Termination of Lease for Demolition – Is Good Faith Required?

Posted on April 23rd, 2019

Share on LinkedInTweet about this on TwitterEmail this to someoneShare on Google+Print this page

It is common for leases, particularly in shopping centres, to contain clauses allowing the landlord to terminate the lease if they have plans to demolish the building (or the part containing the leased premises). The Retail Leases Act 1994 (NSW) does however contain some statutory protection for tenants by requiring the landlord to have a genuine proposal to conduct the demolition within a reasonably practicable time before the lease can be terminated on this basis (section 35).

A recent decision of the NSW Civil and Administrative Tribunal’s Appeal Panel has considered whether a landlord could use a demolition clause to terminate a lease so that it could enter into a new lease with a more commercially advantageous tenant (Wynne Avenue Property Pty Ltd v MJHG Pty Ltd [2019]).    

The landlord owned Burwood Plaza and leased a shop to the tenant. The landlord intended to demolish, amalgamate and refurbish three adjoining shops (including the tenant’s shop) into a single tenancy to attract a major tenant. The landlord had undertaken steps to engage builders for the works and had been in negotiations with TK Maxx to lease the new space. The landlord subsequently entered into heads of agreement with TK Maxx and proceeded to issue a notice of termination to the tenant.

The tenant argued before the Tribunal that the notice of termination was invalid as the motive of the landlord in terminating the lease was to enter into a lease with a ‘better’ tenant. The tenant further argued that the landlord was not acting in good faith and therefore did not have a genuine proposal for the demolition works.

The Tribunal determined at first instance that as the landlord had entered into heads of agreement with TK Maxx prior to issuing the termination notice, this demonstrated that the motivation of the landlord was to enter into a new lease with a more commercially advantageous tenant and not merely to demolish and upgrade the premises. The Tribunal therefore held that the landlord did not act in good faith and did not have a genuine proposal to undertake demolition and refurbishment works and therefore the notice of termination was invalid. The landlord appealed this decision.

The Tribunal’s Appeal Panel overturned the original decision and held the notice of termination was in fact valid. The Appeal Panel noted it was bound by the judgment of Justice Bryson if the Supreme Court decision of Blackler v Felpure Pty Ltd [1999] in which it was determined that the motivation of the landlord is irrelevant in determining whether there is a genuine proposal. It was held in Blackler that it does not matter that the purpose of the demolition is to advance the commercial interests of the landlord, provided there is a genuine proposal as required by the legislation.

It is therefore important for a landlord seeking to rely on termination of a lease under a demolition clause to have a genuine proposal for the demolition works within a reasonably practicable time, although the motives, even if to advance its own commercial interests, are generally irrelevant.

Conversely, if a tenant receives a notice of termination on the grounds of demolition, they should ensure sufficient details are provided to indicate such a genuine proposal to demolish exists.

Michael McGrath is a Director at Mullane & Lindsay Solicitors and practices extensively in commercial, business and property transactions and adviceIf you require any assistance in this area please contact Michael McGrath to arrange a consultation or contact our Newcastle office.

Share on LinkedInTweet about this on TwitterEmail this to someoneShare on Google+Print this page