Australia: When a retail landlord can terminate a lease in order to demolish or renovate a retail shop

Last Updated: 20 May 2019
Article by Ash Rihak

On 15 February 2019, the Appeal Panel of the New South Wales and Civil and Administrative Tribunal (Tribunal) held in Wynne Avenue Property Pty Ltd v MJHQ Pty Ltd [2019] NSWCATAP 41 (the Wynne Avenue Case) that the landlord of a retail shop validly terminated the lease on the basis that the landlord intended to demolish the premises.

The Wynne Avenue Case was an appeal from the decision of Senior Member Sarginson on 23 October 2018, who held that the lease was invalidly terminated because the landlord's notice of termination did not satisfy section 35 of the Retail Leases Act 1994 (NSW) (the Act).

This article will set out the facts of the case, the arguments and decision at first instance, and why the Appeal Panel considered that the requirements of section 35 of the Act had been satisfied.

What happened in this case?

The landlord, Wynne Avenue Property Pty Ltd (Wynne), owned the Burwood Plaza shopping centre and leased one of the shops in that centre to the tenant, MJHQ Pty Ltd (MJHQ).

On 9 August 2017, at the conclusion of previous NCAT proceedings that arose because Wynne attempted to terminate the lease on one month's notice on the basis that it was a tenancy at will, the parties agreed by consent that the lease was a retail shop lease governed by the Act with a term of 5 years, which would expire on 5 March 2020.

The lease included clause 33 that stated that if Wynne wished to demolish, substantially repair, renovate or reconstruct the shopping centre or part of it containing the premises, Wynne could terminate the lease on 30 days' notice.

On 25 August 2017, Wynne gave a notice to MJHQ that stated that:

  1. the notice was given under clause 33 of the lease and section 35 of the Act;
  2. Wynne intended to demolish the premises and two adjacent shops in order to create one larger retail shop, which Wynne would then lease to a major tenant. Wynne had entered into a binding heads of agreement with a proposed major tenant;
  3. this was part of broader renovations designed to strengthen the western end of the centre;
  4. Wynne had entered into a contract with a builder called Upright Builders Pty Ltd and had appointed a named person as a private certifier authority;
  5. the demolition work for the premises would involve removal and readjustment of walls and shopfronts, adjustments to the ceiling, and changes to the services to the premises;
  6. the proposed work could not be practicably undertaken without vacant possession of the premises;
  7. the work would begin on 26 February 2018 and Wynne would need vacant possession on 25 February 2018;
  8. the lease would terminate on 25 February 2018, being six months after the date of the notice; and
  9. MJHQ had a statutory right to terminate the lease earlier than the six month notice period, if it wished to do so.

The notice also attached a refurbishment program prepared by Wynne's agent, Colliers, that was purportedly made in August 2017, a letter of acceptance from Upright Builders dated 3 April 2017, and architectural drawings of the refurbishment of the shopping centre.

As at 25 August 2017, Wynne had entered into a binding heads of agreement with TK Maxx for a lease of the amalgamated shop.

On 16 May 2018, Wynne gave evidence that TK Maxx had pulled out of the heads of agreement due to Wynne's delay, but that Wynne still intended to carry out the demolition and reconfiguration of the shops that included MJHQ's premises.

What are the relevant provisions of the Act?

Section 35 of the Act imposes requirements that the landlord of a retail shop must satisfy in order to exercise a right to terminate the lease on the basis that the premises are to be demolished, which include the contents of the notice, the minimum notice period, and the timeframe in which the demolition must occur.

Why did MJHQ argue that the notice was insufficient?

MJHQ argued that Wynne's notice did not satisfy section 35 of the Act because:

  1. the termination notice was merely a ploy by Wynne to obtain vacant possession;
  2. section 35 of the Act should be construed in a way that favours MJHQ as a retail tenant; and
  3. under section 78 of the Act, a court or tribunal is obliged to take into account accepted industry practice when interpreting the requirements of a section of the Act. MJHQ contended that it is an accepted industry practice that the landlord of a large shopping centre will offer compensation to a tenant for loss of opportunity and relocation expenses where a renovation only affects a limited number of shops, and that this requirement should be taken into account when considering section 35.

What was the decision at first instance?

At first instance, Senior Member Sarginson held that the notice was insufficient to satisfy section 35 for a number of reasons, including that:

  1. the notice did not provide sufficient details of the other renovations that were to be undertaken in other parts of the shopping centre;
  2. the notice did not indicate whether Wynne had applied for or obtained a development consent for the works; and
  3. the purpose of the demolition was to enter into a lease with TK Maxx, but the heads of agreement with TK Maxx had subsequently fallen through.

What was the Appeal Panel's decision?

The Appeal Panel first summarised the principles that apply when looking at section 35 of the Act which were stated by Justice Bryson in the decision of Blackler v Felpure Pty Ltd [1999] NSWSC 958, and then rejected both MJHQ's arguments and the decision at first instance for the following reasons:

  1. the onus is on the tenant to prove that a notice does not satisfy section 35 of the Act. MJHQ did not provide any evidence to prove that the termination notice was merely a ploy;
  2. the fact that section 35 is designed to protect retail tenants does not mean that it should be applied in a way that does not reflect the language used in that section;
  3. MJHQ did not provide any evidence of any accepted industry practice, and accordingly the Appeal Panel could only interpret section 35 based on its own terms and the principles from previous cases;
  4. section 35 does not require that a termination notice include every piece of information or documentation known to the landlord;
  5. the termination notice was given within the requirements of section 35 of the Act;
  6. a termination notice is assessed under section 35 at the date of the notice. Subsequent conduct or events, such as TK Maxx withdrawing from the heads of agreement, is irrelevant unless it shows that the notice did not indicate a genuine proposal to demolish the premises as at the date of that notice;
  7. Wynne's termination notice provided sufficient information to indicate a genuine proposal to demolish the premises within a reasonably practicable time, as at the date of that notice; and
  8. the proposed demolition could not have practicably occurred whilst MJHQ was still in possession of the premises.

Lessons from the Wynne Avenue Case

The Wynne Avenue Case is a reminder that although section 35 and other provisions of the Act are designed to protect retail tenants, this does not mean that the Act will prevent a retail landlord from acting in their own commercial interests, nor that the Tribunal or a Court will stretch the meaning of the Act to assist a retail tenant if the landlord has done everything right under the Act.

Both retail landlords and retail tenants should also take note of the general principles that apply when the Tribunal or a Court is assessing a termination notice against section 35 of the Act. Retail landlords should ensure that their notices are clearly worded and that all of the requirements under the Act are met before issuing such a notice to a tenant.

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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