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Many retail leases include a demolition clause. This clause allows the landlord can demolish your premises (including leased premises) to carry out:

  • substantial repairs;
  • renovation; or
  • reconstruction.

If your landlord wants to exercise these demolition rights, they must comply with the retail leasing legislation, even if these requirements are not in the retail lease. These requirements protect you, as the tenant, and include your right to:

  • receive a genuine proposal of demolition;
  • receive notice that the landlord is terminating the lease;
  • terminate the lease early; and
  • compensation.

In this article, we explain these requirements and rights in more detail, including the differences between each state and territory.

Genuine Proposal

If your landlord proposes to terminate a lease for demolition, they must provide you with a “genuine proposal”. The proposal must contain enough detail about the demolition to show that the premises will be demolished within a reasonable time after the lease is terminated.

To show that their proposal is genuine, the landlord may choose to include a copy of:

  • the contract with their demolition company;
  • quotes;
  • plans and specifications;
  • building permits; or
  • marketing material.

When considering the proposal, the only question you should consider is whether the landlord will genuinely demolish the building. It doesn’t matter whether you think the demolition is unreasonable or inappropriate.

Vacant Possession

In New South Wales (NSW) and Victoria, the landlord may only terminate the lease if the proposed demolition can only practicably occur if you vacate the premises.

The requirement of vacant possession means that you need to stop operating your business and vacate the premises so that the building work can take place. Further, the use of the word “practicably” means that the landlord must also explain their practical concerns of carrying out the building work, such as:

  • time;
  • expense; and
  • inconvenience to you.

For example, a landlord in a NSW case was successful by explaining that, while it would have been possible to complete his works without vacant possession, this would have cost more money (40-70% extra) and twice the time.

Notice

The landlord must also provide you with written notice that they will terminate the lease within the timeframe required by the retail leasing legislation.

The usual timeframe for providing this termination notice is at least six months before the proposed termination date. However, if the lease is for a term of 12 months or less in NSW, the Northern Territory or South Australia, it is reduced to three months.

Like any other notice which the landlord provides to you throughout the course of the lease, the landlord must also deliver the termination notice in accordance with notice clauses in the lease. For example, this may mean that the landlord must deliver the notice:

  • in person;
  • by post to your business address; or
  • by email.

Termination

Most tenants have the right to terminate their lease early after receiving a termination notice from the landlord. To exercise this early termination right, you need to provide notice within the timeframe required by the retail leasing legislation.

This timeframe is usually six months before the proposed termination date. However, if the lease is for a term of 12 months or less in NSW, the Northern Territory or South Australia, it is reduced to three months. Once you provide this notice, the early termination will usually come into effect after seven days (in NSW, the Northern Territory, South Australia and Victoria only). However, if you do not provide this notice, the lease automatically ends on the termination date the landlord proposes.

Compensation

Most tenants are not entitled to any compensation. This is because the landlord has terminated the lease to demolish the premises and the premises are consequently demolished. However, there is an exception to this rule for tenants who had to fit out the premises. In this situation, they are therefore entitled to be repaid their fitout costs (in NSW, Queensland and Victoria only).

However, say the landlord terminates the lease and does not demolish the premises at all or does not demolish them within a reasonable time after the termination date. In these circumstances, the landlord will usually have to pay the tenant compensation for their loss. Again, there is an exception to this rule – if a landlord can establish that there was a genuine proposal to demolish the premises at the time of providing the termination notice to the tenant, they will not have to pay compensation.

Key Takeaways

It is common for retail leases to include a demolition clause (unless you have negotiated otherwise). Therefore, it is important for retail tenants to understand their rights under the retail leasing legislation in their state or territory.

Unfortunately, these legal protections may not be enough to cover your financial losses if you have to relocate your business. For this reason, we recommend that an experienced leasing lawyer reviews and negotiates your lease before you sign. If you require assistance with reviewing a retail lease or if your landlord has notified you of their intention to demolish your premises, get in touch with LegalVision’s leasing lawyers on 1300 544 755 or fill out the form on this page.

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