Mon 10 Feb 2014

Beware silent renewal of leases

I am often asked to clarify the position regarding the termination of a lease. It comes as a surprise to many to learn that their assumption that their Lease has ended because the end date in the lease has been reached is in fact wrong. To be fair, an innocent person reading a lease would be entitled to assume that, as the lease specifies an end date, that is indeed the date on which the lease ends. But that is not the case and both landlords and tenants must be aware of the principle of tacit relocation which translates in layman's terms to "silent renewal" (although it is in fact a silent extension!). Both landlords and tenants must be alert to the fact that, unless they actually serve a termination notice on the other party, there is no automatic termination and their lease will continue.

What follows applies to commercial leases and not to agricultural leases or residential tenancies

Basic rules of tacit relocation

The basic rules of tacit relocation are fairly straightforward: If neither party serves a termination notice prior to the expiry of the stated term of the lease, then the Lease will automatically continue.

If the original term of the lease is:

- for more than one year, then the lease will continue for a one year period; or

- for less than one year, then the continuation of the lease will be for the same term again (ie. a 6 month lease will continue for a further 6 months).

This "silent" extension will then continue year on year indefinitely until one of the parties serves the relevant notice.

The extension will be on exactly the same terms and conditions as contained in the original lease, with the obvious exception of the duration.

No provision in the extension can be incompatible with a one year lease. The main result of this particular rule is that a rent review provision (unless annual) will be incompatible with a one year lease - so the rent payable by the tenant will remain fixed at the level being paid at the date of the original term expiry date. If the lease continues year on year beyond the next review date in terms of the original lease (because neither party serves notice to terminate) the rent remains static.The other provision which will normally be excluded, by the operation of the one year compatibility test, is an option either to renew on the same terms or to break at fixed points.

Notice periods

So, what does the prudent landlord or tenant do with this knowledge? Both parties must remember that if they want the lease to terminate on the end date specified in the lease, then prior notice has to be served on the other party.The required periods of notice are set by statute - and are different for properties up to and including two acres or those which exceed two acres.For a lease of premises not exceeding two acres the notice periods are:- for a lease of more than 4 months - 40 days' notice; or- for a lease of 4 months or less - 1/3 of the duration of the Lease.

For a lease of premises exceeding two acres (but excluding agricultural leases) the notice periods are:- for a lease of 3 years or more - not less than one year and not more than 2 years; or- for a lease of less than 3 years - not less than 6 months.

We recommend that in all cases not less than 28 days notice is given.

Normal good practice rules about notices clearly apply. Make sure that you comply with the notice provisions in the lease and in the statute (including as to the form of the notice and the manner of service), serve the notice on the correct party and calculate the period of notice excluding both the date of service and the termination date.

If the lease contains a provision stating a specific period of notice for termination, then err on the safe side and serve which ever is the longer period of notice between the lease provision and the statutory minimum.

Can you contract out of tacit relocation?

There is some authority to the effect that a lease provision contracting out of tacit relocation would be effective (in the 1992 case of MacDougall v Guidi) - but this would need more than the usual wording that requires the tenant to remove without any warning or process of law.

Most leases don't try to contract out and, even if you have a lease where this has been done, the prudent course is always to serve a notice to terminate if you want to be certain that the lease will end on the intended expiry date.

Practical concerns

For a landlord, the impact of tacit relocation is an unexpected continuation (when the landlord might have had other plans for its property) and that at the same rent, with no right to force the tenant to pay more. As mentioned earlier, a lease which continues on tacit relocation cannot have a rent review and continues on the basis of the rent at the intended expiry date. While I have recently come across drafting in a lease which does specifically provide for rent reviews to be carried out in the event of a lease continuing under tacit relocation, the best advice for landlords is to be aware of their expiry dates and make sure that the relevant termination notice is served.

What if the parties want to continue the relationship? It may be of benefit to a tenant to continue the existing lease on tacit relocation, as that will avoid a rent increase but the extension would be for a maximum of one year only and can be terminated at each anniversary of the date of entry. Landlords are best advised to ensure that a notice to terminate is served and then terms for a new lease agreed - allowing for a rent increase and (if applicable) new review dates and also any other changes to be made to the commercial terms agreed between the parties.

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