Try:
{IF{MERGEFIELD ADDRESS3}<> "NO LOCALITY" "{MERGEFIELD ADDRESS3}¶
"}
or:
{IF«ADDRESS3»<> "NO LOCALITY" "«ADDRESS3»¶
"}
where the ¶ is the actual line/paragraph break that terminates the existing Address3 line (this adds the end of the field code to whatever line follows your Address3 line).

Note: The field brace pairs (i.e. '{ }') for the above example are all created in the document itself, via Ctrl-F9 (Cmd-F9 on a Mac); you can't simply type them or copy & paste them from this message. Nor is it practicable to add them via any of the standard Word dialogues. Likewise, you can't type or copy & paste the chevrons (i.e. '« »') - they're part of the actual mergefields, which you can insert from the mailmerge toolbar. The spaces represented in the field construction are all required. Instead of the ¶ symbols, you should use real line/paragraph breaks.

__________________
Cheers,
Paul Edstein
[Fmr MS MVP - Word]