Do landlords have demolition rights for their commercial buildings?

It depends.  Landlord demolition rights should exist in every commercial lease template.  As a landlord why would you not want to have the right to redevelop?   

But the odds of a landlord redeveloping are vary wildly.  

Which of these buildings do you think a landlord would want to demolish? 

Obviously the building on the right has much more upside for a landlord to demolish and redevelop. 

The building on the left is already maximizing its density and air rights ? in other words, it has maxed out on its potential.  Since it is so high, it has an enormous amount of square feet and has maximized revenue for that landlord. 

It would not make any sense to demolish the bigger building only to build another building of the same size or slightly larger. 

The smaller building has only 2 storeys and if it is zoned for more density, then the landlord has an opportunity to build higher and make more money.  On top of that, the parking lot is not making any money, and a high-rise building with underground parking would maximize site coverage, and allow for underground, paid parking. 

Make sense?  Why would a landlord NOT want to have the right to demolish and redevelop?  It?s how you make millions in commercial real estate. 

So how many small buildings have leases that allow for a landlord to cancel leases and redevelop?

We reviewed 873 leases for buildings that are less than 100,000 square feet.  We found that 772 of those leases specifically had a landlord?s right to cancel the lease in order to demolish the building. 

Here is typical wording that we found:

The Landlord has the right to cancel the Lease if, in its sole discretion, it elects to repurpose, redevelop or substantially renovate all or part of the Building.  The Landlord shall provide six (6) months? prior written notice to the Tenant. 

Here?s the good news. 

If your lease does not have a demolition clause AND you have a right to renew, then you can handcuff your landlord from being able to redevelop. 

Check out our case study on how a client leveraged their LACK of a demolition clause into $600,000 worth of incentives. 

They had a 10 year lease, with a right to renew for 5 years and the landlord realized they did not have a cancellation clause in that lease.  Woops! 

Here?s the bad news. 

Any smart landlord would never agree to removing a demolition clause if it already exists in their standard lease form. 

We just came across in which we were approached by an 18,000 square foot branch office of a Fortune 1000 tech company in Toronto.  They are in a six-storey brick and beam building.  Their landlord owns 6 office buildings. 

The landlord realized that across all of his buildings he does not have any demolition rights.  Did you know that Toronto is currently the condo capital of North America?

So the landlord absolutely refused to renew the lease without the introduction of the demolition clause. 

Here is the wording that was introduced:

The Landlord desires to remodel or demolish the Building or any part thereof, to an extent that renders continued possession by the Tenant impracticable, the Tenant shall, upon receiving two hundred and forty (240) days prior written notice from the Landlord (the ?Demolition/Remodel Notice Period?):

(a)          surrender its tenancy, including any unexpired remainder of the Term; and

(b)          vacate the Leased Premises and give the Landlord vacant possession as if the Second Extended Term had expired on the date set out in the Landlord?s notice.

For further clarity, the definition of ?remodel? in this clause shall only include any activities that a) render the Building uninhabitable by Tenant and other tenants of the Building, b) are for the purpose of substantially altering the Building and c) do not require the full demolition of the Building. 

The tenant didn?t get anywhere with trying to remove the clause and the landlord genuinely refused to compromise on this topic. 

So we recommended a compromise ? ask for compensation in the event the landlord triggers the cancellation. 

Here is what we suggested:

1.       Ask for the clause to only apply to the second extension term.  There were other tenants on long term deals that did not have these demolition clauses anyway, so why not try to delay this landlord right for as long as possible?

2.       Extend the 240 days to an entire year.  Given the size of the tenant and how few options there are available in their submarket, having a full year is much more tenant-favorable. 

3.       Seek compensation.  There are no hard and fast rules on what this should be, but come up with a number that helps offset or completely covers moving and construction costs. 

The landlord agreed.  To all three requests. 

The simple reality is that when millions or tens of millions of dollars are on the line for a landlord, losing your tenancy is likely a risk most landlords are willing to take. 

But since they are making a lot more money by demolishing and redeveloping, your landlord or next landlord may be willing to provide you financial compensation as a horse trade for you agreeing to accept the demolition right. 

Good luck with your lease negotiation and getting out your landlord demolition clause!