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Demolition notices… at the tenant’s cost

Retail shop leases in shopping centres and strip malls often include a demolition clause which allows the landlord to terminate the lease early if they decide to demolish the building in which the premises are located. As long as the landlord complies with the Retail Shop Leases Act (‘RSLA’) and gives at least 6 months’ notice of the demolition to the tenant, the landlord can terminate the lease and pay (limited) compensation for the fit out. Interestingly, this does not include the new fit out, loss of income or loss of their business, as discovered by the tenants in Laldy Pty Ltd v Archer & Ors [2016] QSC 257.

In this case the landlord gave notice to two of its retail tenants ending their leases and requiring them to vacate in order to carry out demolition works. The tenants sought compensation for loss of revenue for the unexpired portion of their leases. A dispute arose between the parties as to the amount of compensation the tenants were entitled to under the RSLA.

Each lease contained clauses compliant with the RSLA. The landlord proposed to terminate each lease on 18 November 2018 and offered compensation for the value of the tenants’ existing fit outs, acknowledging that the landlord was liable to do so under section 46K of the RSLA.

However, the tenants argued they were also entitled to compensation under section 43(1)(f) of the RSLA as there was still 2 years left to run on their leases. Central to the tenants’ argument was that the demolition works caused them to vacate the premises “before the end of the lease”, thereby triggering the application of section 43(1)(f).

The court acknowledged section 43 was implied into the leases, but its application was only enlivened in circumstances where a demolition causes the tenant to vacate before the end of the lease. Unfortunately for the tenants, the lease ended on 18 November 2018 and the demolition works were due to commence after this date.

The fact that demolition works were to occur after the tenant no longer (legally) occupied the premises demonstrated that it was not the demolition works that caused the tenant to vacate, but rather a valid termination of the lease.

The focus of section 43 is to compensate for acts which occur during the currency of the lease and which interfere with a tenant’s use and enjoyment of the premises. In this case the tenants failed to show that the demolition works, not merely the prospect of them, caused them to vacate the shop before the end of the lease.

By way of comparison, had the landlord commenced the demolition works before 18 November 2018, then this would have enlivened section 43 due to the disturbance.