can be negotiated with the landlord. Tenants should ensure that the lease reflects all agreements reached with the landlord as the Retail Leases Act only offers some protection.

A tenant should always seek deletion of demolition clauses, and if a landlord does not agree, they should make further enquiries.

Tenants entering into commercial leases should be even more careful when faced with demolition clauses, as they will not have the protections offered by the Retail Leases Act.

Here to Help

Contact us for free no-obligation initial telephone advice regarding demolition clauses in a retail lease.