Paul is correct. I have done a bit of research on this topic too as this concerns me in relation to my father's application (currently in progress).
Exceptional circumstances also means unable to travel for medical reasons or unable to return to country of origin due to conflict or unrest etc. The exemption has to be applied for by the sponsor prior to the visa application going in.
My understanding is that at the end of the first 3 or 5 year stay, the applicant has to leave for 90 days unless they have exemption to apply onshore. The sponsor has to apply for new sponsorship status to be able to renew the visa and it is at this point that the request for exemption is made, so just prior to the visa expiry. I am hopeful my Dad will still be fit enough to travel and we will arrange a holiday visiting 'home' and other relatives overseas and I might even go with him. If he isn't well enough to travel (due to age or medical reasons) we will apply for the exemption after the 5 years initial stay.
I believe applicants can be onshore or offshore for the visa to be granted. So technically, once the application has gone in 'off shore', with a relevant tourist or visitor visa, they could return and await the 870 visa grant?
