Demolition Clauses in Commercial Leases: Local Guide

If you own commercial premises, or you’re about to sign for some, this one clause deserves more attention than it usually gets.

The name sounds dramatic, and to a tenant picturing their building coming down, it can feel that way. But demolition clauses are among the most misunderstood parts of a commercial lease.

In retail shopping centres, they’re standard. In smaller leases — cafes, offices, warehouses — they’re less common, and that’s exactly where the risk sits.

What’s at stake

For a landlord, the clause creates flexibility. If zoning changes, a redevelopment opportunity appears, or a better-paying tenant comes along, they can act — often after holding the property for years at below-market rent, waiting for exactly that.

For a tenant it’s more complicated. The uncertainty bites when you’re building a brand, training staff and paying for fit-out. But the trade-off may be below-market rent, and if redevelopment proceeds you may get first refusal on a prime position in the new building.

Australian courts have upheld these clauses where the landlord has a genuine proposal and gives the required notice — often six months — even when the motive is commercial rather than structural. So what your lease actually says matters.

A recent example: the restaurant dilemma

Last week, I heard from someone considering leasing a small shopping centre space for a new restaurant. On offer: a 10-year lease — with a demolition clause that could be triggered after three years, on 12 months’ notice and $100,000 compensation.

Reasonable on the surface. But you’re realistically looking at a four-year lease, not ten — barely enough for most restaurants to recoup setup costs, let alone build equity.

When we dug in, the questions multiplied. What’s happening in the surrounding area? How does the rent compare to market? What will the fit-out cost? Is the owner a known redeveloper, or just keeping options open?

And here’s what most people miss: most restaurants are sold within three years. If a buyer sees one year left on the lease with a demolition clause over it, the business becomes almost impossible to sell at a sensible price.

The flip side

I’ve also seen these clauses work brilliantly. If you’re paying half the going rent and your fit-out is modest, four years can be very profitable — and the landlord may not exercise the clause for another five or ten. If the business is thriving, you’ll likely be first in line for a prime spot in the new centre, with relocation incentives if you negotiate well.

There are usually clues. A small centre owner offering these terms is probably keeping options open for a sale in a couple of years. A large centre? Anything can happen — I’d be cautious unless you’re an anchor tenant with real bargaining power.

Not all clauses are equal

Many landlords take the view that if in doubt, put it in. That can backfire. Conditions change and can turn in the tenant’s favour, leaving an aggressive clause to trigger a dispute a balanced one would have avoided.

Across hundreds of leases, the best clauses I’ve seen fit the situation — balancing the landlord’s need for flexibility against the tenant’s need for stability.

Three questions worth asking:

• How likely is redevelopment in the next few years?
• What compensation, relocation rights and notice periods are written in?
• Does your business plan tolerate that much uncertainty?

The bottom line

Whether you’re the landlord or the tenant, don’t accept a one-size-fits-all demolition clause. Get commercial and legal advice early, not at the last minute. A well-negotiated clause protects both sides and prevents costly disputes later.

I’ve written a fuller article on the CST Properties website: How to Deal with a Demolition Clause.