Perpetually renewable leases – take care when granting the right to renew
Tenants are generally keen to maintain the ability to remain in their business premises at the end of a lease and landlords prefer not to afford tenants the statutory rights of tenure under the Landlord and Tenant Act 1954.
Rights to renew a commercial lease are therefore a common point of negotiation between landlords and tenants. A right to renew typically enables a tenant to take a new lease upon the expiry of their current one on the same or similar terms and conditions. The more recent case of Palo Alto v Alnor Estates Ltd, highlights the importance of properly drafted renewal clauses.
The lease in Palo Alto v Alnor Estates Ltd was of an office unit and was intended to afford a one year term with the right to renew twice. Astonishingly, the landlord’s agents prepared a two page lease which the tenant amended and approved without any legal assistance. Following the tenant’s amendments, the culprit clause read:
“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 clause crucially left out the limit on the number of times renewal would be available. Clearly aware of this issue, and upon submission to the Land Registry, the tenant argued that the lease was “perpetually renewable” under the Law of Property Act 1925 and so had been converted to a lease for 2,000 years.
Luckily for the landlord (and its agents), and upon objection to the registration of the lease, the First Tier Tribunal held that the tenant had taken advantage of a unilateral mistake made by the landlord and ordered that the lease be rectified to reflect the original intentions of the parties. The tenant appealed the decision but lost again in the Upper Tribunal.
There seems to be a common belief that the lower the rent and the shorter the term, the less need there is for a proper lease drafted by a solicitor. This case, however, demonstrates that even the smallest of agreements can, if not drafted correctly, have disastrous consequences.
Sam Read is a solicitor in the property department at Barker Gotelee Solicitors in Suffolk.
This article first appeared in the East Anglian Daily Times 15th January 2019.