One of the most if not the most controversial terms in a commercial lease is the demolition clause. Over the years or so I have lost many prospective tenants when the landlord has insisted on retaining this condition. The question is how to deal with a demolition clause?
The very mention of the words “how to deal with a demolition clause” brings upon images of the landlord demolishing the building at any time. This is is not true in all cases.
Demolition & Relocation
Demolition and relocation clauses are relatively standard in retail shopping centres. As such most retail tenants merely accept them. It is a matter of weighing at the advantage and risk of getting into a lease in that shopping centre. However, demolition causes are less common in the majority of commercial contracts.
Why do some landlords insist on making them a condition in the commercial leases? For a start, landlords have made a substantial investment in buying that property. Therefore, they are after the best possible return. Besides, they can see that they have an advantage. The lease permits them in certain defined cases the flexibility of terminating the leases when the opportunity arises.
Some of these opportunities could coincide with planned future zoning changes which would attract repair renovation or reconstruction. This can also mean an increase in available leasing space and a better quality higher-paying tenant. From an investment point of view, this makes sense.
On the other hand, the new tenant would need to be comfortable with the term of the lease being offered. Knowing that they could be terminated at any time with defined months written notice during their existing lease period. On th eother hand a certain amount of anxiety can be created.
The relocation notice
Therefore, the question is what the best way of dealing with this often controversial condition of a lease? Shopping centres usually have relocation clauses. Under this proposal, the contract permits the Landlord to give the tenant certain days written notice to relocate at a particular time after the lease has commenced.
Additionally, the tenants are given details of the proposal, the proposed demolition time and sufficient information of where they are allowed to relocate. Usually, a reasonable, practical time is negotiated within that time frame.
On the other hand, demolition clauses are less common in smaller commercial leases than shopping centres. Over the years I seen many property owners insist on having these causes when negotiating the terms of a new lease. Sometimes without much research. They are attracted to the option of terminating the contract when the opportunity arises to redevelop or to sell to a developer with vacant possession.
Also, property owners have had to endure below market rents waiting for the zoning to change. Often many years. Resulting in many years of well below market rent. Consequently, risking getting a lower value on their property if they had to sell urgently due to partnership disputes, financial or medical reasons.
Demolition Clause opportunity
However, the tenant sees it from the other side. Most tenants may see it as a gamble and a risk. At the same time, rents can be below market value to attract tenants. They are thus creating an opportunity to develop their business and their brand in a better and more affordable location.
In addition, if they establish themselves there, they have a great chance of being offered the best position if and when the commercial property is redeveloped. Often with an excellent new lease.
How you see this depends on your individual situation. It is a bit of a gamble on both sides.
The Commercial Property Owners point of view
From the landlord’s side, the demolition clause gives them flexibility. On the other hand, it can be challenging to attract better quality tenants and higher rent. Therefore, Landlords have asked me on many occasions whether to insert this clause. The answer depends on the likelihood the property has a higher and best use possible in the near future. Look what is going on in the surrounding area. Is the demographics changing? Is there any newly planned zoning changes which could add value to your property?
Doing your homework and talking to the right my people when facing this dilemma can save you Time and money.
Like to discuss “how to deal with a demolition clause” further? Feel free to contact Con Tastzidis on 02 9882 2221 or email invest@www.cstproperties.com