Lessee’s Retail Lease Demolished: Demolition Clauses and Termination

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In Wynne Avenue Property Pty Ltd v MJHQ Pty Ltd [2019] NSWCATAP 41, Wynne Avenue Property (the Lessor) sought to terminate MJHQ Pty Ltd’s (the Lessee) using a demolition clause within their contractual agreement. At first instance, the Tribunal held that the notice for demolition was not a genuine proposal. The Appeals Panel overturned this decision. It held that whilst the Lessor had been unsuccessful in a previous attempt to terminate the lease, the motivation behind the demolition was not a relevant consideration in determining whether the Lessor’s demolition plan was a genuine proposal. The Appeals Panel held that notice for a genuine proposal did not need to indicate every detail of the demolition and that the Lessor’s notice was a sufficient; indicative of a genuine proposal to demolish the Lessee’s premises. Thus, the Lessor’s reliance on the demolition clause was upheld and the termination of the retail lease was valid.

Factual Background

MJHQ Pty Ltd (the Lessee) was the lessee of a retail premises within a shopping centre complex. On On 25 August 2017, Wynne Avenue Property (the Lessor) issued a notice to terminate the contract by using clause 33 of the Agreement.

Clause 33 permitted the Lessor to terminate the agreement and require the Lessee to vacate the premises if the Lessor sought to demolish, substantially repair, renovate or reconstruct the shopping centre complex which contained the Lessee’s premises. The clause required the Lessor to provide 30 days’ notice to the Lessee. The Lessor provided that it wished to demolish part of the Lessee’s shop premises as part of a plan to amalgamate it with two adjoining shops to establish a larger rental space. The notice did not contain any evidence of a finalised agreement with a builder to perform the proposed work, nor did it contain an indication as to how long the work would take. Of further relevance to the Lessee’s case was the fact that the Lessor had previously sought to terminate the Lessee’s tenancy on 30 June 2017 by unsuccessfully arguing that the tenancy was a tenancy at will. The Lessee sought an order declaring the notice of termination invalid.

Section 35 – Retail Leases Act

The Appeals Panel drew on section 35 of the Retail Leases Act which deals directly with demolition clauses. The section provides that for a valid termination on the grounds of a demolition, the lessor must provide the lessee with details of the demolition that indicate a genuine proposal for demolition that will occur within a reasonably practicable time following termination. It was therefore important for the Appeals Panel to consider what a notice must contain in order to be a genuine proposal.

Legal Principles

The Appeals Panel highlighted that it is not necessary for the notice to set out every detail of the proposed demolition. It will be sufficient if the details provided are indicative of a proposal that show a sign of or strongly suggest that there is in fact an existence of a proposal to demolish/renovate.

Importantly, the Appeals Panel noted that the motivations of the Lessor are irrelevant in determining whether a proposal is genuine. It may only be relevant where that motivation demonstrates that there is in fact no genuine proposal to demolish. It was emphasised that the fact a demolition advances the commercial interests of the Lessor or is motivated by a desire to release the premises is not relevant in considering whether the proposal to demolish is genuine. So long as the proposal is genuine and demolition will occur within a reasonably practicable time after the giving of the notice, the Lessor’s private motivations are immaterial.

Application

In applying these principles to the case at hand, the Appeals Panel found in favour of the Lessor. The Tribunal at first instance found that because there was no evidence of a tender, agreed builder or a proposed timeframe of the demolition work, it highlighted that there was no genuine proposal.

However, the Appeals Panel found that section 35 did not require work to be completed within a specific timeframe. All that is required is that the work is commenced and concluded within a reasonably practicable time after the termination of the lease. Furthermore, the Appeals Panel found that the fact the Lessor only had a preliminary agreement with a builder was justified given that this agreement was predicated upon the Lessor having entered into a tenancy agreement for the amalgamated premises with another proposed tenant.

Thus, the evidence of the proposal contained within the Lessor’s notice was considered genuine and hence the Lessor was permitted to terminate its lease agreement with the Lessee.

Lessons

1. A lessor may validly rely on a demolition clause to force a lessee to vacate a premises, even if the motivation behind organising for the demolition is purely to force a termination of the lease.

2. A notice of demolition does not need to contain every specific detail of the demolition and need not indicate a specific timeframe for completion. However, the evidence must provide enough information of the proposed work to demonstrate that the proposal is genuine and that the work will commence and be completed within a reasonably practicable time.