A recent VCAT decision1 provides helpful guidance for landlords, tenants and developers about the ability of landlords to rely on demolition clauses to terminate retail leases.
What is a 'demolition clause'?
A demolition clause is a clause permitting a landlord to terminate a lease prior to the expiry its term if the landlord decides to demolish, or substantially renovate, the leased premises. Such clauses are, in our experience, relatively common in well-drafted leases.
Demolition clauses in retail leases must be read subject to section 56 of the Retail Leases Act 2003 (the Act), which provides:
- The landlord cannot terminate the lease [pursuant to a demolition clause] unless the landlord has:
- provided the tenant with details of the proposed demolition that are sufficient to indicate a genuine proposal to demolish the buildingwithin a reasonably practicable after the lease is to be terminated; and
- given the tenant at least 6 months' written notice of the termination date.
'Demolition' is defined in sub-section 56(7) of the Act as including "any substantial repair, renovation or reconstruction of the building that cannot practicably be carried out without vacant possession of the premises."
Facts
The tenant leased a shop (the Premises), inside the Bacchus Marsh Village Shopping Centre from the landlord. The tenant operated a remedial massage clinic from the Premises.
The landlord served a demolition notice (the Notice) on the tenant, notifying it that the landlord intended to redevelop the centre, and that its redevelopment would involve the termination of the lease and the subdivision of the Premises into two new tenancies.
The tenant applied to the Tribunal for an interlocutory injunction preventing the landlord from acting on the Notice. The tenant relied on 3 grounds in support of its application:
- first, that the 'mere redevelopment' of the Premises into two separate new tenancies was not 'demolition' for the purposes of section 56 of the Act;
- second, that the demolition notice did not contain adequate details of the proposal; and
- third, that the landlord had breached an implied duty of good faith, because its underlying motive was to terminate the lease so that it could enter into two new leases at a higher total rental.
The Decision
Deputy President Reigler, in granting the tenant's application for an injunction, held that on the evidence before him, the works proposed to be undertaken by the landlord did not constitute 'demolition' within the meaning of section 56(7) of the Act.
The injunction preserves the status quo, and means that the landlord cannot terminate the lease unless and until the matter can be finally determined at trial.
Demolition?
The Tribunal considered the dictionary definition of the term 'demolition', 'renovate' and 'reconstruct' before ultimately deciding that:
"[31].. the concept of demolition including substantial repair renovation or reconstruction is different to the concept of redevelopment. Clearly, the concept of redevelopment encompasses bringing something to a more advanced or developed state, which could incorporate changing the Premises from a single leasehold into two separate leaseholds.
[32] . the concept of demolition including any substantial repair, renovation or reconstruction is premised on the subject building requiring building work, either because of disrepair or dilapidation , or the requirement to otherwise reinstate it to its original form. Subdividing leased premises, and the work incidental to that objective, appears to fall outside of what is contemplated by the concept of demolition."
Landlord's motivation and the duty of good faith?
In some good news for landlords and developers, the Tribunal found that a landlord's commercial objectives or motivations for seeking to terminate the lease were "largely irrelevant" and that what is relevant "is whether there is a genuine proposal to demolish".
In support of this proposition Deputy President Riegler relied on authority from the New South Wales Supreme Court in the case of Blacker v Felpure Pty Ltd2where it was held:
"[61] It is not [in] my view open to contention by the [tenant] whether the [landlord's] decision to demolish, repair, renovate or reconstruct the building is reasonable or appropriate; it is sufficient if it is a genuine proposal. Nor in my opinion is it open to debate whether the [landlord] could in some way modify the [landlord's] proposal so as to continue to accommodate the lessee after the premises have been demolished, repaired, renovated or reconstructed. The opportunity to break a lease, retake possession and take advantage of the demolition clause is a contractual opportunity made available to the [landlord] by the terms of the lease itself, including the provisions notionally incorporated by [the NSW equivalent of s 56 of the Act], it is not injurious to the [landlord's] position whether the [landlord] has decided to take that advantage, and it is not relevant that the [landlord] has in view occupying the premises itself, or selling them after reconstruction, or leasing them again.
Key takeaways
1. Landlords should ensure a demolition clause is included in all leases. The ability to terminate a lease in accordance with a demolition clause is valuable, particularly if the premises has development potential.
2. When a decision is made to terminate a lease in reliance on a demolition clause, landlords should ensure tenants are provided with a carefully drafted demolition notice that provides sufficient details of the proposed works, to show that the proposal:
- is 'genuine' and satisfies the definition of 'demolition' under s 56(7) of the Act; and
- cannot be carried out without vacant possession of the premises.
3. When considering acquiring a development site, developers should be alive to the prospect of recovering vacant possession in reliance upon a demolition clause without having to wait for a lease to run its term.
4. Tenants should be aware of and seek appropriate advice in relation to their rights under s 56 of the Act when a landlord purports to serve a demolition notice, including their rights to:
- six months' notice of the purported termination;
- terminate the lease with 7 days' notice following service of a demolition notice; and
- compensation for their fit out (to the extent it was not provided by the landlord) under section 56(4)(b) of the Act;
- compensation for damage suffered as a result of the termination of the lease if the landlord does not in fact conduct the works the subject of the demolition notice under s 56(4)(a) of the Act;
- seek an injunction to prevent the landlord from terminating the lease where the landlord has not complied with the requirements of the clause, or section 56 of the Act; and/or
- negotiate with their landlord to attain a mutually acceptable outcome (which may, for example, include a payment made by the landlord to terminate the lease).
Footnotes
2 [1999] NSWSC 958, [61]; cited with approval in Skiwing Pty Ltd v Trust Co of Australia (trading as Stockland Property Management) [2006] NSWCA 276.
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.
