Avoid the demolition notice trap: How to protect your redevelopment plans

The moment the ribbon is cut on a redeveloped shopping centre is always exciting, but it only comes after many steps. Beyond choosing the right water feature or the chairs for a food court, landlords must tread carefully in how they manage their existing tenants or risk falling afoul of the law.

Most retail leases have a demolition clause that allows a landlord to terminate the lease before the lease expires when they want to demolish, renovate or reconstruct the shopping centre. 

In most Australian jurisdictions, landlords need to provide at least six months’ written notice of termination to an affected tenant and demonstrate they have a genuine proposal to demolish. There are some minor variations on this time period from state to state. Landlords will also need to provide evidence that works cannot be practicably carried out without vacant possession of the shop. 

As redevelopment grows in the sector, it is worth looking at tribunal and court decisions of the past for important guidance on issuing or challenging demolition notices.

When ‘plans’ aren’t really plans: Genuine intent vs commercial motives

The case of Wynne Avenue Property Pty Ltd v MJHQ Pty Ltd [2019] NSWCATAP 41 demonstrates the importance of a landlord having a ’genuine proposal’ to demolish a premises when it issues a demolition notice. 

In this case, the landlord issued a demolition notice to a tenant in Sydney's Burwood Plaza, following unsuccessful attempts to terminate the lease. The landlord sought to demolish part of the shop occupied by the tenant to amalgamate it with adjoining shops and create a larger rental area. The tenant challenged the notice and brought the matter before the New South Wales Civil and Administrative Tribunal.

The Tribunal found that the notice was invalid because it did not contain details sufficient to indicate a ’genuine proposal’ for demolition. However, on appeal, the decision was overturned.

The Appeal Panel held that:

1. “there is no requirement to set out each and every detail of each and every matter which is encompassed within the demolition proposal”. All that is required is the provision in the notice of such details as are sufficient to indicate that it is a genuine proposal
2. section 35 of the Retail Leases Act 1994 (NSW) does not require the work to be completed within a particular timeframe. All that is required is that there be a genuine proposal for demolition “within a reasonably practicable time after the lease is to be terminated”.

In this case, as at the date of the demolition notice, the landlord had already entered into a binding head of agreement with a prospective tenant to occupy the enlarged premises. The tenant complained that the issue of the demolition notice was a ploy on the part of the landlord to gain vacant possession of the tenant’s shop, which it had traded in for 27 years. However, the Appeal Panel noted that:

1. there was no evidence that would detract from the conclusion that the tenant had been provided with details of the proposed demolition sufficient to indicate a genuine proposal for demolition within a reasonably practicable time after the lease is to be terminated
2. the landlord’s motivation is irrelevant (unless, arguably, it demonstrates that there is no genuine proposal to demolish). The landlord’s commercial interests did not invalidate the proposal since in the demolition notice, the landlord described a "sufficiently well-developed and mature proposal that it must be considered as indicative of a genuine proposal for demolition”.

Having acted for the landlord in this case, our view is that the Appeal Panel’s decision is one of the most comprehensive on demolition notices and serves as a useful guide for landlords, particularly in New South Wales.

When the words don’t match the intent

The case of Premprop Pty Limited v Mandalong Projects Pty Ltd [2011] NSWADT 274 demonstrates the importance of ensuring that leases are properly drafted to give a landlord a right to terminate a lease for demolition purposes.

In this case, the landlord purchased a shopping centre and the residential building next door as part of a plan to demolish the existing structures and construct a mixed-use retail and residential development on the two adjacent properties. 

After receiving development consent for the relevant works, the landlord issued a demolition notice. The tenant then sought an order that the demolition notice is invalid and of no effect.

The lease contained a clause giving the landlord a termination right if the landlord wished to ‘extend, alter or refurbish’ the shopping centre in a manner that affects a minimum of 500sqm of the centre or five adjacent premises. The word ‘demolish’ was not included in the clause. 

The core issue in this case was whether the words ‘extend, alter or refurbish’ has a wide enough meaning to include ‘demolish’.

The Tribunal found that the words ‘alter, extend or refurbish’ means that some part of the original structure is to remain – it is not broad enough to include ‘demolish’.

The Tribunal considered several interpretations of the clause, including whether a reasonable person, seeing the fully demolished remains of the shopping centre and adjacent residential building, would “look askance at being told ‘we are refurbishing it’”. The Tribunal was of the view that the response of the reasonable person would probably be “no, you destroyed it”.

Key lessons and best practices for landlords

The cases above offer important lessons for landlords seeking to terminate a lease under a demolition clause:

1. review the lease – before issuing a demolition notice, check the lease to ensure it contains a valid demolition clause that allows for termination. Ensure the terms are clear and be prepared to negotiate with the tenant
2. substantiate claims – landlords must be able to demonstrate that the proposed works, whether repair, renovation, reconstruction or demolition, are necessary and cannot reasonably be carried out while the tenant occupies the premises
3. provide sufficient evidence – although details of each and every detail of each and every matter is not required, a demolition notice should be supported by sufficient documentation to establish that a landlord has a ‘genuine proposal’ to carry out the demolition works, such as approved building plans, expert assessments, financial backing, and construction schedules, to justify the need for vacant possession
4. timing of works – there must be a genuine proposal for demolition within a reasonably practicable time after the lease is to be terminated.

The demolition process is an integral part of redeveloping a shopping centre and requires proper planning and document preparation to address and avoid any potential challenges from tenants.

This article was originally published in Shopping Centre News. If you have any questions about demolition notices, please contact us here. 

Disclaimer
The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Samantha Gou

Martin Deutsch

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