Tenant obtains injunction, preventing development

A decision of the Victorian Civil and Administrative Tribunal (VCAT) provides a useful reminder for landlords of their obligations when undertaking development works (under s 56 of the Retail Leases Act 2003 (RLA) and similar provisions in other states) and the importance of carefully drafted demolition notices.

In the case of Zen Holistic Health Group Pty Ltd v Bacchus Marsh Centre Pty Ltd, VCAT found that a demolition notice served by a landlord to terminate a tenant's lease did not provide evidence that the development works could not be undertaken without vacant possession of the leased premises.

In good news for landlords, VCAT found that a landlord can use a demolition notice to terminate a tenant’s lease where the sole reason for the development works is to provide commercial advantage to the landlord ─ such as dividing a tenancy into two smaller tenancies, as was being done in this case.

However, while VCAT did find that the commercial motivation for the development works is irrelevant, those works still have to meet the requirements of the RLA (which are often included in the lease) that the works are either "a substantial repair, renovation or reconstruction of the building".¹

As the landlord's planned works to divide the premises in half failed to satisfy the above requirements in this case, the Tribunal granted an injunction to prevent the landlord from undertaking the development.

Summary of facts

This case involved retail premises at Bacchus Marsh Village Shopping Centre in Victoria.

The landlord served a demolition notice, seeking to terminate the tenant's lease. The notice stated the landlord's intention to commence a redevelopment of the shopping centre (including the premises) which would include the subdivision of the premises into two separate leaseholds.

The tenant challenged the validity of the notice, submitting:

• the redevelopment of the premises into separate leaseholds did not fall within the meaning of demolition in either the relevant lease clause or s 56(7) of the RLA, and by extension, could not be a genuine proposal to demolish the premises; and
• there was an implied term of good faith in the lease. The landlord's underlying motivation to terminate the lease was to attract another tenant with higher rental, and was thus not in good faith.

The decision

The central question for VCAT was whether the proposed works constituted "demolition" within its meaning in the RLA (and the relevant clause). Under s 56(7), demolition includes any "substantial repair, renovation or reconstruction of the building that cannot practicably be carried out without vacant possession of the premises".²

VCAT found that the landlord's proposed redevelopment was outside the scope of the definition of "demolition". Redevelopment, including subdividing a premises, encompasses "bringing something to a more advanced or developed state",³ whereas substantial repair, renovation, or reconstruction is premised on the building requiring work because of disrepair, dilapidation or to reinstate it to its original form.⁴

After consideration of relevant case law,⁵ VCAT considered the question of whether the proposed works could be practicably carried out without vacant possession of the premises to be a question of fact. VCAT found the notice in question failed to provide any evidence that the proposed works could not be carried out without vacant possession of the premises.

Further, VCAT found there was a "serious question to be tried" (which is the test for an injunction) as to whether the subdivision of a lease falls within the definition of demolition in s 56 of the RLA, and by extension whether the demolition notice disclosed a genuine proposal to demolish the premises.

Regarding the underlying motivations of the landlord, the Tribunal considered the following case law.

• In Blacker v Felpure Pty Ltd,⁶ which concerned the NSW equivalent of s 56, Bryson J accepted that an implied duty of good faith exists when exercising the contractual right to terminate a lease. However, this duty will not be breached when a landlord terminates the lease "with a view to its own advantage".⁷
• Similarly, in Skiwing Pty Ltd v Trust Co of Australia t/as Stockland Property Management,⁸ which concerned a relocation notice, the NSW Supreme Court of Appeal held a "refurbishment redevelopment or extension" did not lose its character as a genuine proposal because of the commercial motivations of the landlord.⁹

Accordingly, the Tribunal accepted that a landlord's motivation behind a proposed building work is largely irrelevant.¹⁰

An interlocutory injunction was imposed by VCAT to restrain the landlord from entering into possession or interfering with the tenant's quiet enjoyment of the premises.

Key takeaways

• Landlords should ensure demolition notices include sufficient details of the proposed demolition to indicate a genuine proposal, as well as evidence that the works cannot be practicably undertaken without vacant possession of the premises to ensure compliance with the RLA's definition of "demolition".
• The decision confirms that a landlord's motivation is irrelevant when determining whether a genuine proposal to demolish exists.

¹ Retail Leases Act 2003 (Vic) s 56(7).

² Retail Leases Act 2003 (Vic) s 56(7).

³ Zen Holistic Health Group Pty Ltd v Bacchus Marsh Centre Pty Ltd (Building and Property) [2022] VCAT 716 [31] (Zen Holistic).

⁴ Ibid [32].

⁵ Blacker v Felpure Pty Ltd (1999) NSWSC 958.

⁶ Ibid.

⁷ Ibid [32] (Bryson J).

⁸ [2006] NSWCA 276.

⁹ Ibid [22] (Spigelman CJ).

¹⁰ Zen Holistic (n 2) [24].

Photo by Mike Petrucci on Unsplash.