Renewing a commercial lease: what happens if you do not exercise a right of renewal?

A commercial Tenant had a right of renewal in their lease after their initial three year term had expired.  They did not formally exercise the right of renewal provided by their lease, but continued to occupy the property and pay rent to the Landlord.  The Tenant assumed that the arrangement had become a month-by-month lease, meaning that they could terminate the lease by giving at least 20 working days’ written notice at any time. 

A while later the Tenant decided to terminate the lease and move to a new property.  They contacted the Landlord to give 20 working days’ written notice that the lease was at an end.  However the Landlord disputed the notice, saying they were still within a fixed term lease that could not be terminated without agreement between the parties.  The Tenant was very surprised and sought legal advice right away.

Most commercial leases, especially those prepared using the standard Auckland District Law Society Deed of Lease template, require a landlord to renew a lease where the tenant provides sufficient notice in writing of their intention to renew.  This is not an extension of the original lease, but a new lease arrangement that the parties agree to enter into. 

The situation can become tricky where a tenant does not formally advise of their intention to renew, but the parties carry on as they did before with the tenant paying rent and occupying the premises and the landlord allowing them to do so, especially if the tenant has given an informal indication to the landlord that they intend to renew for a further term.

Renewal by implication

Where a tenant has not formally communicated their intention to renew the lease, the parties might want to point to the status quo to show that the lease has, or has not, been renewed. 

Many tenants will not give formal notice in accordance with the requirements of the lease (for example because they forget to do so), but in some instances, given the conduct of the parties, the lease may be renewed by implication.

To claim that a lease had been renewed by implication, both parties would need to rely on other evidence to show their intention to renew the lease.  This might include written correspondence such as the tenant asking the landlord about renewal, correspondence indicating that the tenant is choosing to renew without formally saying so, the tenant remaining in occupation of the premises, and ongoing payment of rent. 

If the landlord continues to allow the tenant’s occupation and accepts the paid rent, then it will likely be deemed that the lease has been renewed by implication.  The lease can then only be terminated in accordance with its terms.  

If there was such evidence, the parties could then contend that the lease had been renewed by implication, in other words because both parties intended that it would be renewed even if this was not formally documented.  Whether there has been renewal by implication will differ from case to case depending on the surrounding circumstances.

Statutory tenancy

Where a lease has not been renewed by implication but the tenant continues to occupy the premises with the landlord’s consent, even though a lease has expired and they have not agreed on a new lease period, it will become a statutory tenancy, also known as a periodic/month-by-month, in accordance with the Property Law Act 2007. 

A statutory tenancy can be terminated by either party at any time by giving the other party at least 20 working days written notice.

Which is preferable?

It can be hard to prove that renewal of a lease has occurred by implication.  

If you are a tenant wishing to renew a lease, relying on renewal by implication is not the best option.  Should the landlord receive a better offer or decide that they would like the property unoccupied for whatever reason, it may be easier for them to argue there has been no formal renewal and therefore terminate the lease.  

If you are a landlord, the uncertainty that comes from having a periodic/month-by-month tenancy is likely to be unattractive in terms of cashflow and future planning.

To be certain that a lease will be renewed, tenants should ensure that they give adequate notice in accordance with the requirements of their lease.

In the current situation, due to the conduct of the parties it was most likely that the lease had been renewed by implication, meaning that the Tenant remained bound by its terms.  The Tenant could not simply provide 20 days’ written notice to cancel the lease, but had to work with the Landlord to agree the terms of an early termination.  This caused considerable problems for the Tenant who had already committed to renting new premises on the basis of being able to easily terminate his previous lease. 

If you are wanting to renew a lease, or are concerned about the type of tenancy arrangement you might be subject to, see your lawyer or legal advisor for advice.

Claire Tyler
Commercial Lawyer
Wellington