It’s not too often that a Supreme Court Justice will remark as to the unexpected outcome of their own judgment – and as Doyle J has shown, when they do, it’s worth paying attention.
The Supreme Court of South Australia recently delivered a surprising judgment in the case of Pastina Pty Ltd v Hosanna Excelsis One Universal Church Inc (Pastina). The case focused on the application of s 20B of the Retail and Commercial Leases Act 1995 (SA) (Act), commonly known as the “minimum five year term rule”.
Summary
Section 20B of the Act provides that retail shop leases must ordinarily operate for a minimum term of five years. Broadly speaking, the purpose of s 20B is to provide the lessee under a retail shop lease with security of tenure, whilst also maintaining a balance with the lessor’s own expectation to be able to deal with the premises.
In Pastina the Court held that on the facts, a tenant who was holding over following the expiration of its initial five year term was bound to a further five year term.
In a nutshell
The case itself can be briefly summarised as follows:
- The tenant entered into a five year lease with the landlord, commencing in May of 2010;
- Some four months into the lease, the tenant sought to vary the lease by increasing the premises area by more than 50%;
- The lease expired in April 2015. The tenant did not exercise its right of renewal, but rather began holding over the lease on a monthly basis for a period of over two years; and
- The landlord then claimed that a new lease, with a minimum five year term, had come into effect as from the commencement of the hold over period, on the grounds that the exceptions contained in s 20B(3) of the Act did not apply.
The exceptions
In defending against the landlord’s assertion of a new five year lease term, the tenant sought to rely upon the exceptions contained within the Act. Specifically, the two exceptions considered by Doyle J were:
Section 20B(3)(b), which provides that the minimum five year term rule will not apply where:
- The tenant holds over after the termination of an earlier lease with the consent of the landlord; and
- The holding over period does not exceed six months; and
Section 20B(3)(d), which similarly provides that the rule will not apply where:
- The tenant has been in possession of the retail shop premises for at least 5 years.
The key findings
Several key findings emerged from Doyle J’s discussion of the s 20B exceptions:
Holding over creates a new lease
Doyle J confirmed the common law position that a tenancy by holding over does give rise to a new lease, albeit on the same terms and conditions of the original lease. Whilst acknowledging that it may be possible for parties to expressly provide that the hold over tenancy operates merely as an extension of the original lease, Doyle J made it clear that generally, tenancy by holding over in of itself constitutes a new, separate lease.
The meaning of “premises”
Of particular importance to the decision was that Doyle J concluded that for the purposes of applying s 20B(3)(d), “premises” must be understood as being the leased area as at the commencement date of the holding over period.
In Pastina, the original lease had been amended so as to expand the leased premises by approximately 50% four months into the original term. As at the commencement date of the holding over period, the tenant had thus only occupied the “expanded” premises for a period of 4 years and 7 months; falling short of the 5 year minimum term required for the exception in s 20B(3)(d) to apply.
Six month “grace period”
Doyle J considered that the s 20B(3)(b) exception operates in effect as a six month “grace period” to enable the parties to either enter into a new fixed term lease or bring the tenancy to an end. However, once this six month period expires, s 20B(3)(b) no longer applies, and unless another exception is applicable the parties may be bound to a new five year term.
Given that the tenant in Pastina had been holding over for a period in excess of two years, they had lost the protection of this exception.
What does this mean?
Doyle J’s judgment has put a new and somewhat surprising spin on the application of s 20B – a consequence admitted by Doyle J himself. Recalling that the primary purpose of s 20B is to provide both the lessee and lessor with a degree of security of tenure, Pastina establishes an interpretation which arguably goes well beyond this purpose. The effects of this interpretation are highlighted when considering the following example provided by Doyle J:
Example
- Two parties enter into a lease that has a term of three years, with a right to renew for a further two years;
- Given this original lease has an aggregate term of five years, it need not be extended under s 20B;
- After three years, the lessee does not exercise its right to renew, but instead the parties agree to enter into a monthly periodic tenancy in respect of the same premises;
- A new, second lease (being the monthly periodic tenancy) is thus created and subject to the operation of s 20B; and
- Assuming no exceptions apply, the second lease will then be extended to bring the term of that lease to five years (i.e. the Act will not seek to extend the term of the original lease to five years).
What to look out for
To avoid falling into the “hold over trap”, landlords and tenants alike should be aware that:
- When calculating the duration of possession for the purposes of s 20B(3)(d), it applies only in relation to the premises occupied as at the commencement date of the holding over period (i.e. if the lease was varied so as to expand the leased property one year prior, the tenant will be considered to have only been in possession of the premises for that one year); and
- If the lease expires and the tenant begins holding over, a new lease is considered to exist as at the commencement date of the holding over, which is itself subject to the minimum five year term requirement once the initial six month “grace period” has elapsed.
A note on the Retail and Commercial Leases (Miscellaneous) Amendment Bill
In 2017 the Retail and Commercial Leases (Miscellaneous) Amendment Bill (Bill) proposed a number of changes to the Act, including amendments to s 20B(3)(b) which would exempt hold over tenancies from being subject to the minimum five year term rule. Whilst the Bill lapsed in late 2018, there is perhaps now even more motivation for the Bill to be resurrected, which would once again change the way in which s 20B is applied.
Conclusion
Given the effects of Pastina on the interpretation and application of s 20B, there is a risk that parties to a lease who seek to vary the terms may inadvertently create a new “premises” or even a new lease. In doing so, parties may find themselves inadvertently exposed to a further, unintended, five year term. We therefore recommend that all parties to lease agreements who are looking to vary the premises or terms of their lease seek legal advice so as to avoid the “hold over trap”.
This article was written by Damien Foulis, Partner and Connor Rossi, Law Clerk.
P: +61 8 8205 0574
E: dfoulis@hwle.com.au