On 22 February 2019, in the case of Pastina Pty Ltd v Hosanna Excelsis One Universal Church Inc  SASC 18, the Supreme Court of South Australia set a new precedent for lease agreements under the Retail and Commercial Leases Act 1995. Judicial interpretation may extend a holding over period that goes beyond 6 months to 5 years automatically!
The New Precedent is all about the Operation of section 20B
Essentially, the judgement concerns the operation of section 20B of the Retail and Commercial Leases Act 1995. Which consider the following:
- If a lease agreement gives the Tenant a right to tenancy by holding over upon expiration of the Lease, unless the initial lease was for a period of 5 years, when the period of holding over extends past 6 months, the hold over will be automatically extended to a five year term lease;
- For a lease of less than five years, containing a right to renew (e.g. 3 year lease with right to renew for 2 years), if the tenant holds over on the second lease for more than 6 months, the hold over will automatically become a new 5 year lease. In such cases, the second lease cannot merely be extended by the number of years necessary to equal 5 years in combination with the first lease
How does this impact Landlords and Tenants?
There are undesirable consequences for both the landlord and the tenant in certain situations.
Landlord: Potentially, a landlord may be forced to enter into a minimum 5 year term lease with the current tenant which they may not expect or want.
Tenant: Tenants could be locked into a 5 year lease agreement if they chose to hold over for longer than 6 months, which could be an arrangement they did not want to embark on.
It is important for landlords and tenants to consider the term and any rights to renewal of existing leases, particularly a landlords holding over provisions.
What happened in the Pastina Pty Ltd v Hosanna Excelsis One Universal Church Inc Matter?
The Plaintiff is the registered proprietor of land situated at South Terrace, Adelaide (the tenant). The Defendant (the landlord) commenced leasing a portion of the premises on that land on 1 May 2010.
- The tenant entered into a lease for 5 years, with the right to renew the lease for another 5 years.
- The lease included a holding over, which allowed the tenant to continue occupying the premises after expiration of the lease with the landlord’s approval. The terms of holding over, as stated within the Lease, were that the landlord “does so under a tenancy for a fixed term of one month and then from month to month which either party may terminate upon one month’s notice ending on any day”.
- 4 months into the lease, each party agreed to vary the lease by increasing the rent and area of premises
- The lease expired on April 30 2015. The option to renew was not taken, but the tenant commenced holding over
- 2 years later, 21 October 2017 the tenant vacated the premises
The landlord argued that the expanded lease was not occupied for minimum of 5 years prior to the holding over period which exceeded six months.
The tenant argued that they had occupied the lease for 5 years and thus the extension of the holding over was not relevant for their situation.
The landlord was unsuccessful in the Magistrates court, however, on appeal the Supreme Court overturned the decision in its favour. Stating that in accordance with section 20B a new lease for a term of 5 years was in effect as the period of holding over exceeded 6 months and the tenant was in possession of the larger premises for under 5 years.
It would be wise for Landlords to re-evaluate the terms of their existing lease regarding holding over or rights to renew.
In addition, Tenants who are currently holding over on a lease or who intend to do so, should be aware that they can be locked into a new five year lease after holding over for 6 months, if they have not already held a lease over that premises for a minimum of 5 years.
The impact of this precedent should be considered when entering into new lease agreements, to ensure the terms of the agreement will not allow for a Lessee to gain an extended second term of the lease for 5 years, if this is not the outcome you are looking for as a Landlord.