Navigating relocation or demolition clauses when you're a franchisee

The retail leasing landscape is constantly changing as a result of the increasing numbers of redevelopments in metropolitan areas. In this climate, retail tenants (who are often franchisees) are faced with the prospect of being asked to relocate or being notified that their current premises is being demolished.

This article will step you through demolition and relocation clauses in a retail lease.

Relocation

What is relocation?

What happens when a landlord wants to renovate the part of a shopping centre that you're currently leasing? The landlord can relocate you!

Relocation is the process whereby a landlord can relocate a tenant to another premises within the same centre for the purposes of refurbishment, redevelopment or extension.

What requirements must be met?

Many requirements must be met when a landlord wants to rely on a relocation clause, including:

  • The landlord can't relocate the tenant unless they provide sufficient details that demonstrate a genuine proposal for refurbishment;
  • The landlord must give the tenant at least three months written notice with details of the alternative shop; and,
  • The new lease (of the alternative premises) must be on the same terms, except the term of the new lease is to be for the remainder of the term of the existing Lease. The rent may need to be adjusted to take into account any difference in the size of the premises.

Rights that tenants have

Moving locations can be particularly onerous for a tenant, particularly if the current shop has expensive fit out. In order to compensate for any disadvantages, tenants have various rights under their lease and the Retail Leases Act.

Landlords need to be aware that:

  • The tenant has the right to terminate the lease within one month of the relocation notice being given;
  • However, if the tenant doesn't give notice, then the tenant is taken to have automatically agreed to the relocation;
  • Landlords must pay the tenant reasonable costs for relocation including:
    • The costs incurred by the tenant for dismantling fittings, equipment or services;
    • Costs incurred by the tenant for replacing, re-installing, or modifying fittings, equipment or services to the same standard that was existing immediately before the relocation; and,
    • Legal costs incurred.

Demolition

What is demolition?

What happens if the landlord wants to demolish the premises as opposed to just relocate a tenant? They can terminate the Lease on grounds of demolition!

Demolition clauses can be used when a premises needs to be substantially repaired, renovated or reconstructed which can't be carried out practicably without the premises being vacant.

What requirements must be met?

The landlord must:

  • Provide the tenant with reasonable details of the demolition that is to take place; and,
  • Give a minimum of six months' notice of the demolition. However, if the original term of the lease is for 12 months or less, then three months' notice must be provided instead.

Rights that tenants have

  • The tenant has the right to terminate the lease when notified of the demolition by giving seven days' notice before termination;
  • The landlord is liable to pay the tenant's compensation for the fit out of the retail shop if the franchisee was required under the lease to fit out the premises;
  • If demolition of the building isn't carried out within a reasonable practicable time after the termination date, then the landlord is liable to pay the tenant's reasonable compensation for damage suffered by the tenant as a consequence of the early termination of the lease. However, this won't apply if the landlord can establish that at the time the notice of termination was given, there was a genuine proposal to demolish the premises within that time.

Conclusion

The current climate of redevelopment, coupled with shopping centres conducting renovations, refurbishments and extensions, can create some uncertainty for franchisees who lease premises.

As a result, it's important that franchisees understand the implications of demolition and relocation, along with their rights to compensation and termination if they are faced with either.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.