Understanding Demolition Clauses in Commercial and Retail Leases
Assisted by James Duff.
A 'demolition clause' is a lease term which gives a Landlord the authority to terminate a lease in order to take on repairs, renovations or the complete reconstruction of a leased premises.
Demolition clauses are sometimes seen as controversial, and can be the catalyst for disputes relating to the termination of leases - as was the case in the matter of Wynne Avenue Property Pty Ltd v MJHQ Pty Ltd  NSWCATAP 41, discussed below.
Demolition clauses in retail leases are governed by Section 35 of the Retail Leases Act 1994 (NSW), which stipulates that:
- The lease cannot be terminated based on a demolition clause unless the details of the proposed demolition provided by the landlord constitutes a 'genuine proposal' for demolition, and the demolition is to occur within a reasonably practicable time after the lease is to be terminated.
- The lease cannot be terminated by the landlord based on a demolition clause unless it is accepted that it would be impossible for the proposed demolition to practicably take place without vacant possession of the premises.
- The lease cannot be terminated by the landlord on the grounds of a demolition clause without at least 6 months written notice of termination having been provided to the tenant.
- If a notice of termination on the basis of a demolition clause is given to the tenant, the tenant has the right to terminate the lease at any time within the 6 months prior to the termination date given by the landlord, by giving the landlord at least 7 days written notice of termination.
It is important to note that if the lease in question is for a term of 12 months or less, the period of 6 months in points (c) and (d) is shortened to 3 months.
In the case of Wynne Avenue Property Pty Ltd v MJHQ Pty Ltd, Wynne Avenue Property Pty Ltd ('the Landlord') had relied on a demolition clause in order to terminate the lease. The decision examined the Section 35 requirement, and in turn whether a 'genuine proposal' for demolition had actually existed.
Facts of the matter
MJHQ Pty Ltd ('the Tenant') had leased a shopfront from the Landlord in Burwood Plaza, located in the Sydney suburb of Burwood. The Landlord relied on a demolition clause within the lease when it issued notice of termination to the Tenant. It was indicated in the proposal that the Landlord had planned to amalgamate the Tenant's premises with two other shops.
The reconstructed premises was to be leased to TK Maxx, a move which was described as a 'commercially advantageous' arrangement for the Landlord.
The Tenant subsequently argued that the demolition notice was invalid because it did not indicate 'a genuine proposal for demolition within a reasonably practicable time after the lease was to be terminated'. At first instance the Tenant succeeded in its assertions, although on appeal the NSW Civil and Administrative Tribunal found in favour of the Landlord, in turn setting out the principles for determining a 'genuine proposal'.
What factors determine a 'Genuine Proposal'?
- Whilst the demolition notice must contain sufficient details in order to be accepted as a genuine proposal, it is not necessary that the demolition clause sets out every detail of the proposed demolition.
- Whilst it is not necessary to specify the exact date on which the demolition is to take place, it is necessary for the demolition to occur within a 'reasonably practicable time'. If this fails to transpire, the lessee (tenant) may be able to claim damages.
- The commercial motivation of a Landlord is irrelevant in determining whether a plan is a genuine proposal.
Outcome of the case
The Tribunal found in favour of the Landlord, deciding that the plan had indeed been a 'genuine proposal', and that it did not matter that the purpose of demolition was to advance the Landlord's commercial interests.
Ultimately, the Appeal Panel held that the demolition notice was valid. As such, the Landlord was able to rely on the demolition clause to terminate the lease, and the Tenant was required to vacate the premises.
Key points to consider
It is important for tenants and landlords alike to understand that a lease can only be terminated based on a demolition clause if:
- The notice of demolition is considered a genuine proposal;
- The proposed demolition requires vacant possession of the premises; and
- The Landlord provides at least 6 months written notice to the Tenant (unless the lease is for a term of 12 months or less, in which case the notice period is shortened to 3 months).
If you have a query relating to any of the information in this article, or you require assistance in negotiating a retail or commercial lease, please don't hesitate to get in contact with Coleman Greig's Commercial Property team: