A landmark Supreme Court decision will result in significant consequences where a tenant holds over for more than six months under certain leases.

Introduction

On 22 February 2019 the South Australian Supreme Court handed down its ruling in Pastina Pty Ltd v Hosanna Excelsis One Universal Church Inc (“Pastina”).

The case revolved around the operation of section 20B of the Retail and Commercial Leases Act 1995 (“Act”). Section 20B(1) of the Act states that a retail lease must be at least five years (including renewal periods) - commonly referred to as the minimum five year term rule.

The Act sets out certain exceptions to the minimum five year term rule. Pastina specifically considered the exceptions under sections 20B(3)(b) and (d) of the Act.

Section 20B(3)(b) of the Act

Section 20B(3)(b) states that the minimum five year term (including renewal periods) will not apply where:

  1. the tenant holds over after the termination of an earlier lease with the consent of the landlord; and
  2. the period of holding over does not exceed six months.

Section 20B(3)(b) has been a source of much debate for landlords and tenants (not to mention lawyers) for many years because the exception applies to holding over periods of less than six months. It has been asserted by some, that if a lease of less than five years (including renewals) expires and is held over for more than six months, that a new lease of five years automatically comes into effect.

Section 20B(3)(d) of the Act

Section 20B(3)(d) states that the minimum five year term (including renewal periods) will not apply where the tenant has been in possession of the premises for at least five years.

Facts of the Case

The facts of Pastina are as follows:

  1. The tenant entered into a lease for five years over certain premises;
  2. Approximately four months into the lease, the parties sought to vary the lease by increasing both the rent and the area of premises by more than 50%;
  3. The tenant continued in occupation of the expanded premises after the expiry of the initial five year term of the lease, holding over for a further period in excess of two years; and
  4. The landlord claimed that:
    1. as the expanded premises were not occupied for a minimum five years prior to the holding over period commenced; and
    2. the period of holding over exceeded six months,

a new lease for a term of five years came into effect as and from the commencement of the holding over period.

Supreme Court Decision

The landlord’s claim was initially dismissed by the Magistrates Court. This decision was appealed to the Supreme Court.

Doyle J overturned the Magistrates Court’s decision and found in favour of the landlord and held that the Act operates such that a new lease with a term of five years comes into operation as and from once the tenant holds over more than six months.

Key finding from Pastina

  1. New lease created from the commencement of the holding over period. Doyle J confirmed the common law position that a tenancy by holding over gives rise to a new lease albeit on the terms and conditions of the original lease. Doyle J did, however, state that there might be instances where the express terms of a lease are such that holding over may operate as an extension of the original lease, before concluded that this was not the case in Pastina.
  2. At the time of the commencement of the holding over period, the tenant had only occupied the expanded premises for around four years and seven months. Whilst it was deemed that the agreement to expand the premises amounted to a variation to the existing lease rather than a new lease, the consideration as to whether the tenant had been in possession of the premises for five years must be considered in relation to the expanded premises. In this instance the tenant had not been in possession of the expanded premises for the minimum five years before the holding over period commenced.
  3. None of the exceptions under section 20B(3) of the Act applied. Specifically:
    1. section 20B(3)(b) did not apply as the tenant had been holding over under the new lease longer than six months; and
    2. section 20B(3)(d) did not apply because at the time the holding over period commenced under the new lease the tenant had not been in possession of the expanded premises for five years.
  4. The exceptions in section 20B(3) of the Act are to be considered independent from each other.
  5. In respect of any holding over period, each of the exceptions in section 20B(3) are to be considered at the time of the commencement of the holding over period.

Consequences of Pastina

The decision in Pastina might be considered at odds with the legislative intent of the Act. Doyle J himself appears to acknowledge this in his judgment.

Perhaps the best way to consider the consequences of Pastina is by way of an example. Consider a scenario where a landlord and a tenant enter into a lease that has a term of three years, together with a right for the tenant to renew the lease for a further two years. The lease will have an aggregate term of five years, and will comply with the minimum five year rule under section 20B(1) of the Act. If we assume the tenant after the initial three year term does not exercise its right to renew the lease for a further two years but instead, the tenant is allowed to hold over on a monthly periodic tenancy and that monthly tenancy continues for more than six months. In those circumstances, the second lease (the monthly periodic tenancy) will, if none of the exceptions in section 20B(3) apply, be extended to five years.

Doyle J specifically comments in Pastina that in these circumstances the Act will operate to extend the second lease for a term of five years. It will not seek to extend the term of the original lease to five years.

As noted above, this will in certain circumstances result in the tenant receiving tenure for a period greater than five years.

Specific consequences for landlords and tenants

In light of Pastina, landlords and tenants should be aware that:

  1. where a tenant holds over under a lease that has expired, a new lease is, subject to a term of the lease to the contrary, created from the date of the holding over; and
  2. if the tenant holds over for longer than six months under the new lease, the new lease must operate for a minimum five year term unless an exception under section 20(3) of the Act applies, including if the tenant has already been in occupation of the same premises for at least five years before the commencement of the hold over lease.

The decision in Pastina may result in instances where a landlord is forced to grant a minimum five year term when the landlord was not expecting the tenant to have this right.

Equally, tenants may be caught out where upon holding over for longer than six months their lease is automatically extended for a five year period on the terms and conditions of the lease that was entered into prior to the commencement of the holding over period.

In circumstances where landlords or tenants do not wish their holding over lease to be automatically extended for a five year period, they should validly terminate the lease (noting that the parties have the option to enter into a new lease as they see fit) before the hold over period exceeds six months (usually during holding over, a minimum of one month’s notice will need to be given).

Landlords may also wish to consider including specific provisions in their leases which specifically state that the tenant is prohibited from holding over for longer than six months; or change their leases so that any period of holding over is taken to be an extension of the original lease.

The Retail and Commercial Leases (Miscellaneous) Amendment Bill

It should be noted that the decision of Pastina will be impacted by the Retail and Commercial Leases (Miscellaneous) Amendment Bill (“Bill”) if the Bill is enacted.

The Bill proposes to amend the Act in a number of ways. Please refer to our earlier article here summarising the proposed changes to the Act. Specifically the Bill will amend the Act so that a lease for a term of five years will not arise where a tenant holds over after the expiration of an earlier lease.

Therefore, if passed, the Bill will preclude any decision such as that reached in Pastina.

The Bill lapsed early last year and the timing of the reintroduction of the Bill into Parliament remains unclear. The decision in Pastina may provide an impetus for Parliament to finally push the reforms through.

Summary

The Bill lapsed early last year and the timing of the reintroduction of the Bill into Parliament remains unclear. The decision in Pastina may provide an impetus for Parliament to finally push the reforms through.

In the context of holding over provisions; landlords, tenants, agents and other advisors need to be aware of the decision of Pastina and the potential consequences that may apply to existing leases that have entered into holding over. It has the potential for significant consequences in certain circumstances. Parties should also be aware of the Bill and the changes that will arise if the Bill is enacted in its current form. We recommend that all parties seek appropriate advice and landlords in particular consider having their lease agreements (in particular holding over provisions) redrafted in light of the decision in Pastina.