I've sat across the table from an owner who found out about his demolition clause during the sale of his business, not before it. The buyer's solicitor found it on page nine. The business had traded well for years; the offer was strong. By the end of the week it was worth a fraction of that number, because the buyer wasn't paying for goodwill the landlord could take away with six months' notice.
A demolition clause is one line in a lease. It's usually the most important line in it, and it's the one most owners have never read.
What a demolition clause is
A demolition clause (sometimes a redevelopment or relocation clause) gives the landlord the right to end the lease before the term expires if they genuinely intend to demolish, redevelop or substantially refurbish the building. The landlord has to give notice — the period is set in the lease — and after that, you're out.
They're standard in the major shopping centres, where most tenants simply accept them as part of the deal. They're less common in smaller independent retail and commercial buildings, which is exactly where they cause the most trouble, because nobody expects to find one.
It doesn't mean the building will be demolished. Most never are. What it means is that your lease term is not what the front page says it is. A "5 + 5" lease with a demolition clause on six months' notice is, for valuation purposes, a six-month lease.
Why that matters so much when you sell
A business isn't just what it earns. It's what it earns for how long. That's what a buyer is paying for, and what a bank is lending against.
If your lease can be terminated on six months' notice, a buyer sees a six-month business regardless of how many years of trading history you show them. A bank sees the same thing and lends accordingly, which means fewer buyers can finance the purchase at all. The clause doesn't reduce your goodwill by a bit. It caps it.
I've seen this single clause cut a business's value by more than the fit-out cost to build it. The owner spent years and a great deal of money establishing the premises, and the one document that decided what a buyer would pay for it was sitting in a drawer.
If you own the business and lease the premises, this is the first of the three lease questions I ask every owner: how long is left including options, is it in writing, and is there a demolition clause. I go through all three in the video below.
What NSW law does and doesn't protect
This is general information, not legal advice — get a solicitor to read your actual clause.
Retail leases.
If your premises are covered by the Retail Leases Act 1994 (NSW) — most shops, cafés, restaurants and premises in shopping centres — the Act puts limits around demolition clauses.
Broadly, the landlord must have a genuine proposal to demolish, must give a minimum notice period, and if they terminate and then don't carry out the demolition within a set time, you may be entitled to compensation. Your solicitor can tell you exactly how the Act applies to your lease.
Commercial (non-retail) leases.
Offices, warehouses, industrial premises and most other commercial leases are not covered by the Retail Leases Act. There is no statutory protection. The clause means exactly what it says, and nothing more. If it says three months' notice with no compensation, that's what you get.
Many owners assume the retail protections apply to them. They often don't.
Are demolition clauses good or bad?
It's the question I get asked most, and the honest answer is that it depends entirely on whether there's a plan behind it.
On paper, the landlord's logic looks sound. "I've got a tenant on a five-year lease, so I've got stability. And if I decide to do something with the building, I can have him out in six months." From an investment point of view, it sounds like the best of both.
In the real world it rarely works out that way. Business owners are far more switched on than they used to be. They know you can put them out in six months, and they price that in before they sign. The rent you can ask drops, and so does the quality of tenant willing to take the lease.
The knock-on effect is the one landlords don't see coming. Your existing tenant, when they eventually go to sell their business, finds that experienced buyers won't touch it at a proper price. So the business either doesn't sell, or it goes to a less experienced operator who's paying too much because they couldn't get in anywhere else. The tenant loses interest, the business runs down, and unless you've screened the incoming operator very carefully, you've inherited a weaker tenant than the one you started with — on a lease you can't easily improve.
I've watched landlords hold a demolition clause for a decade, collecting less rent the whole time, waiting for a rezoning that never came.
The landlord's side: plan the cut-off date instead
When I was managing and selling commercial property, the first thing I'd do with an owner was sit down and ask what they actually intended for the building. Is it a potential development site? Has it been rezoned, or is a rezoning on the cards? Do they want to refurbish in three years, or hold for fifteen?
If there's no realistic prospect of a higher and better use in the foreseeable future, don't insert the clause. You're paying for flexibility you'll never use, and the price is real: better tenants avoid you, the rent is discounted, and if you have to sell before any redevelopment eventuates — partnership dispute, health, finance — you're selling a property with a weak lease and a below-market rent, which is the worst combination a buyer can find. I've written separately about how the lease you give a tenant cuts your property's value.
If there is a genuine plan, a demolition clause is usually the wrong tool anyway. The better approach is to pick a cut-off date and organise every lease in the building to expire at or before it. Long leases where you can offer them — tenants want stability and will pay a proper market rent for it — and shorter terms or options structured so that everything falls due together. There's no point putting a demolition clause on one tenant's three-year lease if the tenant next door has five years left with no clause at all. You can't redevelop half a building.
Where you do have one or two tenants whose leases would block an early start, that's when a demolition clause earns its place — and that's when I'd negotiate a sliding compensation scale into it rather than a bare right to terminate. Something along the lines of:
$300,000 if the clause is exercised within 12 months
$150,000 if within two years
$50,000 if within three years
The tenant is protected if you move early, you're protected if you move late, and both sides have signed something they can live with. I was always reluctant to insert a demolition clause without a structure like this, because a clause that works for only one party tends not to work for either party.
Know what the site's highest and best use actually is before you decide to hold an option over it.
The tenant's side: what to negotiate
The day before you sign is the only day you get to negotiate this. After that, you're reading the lease, not writing it. If the landlord insists on a demolition clause, these are the things worth pushing on:
Notice period. Twelve months is far more survivable than three. It's the difference between an orderly relocation and a fire sale.
A genuine-proposal requirement. The landlord should have to show a development application or an approved plan, not just an intention.
Compensation for fit-out. If you've spent $300,000 fitting out the premises and the clause is exercised in year two, that money should come back to you in some form. A sliding scale like the one above is fair to both sides and easy to agree.
A first right on the redeveloped premises. If the site is rebuilt, you want the first offer of a lease in the new building.
A rent that reflects the risk. A lease with a demolition clause should be cheaper than one without. If it isn't, you're carrying the landlord's risk for free.
When a demolition clause works in the tenant's favour
Some tenants take these leases deliberately, and it can be a very good trade.
They buy the business below market because of the clause, and negotiate a rent well below what the space would otherwise command — I've seen it at half the market rate.
The gamble is that the redevelopment is further away than the landlord thinks. It usually is. Getting a development approval for a refurbishment or redevelopment isn't quick; two years is not unusual, and it can run longer. Then the building has to be made ready. All that time, the landlord isn't going to find another tenant on a month-to-month basis, so the existing one stays on, paying half rent and making a high weekly profit.
Run the numbers and a tenant on that arrangement can make the same profit in two years that they'd make in four on a normal market lease. And if they've been a good tenant, a sensible landlord will offer them first choice of space in the new building — sometimes with a contribution to the fit-out — because a proven operator is worth more than an unknown one. That's the genuine win-win these clauses can produce when both sides go in with their eyes open.
If you're selling a business and the lease has one
Don't wait for the buyer's solicitor to find it. Three things to do now, ideally years before you list:
Get the clause read properly. Not "confirmed it exists" — read. What triggers it, how much notice, what compensation, whether the Retail Leases Act applies.
Talk to the landlord before you're under pressure. If there's no real intention to redevelop, ask for the clause to be removed or for the notice period to be extended at the next renewal. Owners who negotiate early, before the landlord knows they're planning an exit, get better terms than owners who negotiate only because they have to.
Get everything in writing. A landlord's verbal assurance that "we'd never actually use it" is not something a buyer's solicitor will let them rely on.
Where to start
Whichever side of the lease you're on, the answer is the same: sit down with someone who knows commercial property, go through what you actually intend for the building or the business, work out the cut-off date, and structure the leases around it. I can't stress this enough — it's a planning conversation, and it's a far better one to have before the lease is signed than after.
The demolition clause is one of twelve questions in my free Sale-Readiness Check, alongside the rest of your lease, your books, how much the business depends on you, and what your property is actually worth. Two minutes, no email required to see your results.
Take the free Sale-Readiness Check →
If you'd rather talk it through, contact me for a confidential discussion. I'd rather talk to you five years early than five months late.
