Overholding and The Unintended 5 Year Lease Extension
- George Konidaris, Principal Lawyer
- Aug 2, 2016
- 4 min read
Section 21 of the Retail Leases Act 2003, grants tenants a minimum 5 year lease term for Retail Leases that are governed by the Act. Tenants and Landlords who seek a shorter term, must apply for a waiver certificate with the Small Business Commissioner otherwise, the Tenant will be entitled to what can be called a statutory option or lease extension so that the total Lease Term equates to 5 years.
In Daco Enterpises v Golden Suntana, a Tenant took advantage of the minimum 5 year Lease Term and what some may call a loophole in the Retail Leases Act 2003.
To sum up the Daco Enterprises decision, VCAT determined that where a Retail Lease has expired and a Landlord allows a Tenant to remain as a monthly tenant under the over-holding provisions for a period of more than 12 months, the Tenant may, in certain circumstances, be automatically granted a new 5 year Lease from the time the date over-holding commenced even though the Tenant had already been in possession for more than 5 years.
The argument is based on combining 2 sections of the Retail Leases Act 2003.
Firstly, Section 12 of the Retail Leases Act 2003 states that the Act does not apply to Retail Premises Leases that are less than 12 months, however if the Tenant has been continuously in possession for a period of more than twelve months either by the lease being continued or renewed, the Act applies to that Lease.
Secondly, Section 21 of the Retail Leases Act 2003 states that a Tenant is entitled to a minimum 5 year lease term. However when calculating the 5 year period, the period which the Tenant was "continuously entitled to possession" before the new lease term was entered, must be taken into account.
The case boiled down to what was meant by the phrase "Continuously entitled to possession" in Section 21(2A) of the Retail Leases Act 2003.
The facts in the case were unique in the sense that the original lease started in 2000 (before the Retail Leases Act 2003) and the Tenant which brought the claim, was an assignee of the original lease and brought the claim after the introduction of the Retail Leases Act 2003.
VCAT accepted the Tenant's arguments that at common law, an over-holding created a new tenancy and in so doing, the monthly tenancy broke the "entitlement to continuous possession" at the end of each month therefore denying the Landlord the ability to rely upon the time the Tenant was in continuous possession before the over-holding commenced when calculating the minimum 5 year term.
Section 12, on the other hand, which determines how the minimum 12 month lease period is calculated in order to enliven the jurisdiction of the Retail Leases Act 2003, allowed all of the months of the monthly tenancy to be taken into account when determining the 12 month minimum period.
Accordingly, VCAT granted the Tenant an extension of the Lease from the time the over-holding commenced even though the Tenant had failed to exercise the options available to it under the Lease which would have given it at least a 5 year term under the Lease.
The decision is interesting because it would be assumed that the purpose of the right to a minimum five year lease term under Section 21 of the Retail Leases Act 2003 is to protect tenants who naively entered leases for short terms due to say, poor lease negotiation skills, rather than to give Tenants a second chance to seek Lease extensions where Tenants fail to exercise their options or have run out of options.
A Landlord therefore that allows a Tenant to over-hold after the expiration of the Lease term for more than 12 months, is at risk of granting the Tenant an unintended lease extension of 5 years, notwithstanding that the Tenant may have already been in actual or physical possession for more than 5 years before the over-holding commenced.
In Awad v Conell, the Tenants (the Awads) sought to take advantage of the loophole in Daco Enterprises and Golden Suntana following a failure by the Landlord and Tenant to reach agreement to renew the Lease after all Lease options had expired.
The Awads were over-holding for in excess of twelve months after the Lease had expired and were also in possession of the Retail Premises for some 10 years or so.
Despite the Awads over-holding for more than 12 months after the last lease option had expired, the Awads did not receive the bonus 5 year lease extension which was granted in Daco Enterprises.
Importantly, the Retail Lease under which the Awads (Tenants) were over-holding was a lease that was subject to the Retail Leases Act 2003.
Section 10 of the Retail Leases Act 2003 in effect, states that a monthly tenancy extends or is taken to continue the Retail Lease. It changes the common law position that arises under a monthly tenancy and therefore, no new lease is created under section 12 by reason of the over-holding.
Tenants and Landlords need to be aware that the Retail Leases Act 2003 confers a minimum 5 year lease term to Tenants and sometimes, the minimum 5 year Lease might start from when a Tenant over-holds under the Lease even though the Tenant may have already been in possession for more than 5 years.
Tenants must also be aware of their rights to exercise options and how to do it correctly so the right to an extension or lease renewal is not lost.
For more information concerning the above cases or if you require advice concerning the renewal of a Retail Lease Term or the entitlement to a 5 year lease, please contact us for a 20 Minute Free Consultation.
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