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Rights of renewal for leases - who is in the right?

15 November 2019

On expiry of a lease term, a landlord may think they have every right to terminate the lease if the tenant has not exercised their right to renew. However, recent case law suggests that it may not be so easy for landlords to terminate a lease if the tenant wants to stay in the premises.

The Wendco case

Wendco Limited v LJCTB Trustees Limited and CQB Trustees Limited (HC) involved an elderly, and recently widowed, trustee Landlord and the large commercial fast food chain, Wendy’s, as Tenant. The Tenant leased commercial premises from the Landlord near the expiry of the 12 year initial term. The Lease provided the Tenant with one right to renew for eight years and a further right to renew for four years.

The Tenant wrote to the Landlord prior to the expiry of the initial Lease term and tried to negotiate either a significant (55%) reduction in rent, or alternatively, the replacement of the eight year renewal term with a number of smaller terms. This was not accepted by the Landlord who sought to increase the rent by around 7%, in line with the market rent review valuation.

The initial Lease term expired and both the Tenant and the Landlord acknowledged in writing that the Lease had converted into a month-to-month tenancy. Over a year and a half later, the Landlord gave notice to the Tenant terminating the Lease and took steps to secure another Tenant. The Tenant disputed the termination and filed for relief under section 261 of the Property Law Act 2007.

By deciding in favour of the Tenant, the Court discounted the personal situation of the elderly Landlord compared to the commercial savvy Tenant and instead placed weight on the Tenant’s argument that it was an ‘acceptable’ and financially secure tenant that would lose its $1,000,000 investment in construction and fit-out. In particular, the Court was swayed by the fact that 24 part-time staff would be made redundant if the Lease was not renewed. The Court found that the loss of these jobs could not be compensated for, whereas the Landlord could be compensated for the costs incurred in securing a new tenant. The Court granted a renewal of Lease to the Tenant, but required the Tenant to reimburse the Landlord for costs.

Ramifications for landlord rights

The Wendco case is certainly a warning for any landlord seeking to terminate a lease where there are unexercised rights to renew. The Court may use its relatively broad discretion under section 261 of the Property Law Act 2007 to step in and grant relief to a tenant. The Court will take into account the underlying circumstances surrounding the failure to renew, the conduct of and prejudice to both parties, the landlord’s motivations for not renewing and the interests of affected third parties.

Landlords who wish to terminate leases with unexercised rights of renewal should make sure they have a clear written acknowledgement from the tenant that if a renewal does not occur, their tenancy will revert to a month-to-month tenancy, which the landlord can terminate. In addition, we strongly encourage landlords to always seek legal advice prior to terminating a lease.

 

Shelly Carden is a Senior Solicitor in the Corporate & Commercial Team at Norris Ward McKinnon. You can contact Shelly at shelly.carden@nwm.co.nz