The hangover from our property boom in Sydney – Impact on commercial and retail leasing
In Sydney we are experiencing a once in a generation property boom. We are in a market where developers are clamouring for sites to redevelop. I’m seeing the impact of this on my leasing practice - receiving a number of enquiries from clients who want to know what their rights are when their Landlord wants them to vacate their premises for the purpose of redevelopment.
What does the Lease say?
If your Lease doesn’t allow a Landlord to terminate the lease for the purposes of redevelopment, then a Tenant shouldn’t roll over and surrender their tenancy rights without ensuring continuity of their business.
Some Leases have clauses that require Tenants to surrender their Lease in the event that a Landlord serves them a Notice (and there is a genuine redevelopment proposal). Alternatively, the Lease might provide for the Landlord to relocate the Tenant to other premises. The clause may or may not entitle the Tenant to relocate in such circumstances.
However, if your Lease doesn’t have any such clauses, then the parties will need to negotiate a fair and reasonable settlement if the Tenant is to surrender their leasing rights. In such circumstances, the parties need to consider the following:
- The likely cost to relocate to new premises
- The impact of relocation on the operations of the business
- Any lost revenue or down time
- The depreciated value of fit out that cannot be salvaged for any alternative premises
- Likely location for an alternative premises (that leaves the tenant no worse off – either in terms of access to customers/clients and impact on goodwill) and size of alternative premises
- Terms of any new Lease – who should carry the burden of higher rent and outgoings?
- Cost of designing and fitting out an alternative premises
- Amount of notice to give the Tenant.
What if your Lease is a retail lease?
There are specific provisions in relevant retail leasing legislation (each state and territory has their own legislation relating to retail leases), which address relocations and redevelopments of retail premises. You should read these provisions carefully along with what the terms and conditions of your Lease say.
New Strata Legislation
In late October 2015 some amendments to existing Strata Titles Legislation were passed through the New South Wales Parliament. The changes have not yet come into operation, but some key amendments will make it easier for a Body Corporate (the collective owners of the strata building) to agree to sell the building to a developer, paving the way for a cessation of the strata scheme for the purposes of redevelopment. As a result of these changes, a Leasehold interest of the Tenant will not necessarily be protected. Legislation anticipates compensation being paid to a Tenant, but the question will be whether any such compensation will be sufficient.
Other Issues – Compulsory Acquisitions
As the State Government compulsorily acquires properties across the relevant road and railway corridors, there are questions over the impact of Leasehold interests. For example, should a Tenant make good the premises if the property is going to be compulsorily acquired? The legislation seems to indicate that there needs to be evidence that the premises will be at the time of acquisition (or shortly after), pulled down.
What compensation is a tenant entitled to in the event of compulsory acquisition? Usually the lease will say that the Landlord is not required to compensate the Tenant and so it will depend on whether the relevant authority is required to compensate the Tenant under relevant legislation.
For more information please read our Plain English Guide to Commercial, Industrial and Retail Leasing.
If you are a Tenant or a Landlord and need guidance through any of these issues, please contact:
Andrew Grima, Principal
Phone: +61 2 9895 9271