Breaking up could be harder to do

Breaking up could now be a lot harder for retail and commercial tenants and landlords explains Cowell Clarke Special Counsel Sam Richardson.

Unsuspecting tenants and landlords could now find themselves locked in an unrequited relationship for longer than they expected following a landmark Court decision.

The Supreme Court decision could have major repercussions in certain circumstances, for lease agreements right across South Australia, effectively making a break up harder and more protracted for tenants and landlords, adding uncertainty to the industry at a critical time.

This decision also adds pressure on our State’s lawmakers to revisit and push through a Bill that could provide the answer but which lapsed early last year and remains at a standstill.

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 (SA) and what’s commonly referred to as the minimum five year term rule.

In this case:

  • The tenant entered into a lease for five years over certain premises
  • 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%
  • The tenant continued in occupation of the expanded premises after the expiry of the initial five-year term, holding over for a further period in excess of two years
  • The landlord claimed that a new lease for a term of five years came into effect as an from the commencement of the holding over period.

The landlord’s claim was initially dismissed by the Magistrates Court however The Supreme Court later overturned this decision, finding in favour of the landlord.

Specific consequences for landlords and tenants
The decision in Pastina may result in undesirable consequences for both landlords and tenants in certain circumstances.

For landlords, they may be 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 locking them into a long term lease arrangement and prohibiting the tenant terminating under any holding over provisions.
We recommend 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.

Are changes on the horizon?
It should be noted that the Pastina decision will be impacted by the Retail and Commercial Leases (Miscellaneous) Amendment Bill if enacted in its current form. The Bill lapsed early last year and the time of writing the timing of its reintroduction into Parliament remains unclear.

It’s therefore important landlords and tenants are not only aware of the implication of this Supreme Court decision but also the changes that will arise if the Bill is enacted in its current form.

Sam Richardson can be contacted at srichardson@cowellclarke.com.au or 8228 1240.