Can a lessor refuse to renew?

A lessor must tread very carefully when considering the position of a lessee who has not yet exercised its right to renew the lease. The Property Law Act 2007 assists a lessee by providing relief in two situations where a right of renewal would otherwise be lost:

  1. Where the lessee has breached a condition precedent to the renewal.
  2. Where the lessee is late in giving notice or gets the process wrong.

This provision allows the lessee great latitude and the court’s jurisdiction to grant or refuse relief is discretionary.

In a decision on 30 May 2011 the Auckland High Court granted an interim injunction to restrain the lessor from bringing a lease to an end. The lease in question was for a term of 1 year and expired on 28 February 2011. There were two rights of renewal of two years each. The lessee was required to give three months notice before the expiry date. That did not happen.

The lessor secured a new tenant to move into the premises from 1 June 2011. From mid April the lessor had been confirming to the lessee that there was no right of renewal anymore and that they needed to be out before 1 June. It was clear that the parties had at some point discussed the possibility of the lease continuing on a month to month basis pending the lessee determining whether to commit to a longer term. The lessee said that he had not understood that the month to month tenancy would prevent the lessee from renewing the lease for a longer term. Although the lessor had not done anything wrong and had endeavored to educate the lessee the Court decided the balance here favored an injunction being granted to the lessee with a trial to then immediately follow. The Court was very concerned that the lessee would lose its business and livelihood if the injunction was not granted, and although the lessor might suffer loss too (given it’s new lease started the next day) this loss was reparable.

Decisions in this area do tend to favor the lessee. The lessor should ensure that the lessee’s clear intentions are ascertained. The lessee may be able to keep its options open for longer than the prescribed notice period. The court will not allow a lessee to deliberately delay exercising a right of renewal to take advantage of the lessor though. For example there is an older decision where evidence showed that the lessee was using this right for relief in order to extract a larger premium from the lessor to surrender an existing lease. In those circumstances the Court found for the lessor.

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