Retail lease round-up: repossession, demolition, and execution

No matter how mature the legal framework may be, there are always some strange wrinkles in the law which can catch out experienced players. Over the last few months, the NSW Civil and Administrative Tribunal and Supreme Court have dealt with some of those wrinkles in the retail lease relationship, focusing on the amendment and termination of retail leases.

Repossession

Charlie Bridge Street Pty Limited leased café premises using the NSW Law Society's Standard Form Commercial Lease. Under clause 12 of the lease, the lessor can repossess the premises if:

• the lessee has not complied with any term of the lease and the lessor has given at least 14 days' written notice of the lessor's intention to end the lease (clause 12.2.4); and
• the rent is overdue for 14 days (clause 12.2.2).

The lessee defaulted on payment of the rent, and the lessor informed the lessee that it was in breach of the lease. Four days later, the lessor terminated and repossessed the premises. The lessee sought damages for wrongful termination because the lessor did not provide 14 days' notice before the termination.

Section 129(1) of the Conveyancing Act 1919 (NSW) requires a lessor to give notice to the lessee prior to termination, but under section 129(8) the lessor does not have to give notice if the default is non-payment of rent.

Section 129(10) provides that the provisions of the Act cannot be excluded and clause 14.3 of the lease stated that the lease was subject to legislation that could not be excluded.

The lessor succeeded both at first instance and on appeal. The Tribunal said that the parties were free to agree how the default was dealt with between themselves under the lease, and clause 12.2.2 of the lease is not affected by section 129 of the Act. Each of the subclauses of clause 12.2 stands alone so a lessor can enter and take possession of the property if rent is 14 days' overdue without further notice to the lessee (Charlie Bridge Street Pty Ltd v Petrazzuolo; Petrazzuolo v Charlie Bridge Street Pty Ltd [2019] NSWCATCD 1; Charlie Bridge Street Pty Ltd v Petrazzuolo [2019] NSWCATAP 184).

What are the lessons from this case for lessors repossessing premises?

Terminating and repossessing premises is a serious step and must be done cautiously, taking into consideration the applicable law and the terms of the lease.

If you have clauses similar to clause 12.2.4 in your lease they are potentially inoperable. Consider drawing this to the attention of your lessee to prompt them to address arrears of rent and to avoid future legal proceedings.

Demolition notices

A lessor purported to terminate a retail lease by issuing the lessee with a demolition notice pursuant to the lease and section 35 of the Retail Leases Act 1994.

The lessee argued that the demolition notice was invalid because it did not indicate "a genuine proposal for demolition within a reasonably practicable time after the lease is to be terminated" as required by section 35, and the lessor's motivation for terminating the lease was to lease the area to a more commercially advantageous client.

At first instance, the Tribunal decided that the demolition notice was invalid because there is an implied term in a retail lease that the lessor will exercise its contractual right to terminate on the grounds of proposed demolition in good faith; whether a lessor has entered into an agreement with a "better" tenant is a relevant factor to be taken into consideration in deciding whether a notice is a "genuine proposal".

The Appeal Panel disagreed. It determined that the notice was valid: as motivation of a lessor is irrelevant in determining whether the lessor's demolition plan was a genuine proposal, it is not in bad faith or contrary to section 35 for the demolition to advance the commercial interests of the lessor. The notice must simply contain such details as are sufficient to indicate that it is a genuine proposal (Wynne Avenue Property Pty Ltd v MJHQ Pty Ltd [2019] NSWCATAP 41).

What does this mean for lessors wanting to demolish?

Demolition notices must set out the lessor's desire to demolish with reasonable detail to evidence that the desire is genuine.

Demolition notices can be issued to advance a lessor's commercial interests provided the desire to demolish is genuine and is set out in sufficient detail.

Reasonable/sufficient detail does not mean a demolition notice must contain "each and every detail of each and every matter" of a demolition proposal.

Subleases (deeds)

A sublessee, Realm, executed and delivered the documents to the sub-lessor Aurora; it then asked Aurora not to execute the sublease and instead hold it in escrow^[1]. However, Aurora did sign the sublease. Realm commenced proceedings for a declaration that it was not bound by the executed sublease.

The court decided that Realm was bound by the sublease, because the sublease contained a substantive deed provision that revealed the parties intended the sublease to operate as a deed. The sublease had been executed correctly as a deed and delivery of the sublease occurred when Realm provided executed copies of the sublease to Aurora. Once this had occurred Realm could not recall the deed of sublease (Realm Resources Pty Ltd v Aurora Place Investments Pty Limited [2019] NSWSC 379).

What should you do when signing subleases and deeds?

Be careful when handing over signed documents and make it clear to the other party whether you intend to be bound or not with clear words in the deed.

Exercise caution when executing deeds and check they are signed correctly, witnessed (where necessary) and delivered.

Note: For comprehensive information on retail leasing nationally, refer to our Retail Leases Comparative Analysis.

^[1] To hold in escrow means to hold on trust until conditions are fulfilled.^{Back to article}

Related Insights

• Retail Leases Comparative Analysis