Important matters relating to leases

There are 3 important matters relating to leases that are subject to the Retail Leases Act 2003 (Act) which landlords often overlook. These are as follows:-

1. Refusing Options to Renew

It is important for a landlord to give its tenant written notice of any default on each and every occasion that the tenant defaults under its lease, if they wish to later rely on those defaults to refuse to accept a tenant’s exercise of an option under their Lease.

Section 27(2) of the Act provides that:

If a retail premises lease contains an option exercisable by the tenant to renew the lease for a further term, the only circumstances in which the option is not exercisable is if:-

(a) the tenant has not remedied any default under the lease about which the landlord has given the tenant written notice; or
(b) the tenant has persistently defaulted under the lease throughout its term and the landlord has given the tenant written notice of the defaults.
In respect of Section 27(2)(b), the defaults of the tenant must have been persistent and have resulted in a written notice from the landlord. If a tenant was late with every rent instalment but the landlord only rarely sent written notices of such defaults to the tenant, it will be very difficult for the landlord to show that the defaults were “persistent” or were “throughout” the term.

The written notices of default can be in a letter form. They do not need to be a formal notice of default and termination of the lease.

2. Estimates of Outgoings

It is also important for a landlord of retail premises to give its tenant an “estimate of outgoings” for each of the landlord’s accounting periods. This usually means giving an estimate annually.

Section 46(2) of the Act provides that the landlord must give to the tenant an estimate of the outgoings to which the tenant must contribute under the lease. The estimate must be given to the tenant before the lease is made and also in respect of each of the landlord’s accounting periods during the term of the lease, at least one month before the start of that period. For example, if the landlord’s accounting period is the financial year starting on 1 July, then the landlord must give the tenant an estimate every year before the 1 June.

Under the Act, the tenant is not liable to contribute to any outgoing until the required estimate for that outgoing has been given.

3. Written Notice of Last date to Exercise Option

Section 28 of the Act provides that if a retail premises lease contains an option for the tenant to renew the lease for a further term then the landlord must notify the tenant in writing of the date after which the option is no longer exercisable at least 6 months but no more than 12 months before that date. Given most leases are drafted on the basis that a tenant must exercise the option at least 3 months prior to the expiration of the current term, a landlord in that case would have to send the written reminder between 15 months and 9 months before the expiration of the term.

Failure to send such a written reminder in accordance with the Act will entitle the tenant to hold off on exercising their option until 6 months after receiving the written notice which effectively extends the tenure under the lease. However, the tenant can elect to terminate the lease on the date the lease would otherwise have expired, and not rely on the extension of tenure provisions provided in the Act.

It is therefore important that the required notice is served on the tenant, by the required time, and the notice complies strictly with the provisions of the Act.