Australia: Invalid demolition notice for a commercial lease in NSW

MJHQ Pty Limited v Wynne Ave Pty Ltd [2018] NSWCATCD 61

One of the most controversial and expensive topics in retail leasing has come before the NSW Tribunal again – demolition notices. In this case, the Tribunal found that the landlord was using the demolition clause to terminate the lease so as to grant a lease to a new tenant.  This did not amount to a ‘genuine proposal’, as required by the Retail Legislation, and the Tribunal declared that the demolition notice was invalid.

Demolition Clauses

It is usual in shopping centres for leases to contain a clause to permit the landlord to terminate the lease if they have plans to demolish the building (or the part of it containing the leased premises). The Retail Legislation (in NSW, and most Australian States and Territories) provides that in order to activate such a right, the landlord must have a genuine proposal to undertake demolition works, repair works, renovation works or reconstruction works to the building (or part of the building) that cannot be carried out practicably without vacant possession of the premises.

This case is the latest one to ask: did the landlord have a ‘genuine proposal’ to carry out renovation works to the part of the centre containing the premises?

The landlord’s plan was to obtain vacant possession of shops 48, 52 and 53, remove internal walls and a mezzanine floor, reconfigure the common area on Level 1, install a new shopfront, renew or replace air conditioning and fire services and lease the larger space to a mini-major tenant. The landlord had been negotiating a new lease with TK Maxx for the refurbished space, and had entered into a Heads of Agreement (which TK Maxx later withdrew from due to the delay).

Do these works constitute a ‘genuine proposal’?

The Tribunal first had to decide whether the landlord’s proposal was to combine shops 48, 52 and 53 so as to lease that space to TK Maxx, or whether their proposal was to combine those shops to convert that space into a mini major premises – not necessarily TK Maxx – ie – a general upgrade of that part of the centre.

The facts were that the landlord began by investigating the building work required to combine shops 48, 52 and 53 so as to create a mini-major premises. The landlord had taken some steps to negotiate and engage builders to undertake those works. The landlord appeared to be firmly committed to carrying out this re-configuration and the associated refurbishment works. A period of time then passed. Approximately 6 months later the landlord entered into a Heads of Agreement with TK Maxx and issued the demolition notice to the sitting tenant.

The Tribunal decided that the motivation to terminate the lease was to grant a new lease to TK Maxx. The Tribunal considers that in these circumstances, the landlord was not acting in good faith, and as such, did not have a genuine proposal to undertake refurbishment works. Good faith can be understood as an obligation on each party to a contract to act so that the other party obtains the benefit of the contract. The Tribunal must consider that a landlord is not acting with good faith when it commences negotiating with another tenant on the basis that it can provide premises after issuing demolition notices to the sitting tenants.

The key issue for the Tribunal was that the landlord had entered into a Heads of Agreement with the new tenant. The Tribunal found that because the landlord had entered into an agreement with a ‘better’ tenant, the landlord lacked the good faith required to activate the demolition clause. If the landlord had not entered into an agreement with a ‘better’ tenant, but merely intended “to demolish and re-develop premises to attract ‘better’ tenants” the Tribunal may not have found a lack of good faith. [at 74]

The fact that the landlord waited until it had a signed Heads of Agreement with TK Maxx indicated to the Tribunal that the landlord’s action lacked the good faith requirement, and the Tribunal could not find that the landlord had a ‘genuine proposal’ to undertake refurbishment works.

Is this distinction supported by the previous case law?

Recent History of Demolition Clauses in Courts

The Tribunal considered the main cases about demolition and relocation notices, Blackler v Felpure Pty Ltd [1999] NSWSC 958, Eddy Azzi Australia Pty limited v Citadin Pty Limited [2001] NSWADT 79 and Skiwing Pty Ltd v Trust Company of Australia [2006] NSWCA 276.

In Blackler v Felpure, the lessee argued the lessor broke the ‘good faith’ requirement when the underlying purpose was to put another occupant into the premises. The NSW Supreme Court found that the landlord had a right to end the lease if it had a genuine proposal to carry out works that required vacant possession of the premises, and that it was not possible to limit that right by considering the underlying purpose of the landlord exercising that right. The Court found that the landlord could use the demolition clause to its own advantage.

In Eddy Azzi, the Tribunal found that the Court’s comments in Blackler v Felpure applied to that particular case. The Tribunal thought that the lessor could not use a demolition clause for the sole purpose of replacing an existing tenant with a more commercially attractive tenant (even if there involved amalgamation of a number of premises). The Tribunal made a factual finding that the landlord did not have a genuine proposal.

In Skiwing, it was raised that under Eddie Azzi, there could not be a genuine proposal if the termination was motivated by the lessor seeking to obtain a more commercially advantageous tenant. This was rejected by the NSW Court of Appeal – a refurbishment “does not lose the character of a ‘genuine proposal’ by reason of the fact that the commercial motivation of the lessor is to attract a tenant or a particular kind of tenant”.

There seems to be some tension between the Court’s approach and the Tribunal’s.

Lessons

The Skiwing series of cases spanned more than 4 years, from the NSW Administrative Decisions Tribunal, then appeals to the NSW Supreme Court, Court of Appeal and an application for special leave from the High Court of Australia. Will these two parties be as committed to continue this dispute for that long?

While we wait for the outcome of any appeals, it seems that the NSW Civil and Administrative Tribunal will impose a limit on the landlord’s right to terminate a lease – where the landlord’s motivation is not in ‘good faith’, the landlord cannot terminate using the demolition clause.

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.

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