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Landlord Ordered To Renew Lease

December 2018

Commercial landlords and tenants should be conscious of the Court’s wide powers under the Property Law Act 2007 in ordering a renewal of a lease in circumstances where the Court thinks fit to create justice.

Background

The recent High Court case of Wendco (NZ) Ltd v LJCTB Trustees Ltd and CQB Trustees Ltd highlights the extent to which the Court is willing to exercise its discretionary powers in favour of a tenant claiming to be aggrieved by its landlord. 

Wendco (NZ) Ltd (trading as Wendy’s), at the close of its 12-year initial lease term, did not expressly exercise its right to renew its lease. Instead, Wendy’s opted to commence negotiations with the landlord requesting variations to the Lease of either:

  • varying the rights of renewal from two further terms of 8 years and 4 years, to four further terms of 2 years with a final 4 year term; or
  • a reduction in the annual rent from $155,000 plus GST to $100,000 plus GST. 

The Landlord refused to accept Wendy’s proposed variations and instead issued its reviewed rent of $166,250.00 plus GST per annum. 

Following expiry of the initial lease term, both parties had acknowledged in their written correspondence that Wendy’s was now leasing the premises on a month to month basis. 19 months following the expiry of the lease, the landlord finally gave notice that it was terminating Wendy’s month to month tenancy, as it had found itself a new tenant. Wendy’s sought an order for the Landlord to grant a renewal of the lease to Wendy’s. 

Decision

The High Court confirmed that the now well-established factors that it will consider in exercising its discretion to order a renewal of lease. The factors are as follows:

  • reasons for the failure to give notice, e.g. whether the failure to renew was inadvertent;
  • whether the cause of the fault was due to any action of the landlord;
  • the lessees conduct, in particular whether it has complied with all conditions and covenants and has been a good tenant;
  • the prejudice to the lessee if the relief is not granted;
  • the prejudice to the lessor if the relief is not granted;
  • the lessor’s motivation for the refusal to renew and understanding of the lessee’s intentions;
  • the interest of third parties and how they may be affected by any order.

The Court had satisfied itself that Wendy’s was a “good tenant”, in that it had paid its rent when it fell due.

The Court also accepted that Wendy’s would suffer significant prejudice should the order to renew the lease was not granted, including the following:

  • losing its $1,000,000 investment on the fit-out of the premises. This investment was calculated based on a 24-year lease term – half of which was still remaining;
  • damage to its brand, including to its bargaining power for leveraging its costs to its suppliers across all of Wendy’s restaurants;
  • potential difficulties in securing another lease;
  • relocation costs.

Crucially, it was also stressed that should Wendy’s lease not be renewed, its 24 part-time staff would be made redundant.  

On the other hand, if the lease was ordered to be renewed, the landlord would suffer a loss of $30,000 that it had incurred on securing a new tenant for the premises. 

In evaluating the respective prejudice to both respective parties, it was apparent to the Court that the prejudice to the tenant far outweighed the prejudice to the landlord. Furthermore, the Court noted its discretion to impose any conditions or compensation in addition to its order to renew the lease. The landlord’s expenses, it felt, could be easily rectified by ordering compensation.

Therefore, the Court granted a renewal of the lease to Wendy’s but ordered it compensate the landlord’s expenses of $30,000.

Conclusions

Commercial Tenants should be aware that the Courts are able to enforce Tenant’s rights under a commercial lease with a wide mandate.

Commercial Landlords, on the other hand, should be careful of terminating a lease in circumstances where there are unexercised rights of renewal under their Lease. Landlords should also be mindful of circumstances that such termination could bring to the tenant and third parties.

It should also be noted that the Court’s discretionary power applies not only to circumstances where there is an unexercised right of renewal, but also where the landlord had covenanted in writing to extend a lease term, enter into a new lease with the tenant, or to assign the lease.

We recommend you seek our legal advice:

  • as a landlord, if you have any concerns prior to terminating a lease; or
  • as a tenant, if you consider that you have suffered prejudice from the termination of your lease.