March 2019

Whether you’re a landlord looking to get out of a lease or a tenant looking to stay in your premises, knowing the ins and outs of commercial lease forfeiture can help clarify your rights.

A commercial landlord has the right to forfeit a lease where a tenant is in breach of a covenant, including where a tenant fails to give appropriate notice to renew their lease. That is, if the tenant doesn’t give notice within the required time limit or in the manner specified in the lease, their landlord may forfeit the lease by refusing to renew the lease for any further period.

However, both landlords and tenants should be aware that under section 261 of the Property Law Act 2007, those affected by such a refusal (which includes tenants as well as mortgagees or appointed receivers in relation to the lease) may apply to the court within three months for relief. A court has the ability to order that the lease be renewed.

If a landlord wants to refuse to renew a lease, the landlord must inform the tenant of their refusal by notice. That notice must explain that the tenant may apply to the court for relief against the refusal and this right will lapse if such an application is not made within three months of receiving the notice. The notice must also state that it is advisable for affected people to seek legal advice on the exercise of the right to apply to the court.

There are several key factors in relation to whether relief should be granted:

• the reason for the failure to give notice e.g. whether the failure to renew was inadvertent or deliberate;
• whether the cause of default was due to any action of the landlord;
• the tenant’s conduct, in particular whether it has complied with all the terms of the lease and has been a good tenant;
• the negative effects to the tenant if the relief is not granted;
• the negative effects to the landlord if the relief is not granted;
• the landlord’s motivation for the refusal to renew and their understanding of the tenant’s intention to renew the lease;
• the interests of third parties and how they might be affected by any order.

No single factor is determinative of the issue; whether an application for relief will be granted is assessed in the particular circumstances of each case. For example, a deliberate failure to give notice in order to negotiate new lease terms can still be accepted by the court if there will be major negative effects to the tenant and third parties if relief is not granted. This is seen in Wendco (NZ) Ltd v LJCTB Trustees Ltd [2017] NZHC 2668, where without relief, Wendy’s significant investment in the fit-out of the premises would be lost and their employees would become unemployed.

Additionally, relief can be granted on any conditions a court thinks fit. This means that although a tenant may be successful in securing a renewal of lease, they may still have to pay compensation to the landlord such as any expenses the landlord has incurred in finding a new tenant.

Anyone seeking to apply for relief should also note that where their lease agreement contains an arbitration clause, this clause will still need to be followed and relief sought from an arbitrator rather than the court.

Although the rights of forfeiture and relief against forfeiture are useful remedies, they are not simple. This article has summarised some of the main factors which landlords and tenants should be mindful of, but it also highlights the importance of obtaining timely legal advice when considering exercising these rights.