The recent High Court decision of Storageone Kapiti (2012) Limited v Sharja Limited¹ illustrates that the Court will look at the overall motivation of a landlord's refusal to renew a lease (or to cancel a lease) in exercising its discretion to grant relief to the tenant.

Background facts

The case involved an application by a tenant for relief under section 264 Property Law Act 2007 (s 264) against the landlord's failure to renew its lease (and potentially under section 253 Property Law Act 2007 relating to cancellation of the lease for breach). The tenant also relied on an estoppel in relation to renewal of the lease.

The lease was of commercial premises in Paraparaumu and was on standard ADLS terms. It commenced on 15 March 2015 for an initial term of five years with four rights of renewal of five years each (final expiry date being 29 February 2040).

The first renewal was on 1 March 2020 but the tenant overlooked giving a renewal notice. The parties proceeded as if the lease was still on foot although the landlord argued that it was merely continuing as a monthly tenancy. The parties started to have disagreements in relation to the tenant's adherence to the lease terms and in December 2021 the landlord gave the tenant notice of termination of the periodic tenancy.

The landlord also argued that the tenant was in breach of the lease, particularly as to two key aspects:

1. Use other than business use: The first breach contended was that the tenant was using the premises for a use other than the business use without the landlord's consent. The business use was storage units. There were storage units on the ground floor, which were being used for the business use, but there was additional space on the first floor which was fitted out, and being used, for residential occupation. The tenant had not obtained the landlord's consent for that use and this was also a breach of the town planning rules.
   
   
2. Structural alterations: Secondly, the tenant had made a structural alteration to the ground floor (by removing two internal walls to incorporate an office space into a larger reception area) without the landlord's consent. The landlord had proceeded on the basis that the lease ended for non-renewal. However, it raised the breaches as part of its counterclaim as an alternate basis on which the lease should be brought to an end.

The landlord made it clear that no steps would be required to address the two breaches. It was, however, prepared to enter into a new lease with the tenant provided it was on terms that were more beneficial to it, including a higher rent.

The law - relief for failure to renew the lease

Under section 261 Property Law Act 2007, the Court may grant relief under s 264 if a tenant has failed to give a notice to renew the lease within the specified timeframe and in the specified manner required by the lease. The Court has a broad discretion in relation to grant of relief under s 264. Some factors referred to by the authorities include²:

• Why notice of renewal was not given, and whether it was inadvertent
• Whether default was due to any action of the landlord
• The tenant's conduct, in particular whether they have complied with all conditions and covenants and have been a good tenant
• The prejudice to the tenant if the relief is not granted
• The prejudice to the landlord if the relief is not granted
• The landlord's motivation for the refusal to renew and the tenant's intentions
• Whether the interests of third parties are affected.

The Court accepted that the factors relied upon would likely be the same for both claims (i.e. renewal and cancellation of the lease for breach) as the factors identified by the authorities on relief from cancellation are similar to those for an application for relief under s 264.

The relevant factors

The Court considered that the question of relief turned on the following key factors:

1. Failure to give notice of renewal was inadvertent. That mistake took place in the context of a lease where neither party strictly followed the technical requirements, for example:
   (a) The parties had entered into an agreement to lease but never executed a formal deed of lease.
   (b) The landlord had not increased the rent by CPI as it was entitled to do.
   (c) When the tenant had failed to give notice of renewal, this was not noticed by the landlord.
   
   
2. The landlord was willing to enter into a new lease with the tenant (provided this was at a higher rent). There was no suggestion that the landlord did not want the tenant as a tenant. The landlord advised that the breach of lease that it relied upon required no remedial action if the tenant entered into a new lease on the landlord’s proposed terms. In other words, there was no issue about a long-term lease between the parties continuing; only the rent and associated terms.

The Court cited Ponsonby Mall Trust Ltd v New Zealand Food Industries Ltd.³ In that case, the landlord had a commercial opportunity to develop the property if the lease was not continued. The question was whether the landlord could rely on this as a basis to oppose relief to the tenant. The judge, however, said ‘..., the whole purpose of the ... discretion is to stop landlords being able to take advantage of a lessee’s mistake.’⁴

Here, the Court considered the position was even more stark: the landlord was happy to continue a lease with the tenant – it simply wanted better terms. The landlord was seeking to take advantage of the tenant’s mistake in order to secure a better deal. The judge considered that there would have to be ‘compelling reasons for the Court not to grant relief in those circumstances.’⁵

The tenant’s breaches

The landlord argued that the ten-ant’s breaches were serious and that the tenant was not a good tenant. However, the Court analysed each breach and concluded:

1. Business use: The judge considered that no ‘harm had been caused’ by the tenant’s use of the first floor for residential purposes (in breach of the business use provisions).⁶ The landlord had raised an issue about the impact on its insurance cover, but had provided no information about its policy or any impact on its insurance. In any event, the residential tenants had left, the space was no longer being used for residential occupation, and any impact was therefore ‘in the past’.
   
   In general, ‘..it is inequitable that the benefit of the lease should be lost to a tenant who has restored to the landlord all that the landlord is entitled to under the lease.’⁷ Here there had been no adverse effect from the breach and the tenant would be obliged to honour the terms of the lease going forward. The judge saw ‘no significance in this breach’ which was reflected in the fact that the landlord sought no more than an acknowledgement that the tenant would only use the space for commercial purposes to deal with this issue in its proposal that the parties enter into a new lease.⁸
   
   
2. Alterations: The judge considered there is more significance in this breach. A building consent would have been required to the works because they were structural. As a building consent was not obtained, the position needed to be regularised by the grant of a Certificate of Acceptance from the Council under section 96 Building Act 2004. The Court accepted a building consultant’s evidence that there was no structural concern arising from the work.
   
   It also concluded that, provided the position was regularised by a decision of the Council and that the tenant restores the tenancy to its original state at the end of the lease (if the landlord requires it), there was no prejudice to the landlord. The judge also noted that the landlord’s proposal for a new lease contained no terms directed to the alterations apart from the tenant acknowledging it would not engage with the Council without the landlord’s prior consent. This reflected the lack of prejudice to the landlord.

The Court accepted the tenant’s submission that the authorities indicate that, where a breach of lease has been remedied, the Court invariably grants relief.⁹ It also accepted that there are other circumstances of some relevance – including that this is a long term lease and has continued to operate at the CPI adjusted price since 1 March 2020. But the judge did not accept that any other factors relied upon by the parties are of significance (apart from the estoppel argument addressed below). For example, the judge did not accept that there is significant prejudice to the tenant or to third parties if relief is not granted. That is because the landlord had offered for a lease to continue, albeit on different terms.

Estoppel

The tenant also raised the argument that the landlord was estopped from contending that the lease was brought to an end by a failure to give notice of renewal.

The principles of waiver or estoppel can operate when a landlord makes an express or implied representation that a lease is continuing notwithstanding that the tenant had failed to give the formal notice of renewal. Actions put forward by the tenant to show such representations included the landlord exercising its right to increase the rent annually by the CPI from 1 March 2020. The Court accepted that this evidenced an ‘implicit representation’ by the landlord that the lease was continuing in its terms notwithstanding a failure to give a notice of renewal.

The Court further found that the tenant had relied on this representation to its detriment by agreeing to, and paying, the CPI adjusted rent. If it had been a monthly tenancy, it would have had no obligation to do so. Accordingly, the tenant had made out the basis for waiver or estoppel. Estoppel does, however, involve the Court granting equitable relief and, in this case, there was a statutory provision directed to relief in s 264. When a statutory basis to grant effective relief exists, a question may arise whether to resort to equitable relief is appropriate. That may be particularly so where the statutory relief introduces further, and broader, considerations than the equitable remedy, which is the case under s 264. For example, here there were the issues concerning the tenant’s breaches of lease to consider.

It was not the judge's view that a Court can never give equitable relief in cases such as this. But, in his view, the Court should apply the statutory provision as the primary basis upon which relief is granted. The fact that the requirements for estoppel had been satisfied was, however, relevant to the grant of relief under s 264 and was a further significant factor in favour of granting relief.

Conditions of relief

The Court concluded that it was appropriate that relief be granted under s 264 and so then turned to the conditions upon which relief should be granted.

Regularising alterations: The first consideration was the need to regularise the position regarding the illegal alterations to the ground floor of the premises. Accordingly, the Court imposed conditions that the tenant apply for a Certificate of Compliance from the Council (at its cost) and reinstate the premises at the end of the lease if the landlord required this.¹⁰

Regularising rent: The landlord had only increased the rent according to CPI from 1 March 2020. It had not done so earlier, despite being entitled to under the lease. Given that the Court was being asked to ‘regularise a lease where the formalities have not been properly observed by either side’¹¹ (i.e. relief relating to inadvertent failure to renew the lease), it considered that the landlord should equally be put back into the position it would have been in had it properly acted in accordance with its legal rights i.e. allow the rent to be adjusted for CPI as the lease contemplated (note, however, that the adjustment was to take effect from 1 March 2023 i.e. not backdated but regularising the lease going forward, the Court considering that requiring the tenant to pay an amount reflecting an increased rent that was never demanded would go too far).¹²

Commentary

The landlord here had no issue with the tenant per se, or the breaches of lease committed, as it was willing to continue to lease its premises to this tenant. The Court saw through this landlord’s actions, in refusing to grant the renewal, and identified that the landlord was simply being opportunistic in seizing on the tenant’s inadvertent mistake (to renew the lease) to gain its own commercial advantage (obtaining a higher rent). It is interesting that the Court took into account the loose compliance with the lease to date (there being no deed of lease entered into pursuant to the agreement to lease and the landlord failing to exercise its CPI rent increases) and to reflect on whether the outcome would have been different had the parties managed and performed the lease more strictly.

Generally speaking, a landlord is only likely to resist a renewal of lease if the tenant is hopeless or it can see a commercial advantage in doing so. That commercial advantage may be another use or development of the property, or to secure more favourable terms from the sitting tenant. This case demonstrates, however, that a landlord should keep their cards close to their chest – at least until the tenant’s three month right to seek relief has passed. Tenants, on the other hand, can take some comfort from the Court’s approach to relief under s 264 and that it will generally use its discretion to prevent landlords from taking advantage of an inadvertent mistake.

First published in Volume 23 Issue 3 of The Property Lawyer.

1. [2022] NZHC 2252↩
2. Ponsonby Mall Trust Ltd v New Zealand Food Industries Ltd (2005) 7 NZCPR 48 (HC) at [29]↩
3. (2005) 7 NZCPR 48 (HC)↩
4. At [47]↩
5. At [16]↩
6. At [19]↩
7. At [19]↩
8. At [20]↩
9. At [24]↩
10. At [34]↩
11. At [37]↩
12. At [42]↩