Investing in a managed hotel apartment? First, review the Lease carefully

The owner and landlord of a hotel apartment that was managed by a renowned hotel chain received a notice to renew the lease from his tenant.  The landlord decided this was a good time to sell the apartment, rather than renew the lease, as a relation wanted to buy and live in it.

However, on reviewing the lease in place with his tenant (which had been supplied by the management company when he purchased the apartment), he found that he had no rights to refuse the renewal or terminate the lease. How could this happen?

A standard lease renewal provision will provide a timeframe that the tenant must adhere to in order to exercise their right to renewal. 

However, the same clause in our owner/landlord’s lease contained one short phrase, and one small word, that together gave all power to the tenant. 

The crucial clause was:

“…Upon the written request of the Tenant or the Landlord at any time after the Commencement Date but not less than three months prior to the expiration of the Term (time not being of the essence), the Landlord will grant and the Tenant will accept a new lease for the Further Term as set out in this Lease ….” (Emphasis added)

In this scenario, the tenant had not adhered to the timeframe, and had written to the landlord about a renewal only one month prior to the current term expiring. 

However the phrase, “time not being of the essence” meant that the timeframe in the clause was deemed to be not essential and was therefore not something the landlord could rely on to refuse to renew the lease.  

Further, the fact that the clause also provided that “the Landlord will grant … a new lease …” as opposed to “the Landlord may grant … a new lease …” meant that the Landlord was essentially stuck, as the tenant possessed all the power. 

The only way the Landlord could exit the Lease was to sell the apartment with the Lease intact and wash his hands of his investment.  If he sold the apartment to his relation, the Deed of Lease would be assigned to his relation as the new owner, with the tenant remaining in possession.

These types of investment properties can be perfect for some. However it’s important that you understand all the terms of the lease involved before signing up.  Depending on your circumstances, you want to be able to exit on your own terms.

The Deed of Lease

As a Landlord, your right to exit a tenancy leasing agreement will depend on the provisions of the Deed of Lease.  This is because, generally speaking, a tenant will be able to exercise their right to a renewal provided it is done in accordance with the Deed.

Being familiar with the terms of the Lease before investing in an apartment, or unit in a hotel complex, is crucial to understanding the type of investment you are committing to.  This is even more relevant where a management company maintains the extent of control that many do.  The many benefits of such an investment, such as the security of a long term lease, along with no management fees, vacancy periods, maintenance, repairs and excessive outgoings, may be at the cost of your degree of control over your investment.

We recommend having your lawyer review the relevant Deed of Lease (or other tenancy documentation) if you are considering this type of investment to ensure that it meets your needs.

Thérèse Greenlees
Legal Executive
Wellington