Leases, Demolition Clauses, and the fine print

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We have frequently posted about the importance of the “boring bits” hidden in leases. This has hit home recently with Mirvac’s decision to permanently close Toombul Shopping Centre.

Toombul Shopping Centre sits on a floodplain, and since opening in 1967 the car park and some low-lying parts of the site have flooded several times.

The February 2022 floods were the worst ever for the centre. Water poured into the mall, wrecking shops, and destroying stock, businesses, and livelihoods.

This was the last straw for the landlord. Mirvac made a business decision that the costs of repair, only to inevitably be flooded again in future, did not stack up. Mirvac invoked the demolition clause in all leases, and gave the tenants notice of termination of their leases. The tenants were thanked and offered support, but no compensation is payable.

Demolition clauses allow a lease to be terminated where the premises are destroyed or damaged to such an extent that it is not viable to repair them. The tenants can’t force Mirvac to reinstate the centre.

Where a landlord relocates a tenant to another shop in the centre, compensation is payable; but demolition clauses commonly do not provide for compensation. The reasoning behind this is that the damage and destruction has been suffered by both landlord and tenant, was unforeseen and an “Act of God”; whereas relocation is the landlord requiring the tenant to relocate.

Those tenants with flood insurance at least have the insurance money to console them; but many tenants did not have adequate insurance or flood cover and are devastated.

When we advise tenants about demolition clauses, the reaction is usually yes of course, fine, that’s never going to happen. However, this is no reason not to properly check the demolition clause and make sure that it is not too easy for the landlord to use. Landlords may have the opposite idea, but the point is being aware of what you are signing.

Business owners have a lot on their plate in satisfying customers, looking after employees, sourcing stock, marketing, budgeting, and working long hours. One relative safe harbour is the lease – pay the rent, landlord leaves you alone. Then something like this happens out of left field!

There is no point lying awake at night worrying about these unlikely events. This is a very rare event.

Business owners should just get advice about the lease before signing, be aware of the terms of the lease, get the best insurance they can, and be the best business they can be. FC Lawyers can help with legal advice every step of the way.   

Contact our team today to discuss your business and commercial leasing needs.

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