Update On Early Termination Clauses In Retail Leases

Over the last few months, the State Administrative Tribunal (SAT) has handed down a series of decisions that have clearly indicated how the SAT is going to deal with applications by landlords for approval of provisions in retail leases allowing the landlord to terminate the lease during the first 5 years of the lease.

The Synicast Case

On 26 June 2023 the SAT handed down its decision in Synicast Pty Ltd and Showroom X Pty Ltd (2023) WASAT 47 (Synicast Case).

The Synicast Case involved an application by the landlord for the inclusion in a retail lease of a clause allowing the landlord to terminate the lease within the first 5 years of the term in order to redevelop.

The key findings of that case are:

• In order for the SAT to approve an early termination clause, special circumstances must exist warranting that approval.
• The special circumstances said to justify approval of the early termination clause must:
  • ‘exist’ at the time of the application to the SAT or there must be an ‘objective intention’ that the special circumstances will arise during the term of the lease; and
  • be ‘real or actual’ or ‘a part of objective reality’, or they must ‘have been in a specified place or manner or under specific conditions.'

Subsequent Decisions

Following the decision in the Synicast Case, in July 2023 the SAT handed down 3 decisions concerning early termination clauses:

• Bieson Pty Ltd and Fix N Shop Pty Ltd [2023] WASAT 50.
• Far East Harbour Town Pty Ltd and Phone Xperts Pty Ltd [2023] WASAT 51.
• GPT Re Limited and Lam [2023] WASAT 52.

These decisions dealt with early termination clauses concerning:

• demolition;
• redevelopment;
• damage and destruction; and
• land resumption by a competent authority.

In each case, approval was not granted for these early termination clauses on the grounds that special circumstances did not exist at the time the application was made and, in each case, the SAT member cited the Synicast Case.

These decisions clearly show that early termination clauses:

• for a potential demolition or redevelopment will be rejected unless there is an existing proposal for demolition (noting that the landlord always has the option of using the prescribed redevelopment and relocation clause without the need for SAT approval);
• in respect of damage and destruction, will be rejected unless the damage or destruction has occurred; and
• in respect of a land resumption, will be rejected unless the actual resumption has actually been planned.

Lavan Comments

Demolition & Redevelopment

The redevelopment and relocation clause prescribed in the Retail Shops Act for the first 5 years of the term should be used by landlords, except where there are genuine plans to redevelop.  Otherwise, it will be very difficult to obtain SAT approval for a clause which is not in the prescribed form.

After the first 5 years have elapsed the landlord is free to include termination rights for demolition and redevelopment.  Provided these clauses do not reference relocation, there is no need meet the requirements of section 14A(2) of the Retail Shops Act and the landlord is not required to compensate the tenant.

Damage & Destruction and Resumption

Even prior to these decisions it was difficult to obtain approval for early termination clauses on the basis of damage and destruction.  The decisions were not always consistent and offered little guidance on what would be approved.  For this reason, we have for some time been advising our clients to remove the termination right from their damage and destruction clauses so that they do not require SAT approval.

In our view, the parties will invariably reach a commercial outcome if the premises are destroyed or damaged.  In cases of total or significant damage, the doctrine of frustration will apply.