Introduction
It is common for a business to take several years to develop its goodwill and reputation, so it may not be sufficient for the company to rent a place for a short period of time, e.g. 2 years only. The company may wish to secure an option to renew the tenancy for a further period after the expiry of the original term. Indeed, a tenancy agreement may give a tenant an option to renew the tenancy for a further period of time. When the tenant exercises such an option, the landlord will be bound to enter into a new tenancy with the tenant. However, clear terms are required before an option to renew can be effective as illustrated in the recent case of Tse Siu Hoi v Lee Dick Gold and Jewellery Limited LDPE 1132/2014.

Facts
Silver Joyce Investment Limited (“Silver Joyce”) was the landlord of the subject premises (the “Premises”) and rented the Premises to the Respondent from 25 June 2004 to June 2008 under a tenancy agreement dated 11 June 2004. Silver Joyce and the Respondent entered into a new tenancy agreement dated 10 July 2008 (the “2008 Agreement”), and subsequently another new tenancy agreement dated 17 July 2012 (the “2012 Agreement”). Relevant clauses in the 2008 Agreement and the 2012 Agreement were stated in the following table:-

On 5 February 2014, Silver Joyce issued a notice to quit to the Respondent, stating that the 2012 Agreement would be determined on 30 June 2014. On 17 February 2014, the Respondent gave notice to Silver Joyce to exercise the option to renew the tenancy for another 2 years (from 1 July 2014 to 30 June 2016) pursuant to clauses 2 and 12 of the 2012 Agreement. However, Silver Joyce denied the existence of such an option in the 2012 Agreement.

The Applicant entered into a provisional sale and purchase agreement dated 3 April 2014 with Silver Joyce to purchase the Premises and became the owner of the Premises on 11 September 2014. However, the Respondent had refused to move out since 30 June 2014. The Applicant applied to the Lands Tribunal on 11 November 2014 for, among other reliefs, recovery of possession of the Premises.

The Lands Tribunal was asked to decide whether the Respondent was entitled to remain in possession of the Premises until 30 June 2016 as a lawful tenant. The key issue was whether the 2012 Agreement contained an option to renew for a further term of 2 years.

Legal Principles
The Lands Tribunal examined various precedents in relation to the interpretation of clause 12 of the 2012 Agreement i.e. “2 years being fixed tenancy and 2 years being open tenancy”. In particular, in陳火光v å‘¨å»ºé‚¦ç¶“營常春藤書店 DCCJ 4975/2005 (unreported, dated 28 July 2006) (“Chan For Kwong”), the tenancy agreement stated a term of 2 years being fixed tenancy and 2 years being open tenancy, but did not expressly state the term was for 4 years. The court noted that if the open tenancy was interpreted as providing the tenant with the right of termination, there was no provision as to how this could be done. The agreement also contained a remark that should the tenant wish to continue to rent the property, he was given the priority to do so. Therefore, the term “open tenancy” there could not be interpreted as conferring upon the tenant the right to terminate the open tenancy.

In張佩芳v åŠ‰å°‘珊 LDPD 1304/2011 (unreported, dated 29 July 2011) (“Cheung Pui Fong”), the tenancy was a term of 2 years with 1 year being fixed tenancy and the other being open tenancy. There was no provision as to how the open tenancy could be terminated. The applicant relied however on the verbal agreement and the interpretation of the estate agent to suggest that either party could give a 1-month notice to the other party to terminate the open tenancy. The court agreed with this interpretation because this was the common parlance in the property market.

Decisions
The Lands Tribunal commented that, after reviewing the above precedents, the open term stated in the 2012 Agreement may have the following meaning:-

1.         either party could give a 1-month notice to the other party to terminate the open tenancy, as in Cheung Pui Fong; or

2.         the tenant was conferred upon a right to renew the tenancy for another 2 years when the fixed term expired, as in Chan For Kwong.

The Lands Tribunal found that the terms of the 2012 Agreement were conflicting, so Cheung Pui Fong should not be directly applicable to the present case. Clause 1 of the 2012 Agreement stated a term of 2 years only but clause 12 of the 2012 Agreement stated a term of 2 years being fixed tenancy and another 2 years being open tenancy. Although clause 13 of the 2012 Agreement suggested the tenancy should read the same as in the previous one, probably the 2008 Agreement, such clause did not specify which terms in the 2008 Agreement should be followed, especially when there were obvious differences in the terms between the 2008 Agreement and the 2012 Agreement.  Furthermore, there were no provisions in the 2012 Agreement to specify the new rent if there would be a renewal of the tenancy from 2014 to 2016.

In such circumstances, the Lands Tribunal held that the open tenancy may be regarded as unenforceable for being uncertain so that the Respondent’s suggestion that there was an option for a 2-year term in the 2012 Agreement became invalid. The 2012 Agreement only created a tenancy for two years only. 

The Lands Tribunal also noted that section 3(2) of the Land Registration Ordinance requires any written instruments (except those at market rent for any term not exceeding 3 years) to be registered. Otherwise, they will be invalid as against any subsequent purchaser in good faith for valuable consideration.  If the option to renew existed, the 2012 Agreement would have become a registrable instrument but it had not been registered. As the 2012 Agreement would have been extended to 4 years according to the Respondent’s interpretation, the 2012 Agreement has to be registered under section 3(2) of the Land Registration Ordinance. As the Applicant was a subsequent purchaser in good faith for valuable consideration, the Respondent’s exercise of the option would have been invalid as against the Applicant due to its failure to register the 2012 Agreement prior to the date of the registration of the subsequent agreement for sale to the Applicant.

In conclusion, the Respondent was not entitled to remain in possession of the Premises after 30 June 2014 and was ordered to deliver vacant possession of the Premises to the Applicant.

Conclusion
As can be seen from the case above, the Respondent’s intended option to renew became invalid due to the conflicting terms and the lack of an express option to renew in the 2012 Agreement, and the failure to register the 2012 Agreement. Therefore, when a tenant intends to rent a place, the tenancy agreement should not be casually executed (e.g. using the estate agent’s standard tenancy agreement).  Both the landlord and the tenant should consult their lawyers in order to fully understand their rights and interests before entering into a binding tenancy agreement. The tenant should ensure the consistency of the terms in the tenancy agreement. An express and clearly drafted option to renew should be incorporated to specify how the option should be exercised and how the new rental is to be determined. The tenancy agreement should then be registered if it may, upon the exercise of an option to renew, be extended to a term of 3 years or above.

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.