Section 35 of the Retail Leases Act (NSW)
Wynne Avenue Property Pty Ltd v MJHQ Pty Ltd  NSWCATAP
This case is an appeal by the landlord of the case we wrote about last month.
In the initial case, the Tribunal found that the demolition notice was invalid because the landlord lacked a 'genuine proposal' to carry out the works. The Tribunal found that the landlord's motivation to terminate the lease was so it could grant a new lease to TK Maxx. The Tribunal found that the landlord was not acting in good faith because it had entered into an agreement with a better tenant.
The premises was in Burwood Plaza, in Sydney.
Demolition clauses have been thoroughly reviewed by Courts and Tribunals. The three main cases in NSW are Blackler v Felpure Pty Ltd  NSWSC 958, Eddy Azzi Australia Pty Limited v Citadin Pty Limited  NSWADT 79 and Skiwing Pty Ltd v Trust Company of Australia  NSWCA 276. To recap from our article last month:
- In Blackler v Felpure, the NSW Supreme Court found that the landlord had a right to end the lease if it had a genuine proposal to carry out works that required vacant possession of the premises, and that it was not possible to limit that right by considering the underlying purpose of the landlord exercising that right. The Court found that the landlord could use the demolition clause to its own advantage.
- In Eddie Azzi, the Tribunal found that the Court's comments in Blackler v Felpure applied to that particular case. The Tribunal thought that the lessor could not use a demolition clause for the sole purpose of replacing an existing tenant with a more commercially attractive tenant (even if there involved amalgamation of a number of premises). The Tribunal made a factual finding that the landlord did not have a genuine proposal.
- In Skiwing, it was raised that under Eddie Azzi, there could not be a genuine proposal if the termination was motivated by the lessor seeking to obtain a more commercially advantageous tenant. This was rejected by the NSW Court of Appeal – a refurbishment "does not lose the character of a 'genuine proposal' by reason of the fact that the commercial motivation of the lessor is to attract a tenant or a particular kind of tenant".
In the initial case, the Tribunal found that there was still room for the Tribunal to follow Eddie Azzi, rather than Skiwing, on the basis that the facts in Skiwing "did not involve a landlord entering into heads of agreement with a prospective new tenant prior to the proposed repair, renovation or demolition."
10 Principles of Demolition Notices in NSW
The Appeal Panel in the Tribunal found that Blackler v Felpure is the correct statement of the law, which was supported by Skiwing. Based on those cases, the Appeal Panel set out:
10 Principles of Demolition Notices in NSW:
- Section 35 of the Retail Leases Act creates circumstances which will interfere with, and impact upon the duration of a retail lease so as to bring it to a premature end.
- There is some protection of a lessee built into the provisions of section 35 (3) and (3A).
- It is a requirement of section 35 that there exist a genuine proposal to demolish the building or relevant part thereof within a reasonably practicable time after the lease is to be terminated.
- The notice must contain such details as are sufficient to indicate that there is a genuine proposal, and the effectiveness of the notice is to be determined upon whether such details sufficiently indicate that the underlying proposal was genuine. This is a matter which is to be distinguished from the actual basis of the underlying proposal.
- The use of the words "sufficient to indicate" means that the details provided are sufficient to "be a sign of" or "strongly suggest" that there is in existence such a proposal (per the Oxford Internet dictionary). It is not necessary that there be proven to be in existence an actual proposal.
- It is not necessary that the notice set out every detail of the proposed demolition, and it is sufficient if the details provided are indicative that a genuine proposal to demolish exists in the sense referred to above.
- The sufficiency of details is to be tested against whether the lessee is able to conclude that there is a basis for termination under section 35, by indicating a genuine proposal to demolish, or whether that is a matter which should be contested:
"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" (Blackler at )
- It is not necessary to specify a particular time when the demolition is to take place, only that the demolition is proposed to take place within a reasonably practicable time. To meet that requirement "the proposal must be sufficiently well-developed and mature to proceed within a reasonably practicable time. A proposal which was immature or only partly formed or to which the lessor was not committed could not comply."
- The motivation of the lessor is irrelevant (unless, arguably, it demonstrates that there is no genuine proposal to demolish). It matters not that the purpose of the demolition is to advance the commercial interests of the lessor, including releasing the premises.
- The time at which the genuineness of the proposal should be considered is the time when the notice under section 35 is issued.
The Appeal Panel of the Tribunal applied these principles and decided that the demolition notice in this case was valid.
Analysis of the facts
The Tribunal had originally made its finding that the landlord did not have a genuine proposal to undertake refurbishment works, in part because:
- a lack of evidence from the centre manager about the refurbishment program;
- a lack of evidence about whether a DA had been sought or obtained;
- insufficient clarity about the timing of the refurbishment;
- omissions in the demo notice about works in other parts of the centre;
- the building contract did not include a timeframe; and
- the building contract was conditional on the deal with TK Maxx proceeding.
While this evidence (and lack of it) caused the original Tribunal to decide that the landlord did not have a genuine proposal to undertake the refurbishment, the Appeal Panel found that these matters did not affect the validity of the demolition notice. Section 35 of the Retail Leases Act does not require the work to be completed within a particular timeframe for the notice to be valid, but only that there is a "genuine proposal for demolition within a reasonably practicable time after the lease is to be terminated". The lack of evidence and the omissions that swayed the original Tribunal were things that the Tribunal would like to have seen in order for it to find that there was a genuine proposal. The Appeal Panel found that the Tribunal should not have been looking for extra evidence, but rather assessed the case on what was contained in the demolition notice. The Appeal Panel found that the demolition notice provided material sufficient to indicate to the lessee that the lessor had a genuine proposal to undertake the refurbishment works.
One final note about the case: on appeal, the retailer argued that there is no caselaw and no accepted industry practice that permits the landlord to terminate a lease using a demolition notice so as to amalgamate 2 premises. Section 78 of the Retail Leases Act provides that in interpreting the Act, a Court or Tribunal should have regard to accepted industry practices. The retailer urged the Appeal Panel to seek information from other Tribunal members who were more experienced in the retail industry so that it could inform itself of industry practices. The Appeal Panel of the Tribunal pointed out that it is up to the party involved in litigation to bring the evidence that it required to support its case.
We would usually advise a landlord that a demolition notice should only be issued after the DA is lodged. Lodging a DA can assist in demonstrating that the landlord has a genuine proposal to undertake a refurbishment. There was no DA lodged in this case, and the Appeal Panel has found that the demolition notice was valid – however, while the landlord has now won the appeal and Appeal Panel has made orders for the tenant to vacate the premises on 15 March 2019 the demolition notice required vacant possession on 25 February 2018 and the landlord's deal with TL Max seems to have has fallen through.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.