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In the matter of South Yarra Colonnade Pty Ltd v Designbuilt
Industries Pty Ltd & Ors (Retail Tenancies)  VCAT
266, VCAT held that a letter from a lessee indicating an intention
to exercise an option under a retail lease was not sufficient to
constitute a valid exercise of that option.
The lease contained an option to renew for a further term of six
years. The relevant provision of the lease provided that the option
to renew could be exercised by giving notice to the lessor in
writing within a specified period.
Approximately three months before the lease was due to expire
the lessee wrote to the lessor as follows:
"We write to advise you of our intention to exercise
our lease option for a further 6 year period".
12 days later the lessor responded as follows:
"We are in receipt of your letter dated 12 October 2005
wherein you have exercised your option for a further term of 6
years from 1 February 2006. On behalf of the lessor...we
acknowledge that the option has been exercised in accordance with
the Lease agreement"
Nothing more was done by either party. Upon expiry of the lease
the lessee denied that it exercised the option to renew and
purported to treat the lease and having come to an end. The lessor
brought a claim in VCAT.
What constitutes sufficient notice to exercise an option
In this case the issue to be determined by the Tribunal was
whether the option to renew had been validly exercised by the
lessee, and therefore whether the lessor could bind the lessee to a
further six year term under the lease.
Ultimately VCAT held that the lessee's notice expressed
nothing more than a future intention. Further, because the lessee
failed to act on its intention to exercise the option to renew, it
had lapsed. As a result the lessee was not bound to the lease for a
VCAT applied the general principle that a lessee's exercise
of an option must be considered objectively. The question is
therefore whether a reasonable person in the lessor's position
would understand the lessee's position as an unequivocal
and clear expression that the lessee wished to exercise its
option [our emphasis].
It is important to note that while the test is an objective one,
each case will turn on its individual facts. However in this matter
VCAT found that the wording of the lessee's letter did not
represent a "clear and unequivocal" intention to exercise
the option. In addition, despite the letter from the lessor
purporting to confirm that the lessee had exercised the option,
nothing more was done by either party in respect of the new
Like most leases the lease in this matter provided a clause for
rent review if a lessee exercised the option to renew the lease.
While the lessor acknowledged the lessee's intention to
exercise the option, it failed to take any further steps within the
timeframe specified by the lease in respect of determining the
amount of rent payable under the new lease.
Each matter will turn on its individual facts and must therefore
be assessed on a case by case basis, however we note the following
take home messages from the decision.
A lessee's intention to exercise an option must be
"clear and unequivocal".
The lessee's position in relation to exercising an option
should be put in writing. If the lessee does not initially provide
notice in writing, a lessor should request that they do.
Once the lessee provides notice in writing of their intention
to exercise an option to renew, the lessor must undertake the
relevant processes specified by the lease in relation to finalising
the terms of the new lease.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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