A situation that contains pitfalls for both landlord and tenant arises commonly as a result of the renewal clauses in most commercial leases.

A lease will usually say that if a tenant wishes to renew a lease, then the tenant must give notice in writing to the landlord not later than three months before the lease expires.

Also, the lease usually says that if the tenant remains in the premises after the lease ends, then it is on a restricted basis (often a month by month tenancy which can be brought to an end upon one month's notice).

If the tenant fails to give a renewal notice within the time limit, then the landlord is able to write to the tenant pointing out that the lease has come to an end. The landlord may also be able to require the tenant to vacate the premises immediately or, depending on the terms of the lease, give the tenant one month's notice to quit.

This is a situation of considerable peril for a tenant, particularly one who has developed a business with goodwill relating to the site itself (a petrol station for instance).

Notwithstanding that the tenant may not have given notice renewing the lease within the time limit, the tenant should still give that notice. If the landlord refuses to renew the lease because of the lateness of the notice, the tenant has three months to apply to the High Court for relief and for an order directing the landlord to renew the lease. The three-month period is a very strict time limit, and cannot be extended. The practice of the Court is to always grant relief, unless the tenant is in flagrant breach of the lease. As the practice of the Court is well known, landlords will nearly always grant the new lease and there is rarely need for a tenant to make this application.

Once three months have passed after the tenant is given notice that the lease has come to an end, the tenant cannot apply to keep the lease.

An issue sometimes raised is whether the landlord has given a proper, unambiguous notice refusing to renew the lease. For a landlord with a desire to take possession, the landlord must ensure that the notice is clear and unambiguous. For additional caution, it should refer specifically to the appropriate clauses in the lease and make it clear that the landlord's position is not one of re-negotiating terms or bargaining. As a further safeguard, the landlord could add that this is a final notice and that the original lease cannot now be renewed.

At this point, tenants often propose some form of re-negotiations. If this happens, the landlord should express all correspondence as being without prejudice. Such correspondence should either contain offers of settlement or negotiation of terms and be noted as not indicating that the notice has been varied or is no longer relied on.

From the tenant's perspective, an application to the High Court for the lease to keep going should be submitted without delay, and must be submitted within the three month period.

In almost all cases (provided there have been no clear and compelling breaches of the lease) the tenant will succeed and the lease will be renewed. Stubborn landlords who try to use the proceedings to increase rent or alter the lease usually are unsuccessful and sometimes have costs ordered against them.

From the landlord's perspective, if the tenant, having given out of time notice of renewal, files proceedings for relief within the strict three-month time limit, then the opportunity to re-take possession has gone and the lease will usually continue on its original terms.

Both landlord and tenant should consider the perils within their lease and from the Property Law Act 1952 seriously.

Copyright The Lawlink Group Ltd 2002

Every effort has been made to ensure that this information is accurate. However, it is general introductory information only. It does not constitute legal advice and should not be relied on as such. Specialist legal advice should be sought in particular matters. Any reference to law and legislation is to New Zealand law and legislation.

David Sharp is a partner of the Gisborne Lawlink firm of Burnard Bull & Co.

Web site: Burnard Bull & Co
Email: bbull@bpc.co.nz

June 2002