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In most commercial leases that contain an option to renew, there
is a condition which states that the Tenant may only exercise the
option if they are not in default of the terms of the lease. This
condition may be limited to not being in default at the time of
exercise or it may be a more onerous condition stating that the
Tenant must not have been in default at any time during the
term.
The question is, are such provisions effective in preventing a
defaulting Tenant from exercising the option to renew? The answer
is not so easy!
Prior to the introduction of Part 8 Division 4 of the
Conveyancing Act 1919 (Act), conditions such as
these were interpreted strictly and any breach by the Tenant would
preclude the exercise of the option. However, following the
introduction of Part 8 Division 4, the Court now has discretion to
allow a Tenant to exercise an option to renew despite the fact that
there may have been defaults during the term or even subsisting
defaults at the time of exercise. The Courts power is a general
discretionary power to be exercised in the circumstances of the
case to achieve an equitable outcome for the parties.
Section 133E of the Act requires a Landlord to serve notice on a
Tenant advising of any breaches which the Landlord considers will
preclude the Tenant from exercising the option to renew within 14
days after receiving the notice of exercise from the Tenant. This
obligation has been strictly enforced by the Courts. If the
Landlord does not serve the required notice then the fact that the
Tenant may be in breach of the lease will not prevent the option
from being exercised. However, even if such notice is served, the
Tenant may bring proceedings in the Court seeking relief pursuant
to Section 133F of the Act.
In what circumstances is the Tenant likely to be granted relief
by the Court? It is difficult to answer this with any degree of
certainty. There have been several cases on this issue and the
outcome has very much been determined on the specific
circumstances. For example, in Ell v Cisera [2000] NSWSC
768, the Court found against the Tenant and did not compel the
renewal of the lease in circumstances where the Tenant had
committed several breaches of the lease including non-payment of
rent over a lengthy period of time and failure to take care of the
premises as required by the lease. However, in contrast, in the
more recent decision of Nameless, Shameless and Legless Pty
Limited v 2 Roslyn Street Pty Limited [2004] NSWSC 519, where
the Tenant also had a significant history of late payments of rent,
the Court decided that the Tenant should be given "one last
chance" and granted relief under Section 133F allowing the
Tenant the benefit of the option term.
Such contrasting decisions leave some uncertainty as to how the
Courts discretion will be exercised however, what is clear is that
Landlords cannot assume that a Tenant will be precluded from
exercising an option to renew even where there may have been
numerous defaults during the initial term.
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