Lessor’s purpose for demolishing leased building is irrelevant

Leases commonly permit a landlord to terminate a lease if the landlord intends to demolish the building located on the leased premises. Section 56 of the Retail Leases Act 2003 (Vic) implies terms into a retail premises lease that provides for the termination of lease on the grounds that the building is to be demolished. Section 56(2) of the Act says:

The landlord cannot terminate the lease  on that ground unless the landlord has—

(a)        provided the tenant with details of the proposed demolition that are sufficient to indicate a genuine proposal to demolish the building within a reasonably practicable time after the lease is to be terminated; and

(b)       given the tenant at least 6 months’ written notice of the termination date.

Tenants often claim that a proposal is not a “genuine proposal” because the landlord intends to demolish the building so that the new building constructed on the site can be used for the landlord’s own purpose or for the purpose of leasing to a new party. However, the claim is misconceived because the purpose for which a landlord wishes to “demolish” leased premises is irrelevant to the question of whether there is a “genuine proposal”.

Assuming that enough detail is provided in the notice of termination concerning the proposed demolition, the only question is whether there is a genuine proposal to demolish. The term “demolish” is widely defined in s.56(7). In Blackler v Felpure Pty Ltd (1999) 9 BPR 17,259 Bryson J said at [31] that the lessor “should have a genuine proposal to demolish the building within a reasonably practical time after the lease is to be terminated.” Blackler concerned s.35 of the Retail Leases Act 1994 (NSW) which contained a demolition clause in similar terms to s.56 of the Act. Bryson J identified the question for determination as whether the notice itself provided sufficient details to indicate a genuine proposal.

At [37] His Honour said:

The requirement to provide details is not merely a formal step imposed in the lessor’s path, but the details are to be provided so that the lessee can come to a conclusion about whether the termination will be effective, and whether the lessee should accept that it will be effective or dispute it. The sufficiency of details provided should be tested in relation to that purpose. The question is whether the details provided are sufficient to indicate a genuine proposal to demolish the building; if they are not the termination cannot take place and if they are it will be effective no matter what other details of the proposed demolition exist or could have been provided.

And at [61]:

It is not in my view open to contention by the lessee whether the lessor’s decision to demolish, repair, renovate or reconstruct the building is reasonable or appropriate; it is sufficient if there is a genuine proposal. Nor in my opinion is it open to debate whether the lessor could in some way modify the lessor’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 of take advantage of the demolition clause is a contractual opportunity made available to the lessor by the terms of the lease itself, ……, it is not injurious to the lessor’s position whether the lessor has decided to take advantage, and it is not relevant that the lessor has in view occupying the premises itself, or selling them after reconstruction, or leasing them again, even if the lease should be a business similar to the lessee’s. The demolition clause is a reality of the party’s relationship, and so is its potential operation to end the lease.

See also [62].

In Skiwing Pty Ltd v Trust Company of Australia [2006] NSWCA 276 the Court of Appeal held that a proposed “refurbishment redevelopment or extension” did not lose the character of a “genuine proposal” because the commercial motivation of the lessor was to attract a tenant or particular kind of tenant. See: Skiwing at [22] (Spigelman CJ (with whom Hodgson JA and Bryson JA agreed). Skiwing concerned a relocation notice given under s.34A of the Retail Leases Act 1994 (NSW) which provision was described at [22] as a “parallel formulation” to that considered by Bryson J in Blackler. The Court of Appeal at [22] said that Bryson J in Blackler was “correct”.

In Blackler Bryson J also accepted at [32] that there was an implied duty of good faith in the exercise of the contractual right to terminate the lease. However, the duty of good faith was not breached where the landlord had an intention to occupy the premises itself or lease them out to an identified person after the works had been carried out. His Honour said at [32]:

The defendant can exercise its power to terminate the lease with a view to its own advantage; it is for purposes of that kind that contractual entitlements generally exist.

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  1. #1 by Sam Hopper on February 18, 2015 - 5:55 pm

    Reblogged this on Sam Hopper Barrister and commented:
    Here is an interesting and useful blog post from Robert Hay about demolition clauses in retail leases.

    Lawyers advising tenants should alert them to a demolition clause in a retail premises lease. These are often overlooked or underestimated by tenants. In particular, provided that the proposed demolition is carried out within reasonable time, the tenant is only entitled to be compensated for the value of its fitout, and not for the value of its goodwill or other losses to the business caused by the demolition notice (see s 56(4)(b) of the RLA here: http://www5.austlii.edu.au/au/legis/vic/consol_act/rla2003135/s56.html).

  2. #3 by Robert Angyal SC on February 19, 2015 - 10:16 am

    Robert, You may be interested in the clash between the NSW Retail Leases Act and the Liquor Act which, according to the NSW Court of Appeal, has the result that the first statute brings a retail shop lease into existence and the second immediately strikes it down as illegal: See http://www.sixstjameshall.com.au/s/STATUTORY-WARFARE-2015-89-ALJ-11.pdf

    There may be a similar result in Victoria.

    The High Court will hear a special leave application on 13 March 2015: Gynch v Polish Club Ltd S266/2014.

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