Demolition clauses in retail shop leases: when is there a genuine proposal to demolish? - Landlord & Tenant - Leases

Demolition clauses are commonly inserted in retail shop leases to allow a landlord to terminate a retail shop lease if the landlord proposes to demolish the premises. However, strict legislative requirements must be met before a termination notice to permit demolition is issued, including the requirement for a 'genuine proposal' to demolish.

Until recently, there was ambiguity around the notion of a 'genuine proposal'. Could a landlord could exercise its rights under a demolition clause to further its own commercial interests? Wynne Avenue Property Pty Ltd v MJHQ Pty Ltd¹ (Decision) provides some clarity.

In the Decision, it was held that a landlord's intention behind a proposed demolition is not relevant when determining whether a 'genuine proposal' exists – even if the purpose of the demolition is to advance the Landlord's own commercial interests.

Rather, a termination notice due to demolition will be a 'genuine proposal' if it contains sufficient information of the proposed demolition at the time the notice is issued.

In this article, we explore the New South Wales Civil and Administrative Tribunal's (Tribunal's) reasoning in the Decision, and the implications for landlords and tenants of retail shop leases across Australia.

Relevant legislation

Section 35 of the Retail Leases Act 1994 (NSW) (Act) sets out the requirements for the valid termination of a retail shop lease for the purposes of a demolition. Under section 35(1), a notice to terminate due to demolition will only be valid where:

the landlord has provided details of the proposed demolition sufficient to indicate a genuine proposal for demolition within a reasonably practicable time after proposed termination date;
the proposed demolition cannot be carried out practicably without vacant possession of the retail shop; and
notice of the termination was given by to the tenant at least six months prior to the proposed termination date.

Although each Australian State has its own legislation concerning retail shop leases, the requirements for demolition clauses are quite similar in each case. Relevantly for the purposes of this article, the applicable legislation in each State (except Western Australia, where there is no express provision dealing with the termination of a retail shop lease to allow a demolition) requires the landlord to provide details of a proposed demolition sufficient to indicate a 'genuine' proposal to demolish (among other requirements) before the termination of a retail lease can take effect.

Background to Decision

The Decision concerned the termination of a retail shop lease under a demolition clause by a shopping centre owner, Wynne Avenue Property Pty Ltd (Landlord) against a tenant in the shopping centre, MJHQ Pty Ltd (Tenant).

The purpose of the demolition was to amalgamate the leased premises with two other adjacent premises to form a larger tenancy. This would, in the Landlord's opinion, be attractive to potential 'anchor tenants'.

Before serving the demolition notice, the Landlord had entered an agreement with an anchor tenant for a lease of the amalgamated premises. The Tenant argued that this did not constitute a 'genuine proposal' to demolish the premises, and that therefore the demolition notice was invalid.

Criteria for a 'genuine proposal'

The central issue for the Tribunal was whether the Landlord's plan for the amalgamated premises constituted a 'genuine proposal' to demolish the leased premises within the meaning of section 35(1) of the Act.

After considering relevant case law,² the Tribunal set out the principles that apply when considering whether there is a 'genuine proposal'. They include:

A demolition notice must contain such details as are sufficient to indicate that there is a genuine proposal, although a demolition notice need not set out every detail of the proposed demolition.
The effectiveness of the notice is to be determined by whether the details sufficiently indicate that the underlying proposal is genuine. (This is to be distinguished from the actual basis of the underlying proposal.)
The words 'sufficient to indicate' mean that the details provided are sufficient to 'be a sign of' or 'strongly suggest' that such a proposal exists.
the sufficiency of the details is to be tested against whether the lessee is able to conclude that there is a basis for termination under section 35;
The motivation of the landlord is not relevant (unless, arguably, it demonstrates that there is no 'genuine proposal' to demolish).
The time at which the genuineness of the proposal should be considered is the time when the notice under section 35 is issued.

Based on these principles, the Tribunal found that, when considering whether there was a 'genuine proposal' to demolish, it did not matter if the purpose of the demolition was to advance the Landlord's interests of the Landlord.

The Tribunal considered whether the Landlord gave sufficient information to the Tenant to indicate a 'genuine proposal' to demolish, and noted that the Landlord had attached to the demolition notice:

the agreement with the contractor employed to carry out the demolition works, which contained architectural plans and specification of the works;
the signed heads of agreement with the proposed tenant who would lease the amalgamated premises;
the refurbishment program prepared by the Landlord's agent; and
a proposed commencement date for the works.

In the Tribunal's opinion, the provision of this information at the time the notice was given did sufficiently indicate a 'genuine proposal' on behalf of the Landlord to demolish the premises within the meaning of section 35(1). Accordingly, the Tribunal held that the demolition notice, and the Landlord's subsequent termination of the retail shop lease, were valid.

Key points

The Decision clarifies the information that a landlord must provide in order for a demolition notice to constitute a 'genuine proposal' to demolish within the meaning of section 35.

It is clear that a landlord's intention is not relevant when determining whether a 'genuine proposal' exists, even when the purpose of the demolition is to advance the Landlord's own commercial interests.

Landlords of retail shop leases should prepare demolition notices carefully, ensuring they provide sufficient information of the proposed demolition at the time the notice is issued. If not, they risk issuing an invalid notice.

Finally, while the decision was made under New South Wales legislation and case law, it may be used persuasively in other jurisdictions because the legislation regarding demolition clauses in retail shop leases is similar across the board.

Footnotes

¹ [2019] NSWCATAP 41.
² Hampton Court Pty Limited v Crooks [1957] HCA 28; Blackler v Felpure Pty Ltd [1999] NSWSC 958; Skiwing Pty Ltd v Trust Company of Australian (trading as Stockland Property Management) [2006] NSWCA 276; Helen Lazaros t/as Perfect Health v IOF Custodian Pty Ltd [2015] NSWCATAD 25.

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.