The danger of mistakenly granting a perpetually renewable lease

What is a perpetually renewable lease?

A perpetually renewable lease is a lease which contains a contractual right to renew on the same terms, including the right to renew, therefore the tenant will have an infinite right to renew the lease.

Consequences of granting a perpetually renewable lease

By operation of the Law of Property Act 1922 a perpetually renewable lease becomes automatically converted into a 2000 year lease and will be registered as such at the Land Registry.

Recent case law - Palo Alto Ltd v Alnor Estates Ltd

In this case the landlord had intended the lease to last one year, with the ability to renew the lease so that tenant could stay in the premises for a total of 3 years.  The landlord preferred using "simple” leases and did not take any legal advice on the drafting of the lease.  The landlord issued a short two page lease to the tenant, which was returned by the tenant with the following amendment (in square brackets):

"The tenancy 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 landlord accepted the amendment and following completion of the lease the tenant applied to register the lease at the Land Registry as a 2000 year lease. The lease had become a perpetually renewable lease because it permitted renewal and contained no restrictions on the number of times it could be renewed by the tenant.

The landlord objected to the registration and applied for rectification of the lease on the grounds that it was a unilateral mistake and that the parties had understood the reason for that amendment was only to allow for two renewals so that the tenant could stay in the premises for 3 years.

This case proceeded on appeal to the Upper Tribunal. The judge concluded that the lease should be rectified based on a unilateral mistake. He also added that dishonesty and sharp practice are not an ingredient of this cause of action (although he did agree that the tenant in this case had been dishonest). The tenant had actual knowledge of the mistake made by the landlord and this was sufficient for unilateral mistake.

This case serves as a useful reminder as to why proper legal advice should be sought if a party does not fully understand the effect of the drafting of a lease.  Parties often use what they consider to be "simpler" leases for smaller properties or those with a low rent, or a short term and whilst this is tempting (especially to keep costs down) this can lead to problems further down the line.  There is a need for professionally-drafted documents.  Options to renew must all always be considered very carefully and it is important that a landlord restricts the number of times a lease can be renewed in order to avoid granting a perpetually-renewable lease.

At Myerson our property team has extensive experience in acting for all parties in connection with landlord and tenant issues and would be delighted to provide further advice in this area should you require it.  Please call our Commercial Property on 0161 941 4000 or email us lawyers@myerson.co.uk.