What happens if a tenant exercises their option then subsequently the parties negotiate different terms and conditions? This recent Supreme Court case decided whether the lease arising out of that option had been abandoned by the tenant by negotiating the terms of a new lease (substantially different to the option lease) over a long period of time. In this case, the Court found the protracted negotiations did not mean the tenant had abandoned the option lease.
Valid exercise of option or abandonment
Mr Gupta (Tenant) brought proceedings against Fordham Laboratories Pty Ltd (Landlord) (Gupta v Fordham Laboratories Pty Ltd  NSWSC 551) seeking, amongst other things, injunctive relief to restrain the Landlord from treating particular letters as valid notices to terminate his tenancy (due to breaches which are not dealt with in this article) and from taking any steps to re-enter the premises or to forfeit the Tenant's leasehold interest in the premises. The Tenant also sought specific performance of the equitable lease the Tenant claims came into existence in respect of the premises.
Just to touch on a bit of the history of this lease, right from the beginning of negotiations for the initial lease there were issues:
- prior to entering into the lease the Tenant paid a deposit which he considered would be used on account of rent or other monies once the lease commenced, however, the Landlord considered the deposit was a payment so the Landlord would not lease the premises to another [it was held by Ward CJ that this deposit was in fact to "qualify" the Tenant];
- the Landlord, in a letter dated May 2010, expressed the view that the dealings in relation to the proposed lease had been "excessively protracted";
- the practice from time to time by the Tenant to make payments by direct deposit in lump sums without any reference or description; and
- by the fact that the Landlord applied to the Department of Fair Trading for a security bond to be paid out to the Landlord in 2011, the monies so drawn down were not then treated by the Landlord as discharging the rent arrears (it was just being held by the Landlord) [Ward CJ held the release of the security bond discharged the then rent arrears and in the absence of an express obligation to reinstate the security bond if called upon by the Landlord, considered that the Tenant was not in breach of lease by failing to make any payment to reinstate the security deposit].
The dispute about the option lease, concerned whether the Landlord had validly terminated the Tenant's lease of the premises and was therefore entitled to vacant possession or whether the Tenant was entitled to specific performance of an equitable lease that came into existence following the exercise by him in March 2015 of an option to renew the lease that he then held.
The Landlord acknowledges that there was a valid exercise of option by the Tenant in March 2015. The Landlord also accepts that if there is a renewed equitable lease on foot, then the circumstances in which the Landlord can terminate is limited. The Landlord's argument was that in the course of negotiations the Tenant abandoned or relinquished his rights under the option lease with the consequence that the Tenant was thereafter occupying the premises on no more than a monthly tenancy and the Landlord was entitled and had exercised its right to terminate that monthly tenancy by giving sufficient written notice.
Pursuant to the terms of the lease, the first option to renew was required to be exercised between 29 December 2014 and 29 March 2015. Within that time period, on 12 March 2015, the Tenant exercised the option by email to the Landlord. At that time the Tenant was not in arrears nor had any alleged breach notice been issued.
The Landlord suggested (via various letters dated March 2015 to June 2015), that a "fresh lease" be entered into due to the terms that were being negotiated being substantially different to that of the option lease that the Tenant was entitled to following the exercise of his option. The terms the Tenant sought to be re-negotiated were changes to the permitted use; to exclude contributions to outgoings; to allow for a sublet area; and proposed a further 2 five year renewal options. The Landlord said it was at this point that it was open to the Tenant to either accept the offer of a fresh lease on different terms or to insist upon the execution of the Option Lease, but the Tenant continued negotiations as to the terms of a fresh lease. The Landlord's position was that the new terms, that were the subject of the negotiations, were not consistent with the Tenant's exercise of his option and the Tenant had therefore relinquished his right to the Option Lease.
On 1 September 2016, the Landlord's solicitor wrote to the Tenant's solicitor noting that the Tenant's rental arrears had not been brought up to date over a period in excess of 14 days and referred to a conversation between their respective clients to the effect that the Landlord would not grant a new lease of the premises stating "as you know, the previous lease, the option never having been exercised, terminated on 29 June 2015 and your client has remained in occupation pursuant to a monthly tenancy". By letter dated 26 September 2016, the Tenant's solicitor wrote to the Landlord's solicitor denying that the Tenant had relinquished or forfeited the option and denied that the Option was never exercised.
In support of the Landlord's contention, it was stated by the Landlord that negotiations for a new lease contemplated a lease on significantly different terms to that propounded for under the option lease but also on the fact that those negotiations involved persistent delay by the Tenant and that during the period September 2015 to March 2016, the Landlord continued to assert through its solicitors that the Tenant was occupying the premises pursuant to a monthly tenancy and at no point did the Tenant contest that position until September 2016.
The Landlord submits that the Tenant abandoned or relinquished his rights under the option lease around 21 March 2016 when there was no substantive communication from the Tenant after that date. The Landlord submits that whether the contract formed from the exercise of the option had been abandoned may be inferred from the acts and conduct of the parties. The Landlord argued that the inference of abandonment should be drawn from the length of time which had been allowed to elapse, during which neither party had attempted to perform.
Therefore, the Landlord argued that at the time of the service of notices terminating the tenancy, the Tenant's occupation was only as a monthly tenant.
Ward CJ held that during the period from March 2015 to September 2016 both parties were negotiating for different lease terms than those provided for under the lease itself on the exercise of that option but is not inconsistent with the Tenant relying on his entitlements to the option lease. That is because there is nothing to stop the parties agreeing to vary or add to the term of the lease for which the option clause in the lease provided. The fact that the parties sought to do so does not to Ward CJ, evince an unequivocal abandonment by the Tenant of the rights and obligations under the option lease. Ward CJ noted in the case of Fitzgerald v Masters (1956) 95 CLR 420;  HCA 53, Fullagar J said "that the inference of abandonment will be drawn where an "inordinate" length of time has been allowed to elapse during which neither party has attempted to perform or called on the other to perform". Ward CJ noted that in the present case the lapse of time was some 18 months and during that time the parties were still in contemplation of a further lease as they were still attempting to negotiate the terms of the new lease.
It was held that the Tenant, by engaging in negotiations as to varied terms for the lease to be entered into following the exercise of the option did not abandon his entitlement to take a lease on the terms of the option lease and that as at the time of issue of the notices of termination, he occupied the premises on the terms of an equitable lease arising as a consequence of the exercise of the option.
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.