While redevelopment of your premises can be a win for SME owners, it can also be disruptive, so it is important to be aware of what may happen when negotiating the terms of your new retail lease.
Is relocation worth it?
A relocation clause allows the lessor to move you to a different location in the centre, but consider that the new premises could be in a poor spot or may be an inappropriate size.
Even with a mandatory adjustment by the lessor of the rent to account for any difference in the commercial values of the existing and proposed new shop, it may not leave you in an equivalent position.
Any relocation provisions must not be inconsistent with section 34A of the Retail Leases Act 1994 (NSW)*. The lessor must provide you with a minimum of three months' written notice, and to be valid it must include details of:
- The proposed redevelopment that shows it is a genuine proposal that will be carried out within a reasonable time after relocation of your business, and that it cannot be carried out practicably without vacant possession of your shop;
- The premises you are to be relocated to.
Before signing, you may wish to negotiate a right to trade in the existing premises for a fixed amount of time and/or a right of first refusal for a prime position in any new development in connection with a proposed relocation.
If you agree to the relocation, the lessor must bear the relocation costs, including for dismantling, replacing and re-installing fittings and equipment, and any legal costs.
But beware that the relocation may result in an increase in rent if the new premises has higher commercial value. The lease must otherwise be on the same terms as the existing lease.
Depending on your individual circumstances, the best commercial decision may be to terminate the existing lease by giving written notice.
Demolition – managing the disruption
A lessor can terminate a lease for the purpose of demolishing the building in which your shop is located, if the lease permits such termination and the provision is consistent with section 35 of the Retail Leases Act 1994.
The lessor will have to provide a minimum of six months' notice (or three months if the term of the lease is 12 months or less) and sufficient details of the proposed demolition that show it will take place within a reasonable time after the lease is terminated.
If demolition is not carried out within a reasonably practicable time after the termination date, the lessor may be liable to pay you reasonable compensation for any damages and will also have to pay for the fit-out of the shop.
Demolition includes acts that are less destructive, such as substantial repair, renovation or reconstruction of the building. However, repair or renovation to only one or two shops in a large centre will not meet the threshold of substantial repair unless the premises itself constitutes the whole of the building.
To minimise disruption, you can opt to leave before the end of the six months by giving the lessor not less than seven days' written notice.
Protect your business
Be familiar with the terms of the lease and, if it contains a relocation or demolition clause, check that the provisions are consistent with sections 34A and 35 of the Retail Leases Act 1994.
The Retail Leases Act 1994 may provide some protection, but negotiate the scope of the provisions with the lessor before entering into any lease to minimise any potential loss.
*Note: This article refers to the NSW Retail Leases Act 1994. Tenants in other states and territories should familiarise themselves with their rights under the relevant legislation.
Jaye Smale (right) is a solicitor in the corporate and dispute resolution team, Audra Oliveira-Ben (centre) is a senior associate and Bob Miljevic (left) is a partner in the property and development team at Colin Biggers & Paisley.