Continuity of Business Goodwill

For many businesses, a large part of goodwill is tied to the premises from which they operate. Location, foot traffic, visibility, ease of access, car parking and regular customers can all have a direct impact on the value of the business.

Leases can be valuable commercial assets so it’s important to ensure that as a business owner you understand your lease provisions, including those relating to renewal.

Lease terms will not generally renew automatically where rights of renewal exist. A right of renewal is usually an option that the tenant must actively exercise in accordance with the lease. If the tenant misses the required notice period, the tenant may lose the right to a further term.

The renewal process depends on the particular wording of the lease. Many commercial leases are documented using the Law Association Deed of Lease (“DOL”). Unless parties have agreed bespoke terms varying the standard position, that DOL contains a specific process for exercising a right of renewal.

Example:

A restaurant owner leases a premises from a landlord. The lease has an initial term of three years, with two rights of renewal of three years each. As the end of the first three-year term approaches, the restaurant is performing well and the tenant wants to secure the premises for the next renewal term. Under the default DOL terms, the tenant must give at least 3 months’ written notice to the landlord of its intention to renew before the current term expires. The tenant must also not be in material breach of its lease obligations at the time notice is given and at the renewal date. If the tenant does not give a valid renewal notice, the lease will not renew automatically. If the landlord does not wish to grant a further term, the landlord may issue a notice of expiry. This must comply with the Property Law Act 2007 and include prescribed information, including the tenant’s right to apply to the Court for relief.

If a tenant fails to exercise a renewal right correctly, the tenant may face several possible outcomes.

The tenant may need to:

• vacate the premises at the end of the term, potentially losing substantial goodwill tied to the site;
• negotiate with the landlord for a new lease or other compromise, but the tenant’s bargaining position may be weaker once the renewal right has been missed;
• remain in occupation only on a holding-over basis, if the landlord permits this. This can create uncertainty regarding longevity as there will generally be a right for either party to terminate upon one month’s notice; or
• apply to the Court for relief. This can be costly and uncertain and there is no guarantee that relief will be granted.

In many cases, these issues could have been avoided by diarising the renewal date and giving a valid notice of renewal.

Tenants should:

• diarise their lease expiry date and all renewal notice deadlines;
• ensure any notice is in writing and served in the manner required by the lease;
• ensure that all rent and other lease obligations are up-to-date; and
• review any rent review provisions that will apply on renewal.

It is also prudent to review the lease before a prospective business sale. A purchaser will often want certainty that the lease has sufficient term remaining, including renewal rights.

Steindle Williams Legal is available to assist tenants in understanding their rights and obligations under their leases, including addressing any issues that may affect their business continuity.

This article is for general informational purposes only and does not constitute legal advice. While every effort has been made to ensure the accuracy of the information, readers should not rely on this article as a substitute for professional legal advice.