Rights of Renewal in Leases
Many tenants under commercial leases seek to negotiate a shorter initial term with rights to renew the lease in the future, rather than committing to a long-term lease at the outset. These rights are referred to as “rights of renewal”, and allow the tenant some flexibility by giving them the right (subject to certain conditions) to renew the lease for a further term or let the lease expire.
Exercising the Right
Generally a right of renewal is not exercised automatically. It is important therefore that any tenant wanting to stay in the premises is aware of the need to exercise the right of renewal, and to do so in advance. Continued occupation of the premises after the expiry of the current term does not mean the lease has been renewed. Although commercial leases vary, the widely used Auckland District Law Society Inc. Deed of Lease requires the tenant to give at least three calendar months’ notice of their intention to renew. This is usually done by the tenant giving written notice to the landlord, in accordance with the terms of the lease, that they wish to renew the lease. Under this particular Deed of Lease, if notice has not been given before the last three months of the term, the right to renew the lease may lapse, as the period of notice is a term of the renewal.
The tenant’s decision to give notice of the intention to renew the lease must be carefully considered. It is a commitment to be responsible for all obligations under the lease for a further term, often a number of years.
One complicating factor for tenants is that the rent review date may coincide with the renewal date. The time frame for the landlord to determine the new rental can be quite different to the renewal time frame. Consequently, the tenant may have to make a decision on renewing the lease before knowing what the new rental may be. We consider it prudent for a tenant, in such circumstances, to seek to negotiate the new rental with the landlord prior to giving notice to renew the lease as once notice to renew has been given the tenant is legally bound to renew the lease for the renewal term.
Breach of the Lease
Almost all leases will provide that a tenant cannot exercise their right of renewal if they are in breach of the lease. Tenants must ensure that when they give notice of their intention to renew the lease they are complying with all their obligations under the lease, including any non-monetary obligations. A tenant is advised to ensure they are aware of their obligations under the lease in advance of renewing the lease.
A new Lease
Where the lease is renewed pursuant to a right of renewal, it is deemed to be a new lease, rather than an extension of the prior lease. The landlord is entitled to require, as part of the renewal, that any guarantor of the existing lease also guarantee the new lease. It is therefore recommended that a landlord have the renewal formally documented, and signed by the guarantors to record their ongoing obligations. Guarantors should also review all aspects of the lease and think carefully prior to agreeing to this obligation.
When the Lease is not renewed
Provided that sufficient notice has been given, the tenant is not in breach and is complying with any conditions of the renewal of lease, the landlord must agree to a renewal of the lease. A tenant who has a right to renew the lease, and that right has been refused by the landlord, may apply to the Court for relief under the Property Law Act.
If you have missed the deadline for exercising a right of renewal, or you wish to renew the lease but are in breach, or you have been refused by the landlord, contact us immediately. If relief from the Court is necessary, there are time limits within which you must apply.