Commercial leases frequently include a renewal clause. This option entitles the tenant to extend the length of their lease on the same or similar terms and circumstances. However, both the additional term given and the number of renewals are typically restricted for good reason.
By operation of the Law of Property Act 1922 a perpetually renewable lease becomes automatically converted into a 2000 year lease and will be registered as such at the Land Registry.
In this article, the risks of unwittingly granting a perpetually renewable lease, we take a look at the process and mechanism involved.
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Case Law
In Palo Alto Ltd v Alnor Estates Ltd, the tenant of an office space paying £3,120 per year
The landlord’s practise was to grant basic, short leases. The tenant was offered a one-year lease and informed that if it desired a three-year lease (which it did), the contract would need to be drafted by solicitors, which the tenant did not want to do for unknown reasons. Thus, the parties agreed that the tenant would sign a one-year lease with the option to renew.
The landlord’s agents issued the tenant a two-page lease with an option to renew. The renter returned the updated draught lease.
The relevant clause, as amended by the tenant, reads as follows:
‘The tenancy is granted for a period of one year with an option to renew at the end of the term/or a further one year on the same provisos and agreements as are herein contained including the option to renew such tenancy for a term of one year at the end thereof. ‘
The lease was completed, and the tenant then applied to HM Land Registry to register the lease as a 2000-year lease.
The reason for this was that the lease enabled renewal but did not specify the maximum number of times it may be renewed. As a result, it was declared ‘perpetually renewable’ and converted to a 2000-year term under section 145 and Schedule 15 of the Law of Property Act 1925.
Understandably, the landlord complained and sought to have the lease rectified on the grounds that it was only intended to allow for a maximum of two renewals.
When the dispute was heard by the First Tier Tribunal the judge recognised that “a perpetually renewable lease is a disastrous encumbrance on a landlord’s title unless.it happens to make provision for a market rent throughout its life-span”.
What was the outcome?
The First Tier Tribunal held that there had been a unilateral mistake by the landlord and ordered the lease to be rectified such that it would only be renewable twice so as to permit a maximum letting period of three years.
The judge found that the tenant had taken advantage of the landlord’s agents, knowing perfectly well what he was doing. The amendments he had made to the renewal clause had a very different effect from that which had been discussed and to which the landlord was agreeable.
Was there an appeal?
The tenant appealed but was unsuccessful once more in the Upper Tribunal.
On appeal, the tenant contended that the First Tier Tribunal judge was wrong in concluding that there had been a unilateral mistake because such a finding required the tenant to be dishonest, which the tenant had not been.
The Upper Tribunal decided that where the defendant had real knowledge of the other party’s mistake, this was sufficient to establish a unilateral mistake; dishonesty was not required. The judge was convinced that the tenant was aware of the landlord’s agents’ error in accepting the tenant’s revisions to the lease’s renewal clause, and that was sufficient to decide in favour of the landlord and fix the agreement.
In any instance, the Upper Tribunal stated that it would have found dishonesty on the circumstances since the tenant’s failure to adequately explain the consequences of its change to the landlord’s agents constituted dishonest behaviour.
Conclusion
This case serves as a good reminder of the importance of seeking expert legal guidance if a party does not completely grasp the consequences of the lease’s wording. Parties frequently employ “simpler” leases for smaller properties or those with a cheap rent, or for a short time, and while this is tempting (particularly to keep costs down), it might result in complications down the road. There is a need for documents that have been professionally drafted. Renewal options must always be carefully evaluated, and it is critical that a landlord limits the number of times a lease can be renewed in order to prevent issuing an infinitely-renewable lease.
How we can help
We have a proven track record of helping clients deal with renewing a commercial lease. We will guide you through the process and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting. You can read more about the range of commercial property services we offer by clicking here: https://blackstonesolicitorsltd.co.uk/commercial-property-services/
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Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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