Property Law Update – August 2009
This month’s Property Law Newsletter from the Property Law Division at Carroll & O’Dea Lawyers looks at the recent NSW Supreme Court decisions inSoftwash Castle Towers Pty Ltd v Queensland Investment Corporation. (Softwash v QIC  NSWSC 490 & Softwash v QIC(No 2)  NSWSC 652).
The decisions look at on what should be included in “compensation for the fitout” which a lessor is required to pay to a lessee when the lessor terminates a lease under a demolition clause.
The Court decided a lessor must compensate the lessee for:
1) the value of its fixtures including those fixtures which could be removed and resold
2) any construction and installation costs and
3) construction management costs which related directly to the fitting out.
The Court decided that a lessor does not have to compensate a lessee for:
1) any items not installed (eg furniture and electrical equipment),
2) lease negotiation costs including legal fees, borrowing costs, stamp duty, legal fees associated with lessee incorporation, accountant fees, and bank guarantee fees.
Demolition: “Compensation for the fitout”
The lessor exercised a right to terminate the lease in Castle Towers by notice pursuant to a demolition clause three years into the term of the lease.
The lease was for a five year term with two five year options.
The case did not concern retail premises, however clause 30.4(e) of the lease was the same as section 35(3A) of the Retail Leases Act (NSW) 1994 (set out below) – so the lessons are applicable for retail leases.
Section 35(3A) of the Retail Leases Act (NSW) 1994 reads:
“If a retail shop lease is terminated on such a ground [on the grounds of a proposed demolition], the lessor is liable to pay the lessee compensation for the fitout of the retail shop if the lessee is required under the lease to fit out the retail shop, whether or not the demolition of the building is carried out.”
The court concluded that “compensation for the fitout” must mean “compensation for the loss of the fitout”. Hence, if an item was part of the fitout, the amount to be compensated was found to be the “value attributed to that item in [the lessee’s] … financial and accounting and taxation records” less the amount the lessee obtains by selling the item (if the item can be removed and sold). (See in Softwash v QIC  NSWSC 490 at ).
Further, the court found that many items of furniture and electrical equipment (eg the cash register, a fridge, a printer and photocopier, filing cabinets and bins) were not part of the fitout of the premises and so the lessor did not have to compensate the lessee for these items. “The concept of fitout … is one that contemplates more than the casual physical location of items” and that these “came to the premises as items of furniture or the equivalent and they are removable from the premises by the [lessee] as such without loss. The fact that the [lessee] may have suffered a loss by reason of their purchase for use in a business that has now been forced to close and that has ceased to operate does not make them items that are compensable as part of the fitout”. (see Softwash v QIC (No 2)  NSWSC 652at )
The decision shows that there can be great scope for a lessee’s claim for compensation to be reduced by a lessor’s careful analysis of the elements of that claim, however, at the same time, a lessee should be careful to ensure they obtain the compensation they are entitled.