Australia: Options to renew leases - saying what you mean and meaning what you say

Landlord and Tenant Alert
Last Updated: 3 November 2012
Article by David Turner
Focus: Exercising an option for renewal of a lease
Services: Property & Projects
Industry Focus: Property

Exercising an option for renewal

A tenant's option to renew a lease is a significant right. To capitalise on it, the right should be exercised properly, both in the words used, and how those words are communicated. Otherwise the right could be lost. It is also important for the landlord to know whether an option has been exercised properly. Better for both parties to know what the position is, than to be involved in an expensive and uncertain dispute.

An option for a further 20 year term came before the NSW Supreme Court in Kavia Holdings Pty Limited v Suntrack Holdings Pty Limited [2011] NSWSC 716. The tenant had sent an email to the landlord stating: "I would like to have at least another 20 years with Jordons lease and tie that in with Cohibar and Watershed so that they are a composite asset in the books of Kavia."

Were those words sufficient to exercise the option? Was communication of those words by email sufficient to constitute notice under the lease? The tenant thought so. The landlord did not.

When looking at whether the words used were effective to exercise the option, the Court considered what a reasonable person in the landlord's position would have understood the email to mean. That is, would a reasonable person in the landlord's position have understood that the tenant was giving a notice exercising the option to renew the lease for a further term?

For the words to be adequate, at a minimum they must be clear and unequivocal and not indicate any qualification or ambiguity. Using this test, the Court held that the message failed and would not have been understood as an unqualified statement of a desire to take a further lease of the premises for a further term. The tenant's intention to take the renewed lease was not clearly communicated because it contemplated further negotiation and stated that the tenant wished to have "at least another 20 years" and "tie in" leases of other premises, which would have involved amending the current lease.

As to the means of giving notice of the exercise of option, the lease required written notice which could be given or served by being left at the address specified by the recipient party.

The Court held that the email was sufficient to satisfy the requirement for written notice. The obligation to leave the notice at the landlord's address was deemed not to require physical delivery. Furthermore, the requirement that the notice be signed was satisfied by the sender including his name and email address in the email. That was sufficient to identify the sender and authenticate the message.

The decision in this case that notice by email was sufficient should not be interpreted too widely, as it depended upon the particular wording in the lease.

So the lessons from this case are plain. If you wish to exercise an option, be clear and unequivocal. That is, say what you mean. In communicating the message, do it in a way which puts beyond doubt whether the formalities of the lease have been carried out. Best not to leave it to the Courts to decide in your circumstances whether an email was good enough.

The terms of the renewed lease

If an option to renew is exercised, what are the terms of the renewed lease? A properly drafted option clause will specify what provisions are to be contained in the new lease. For instance, that the provisions are to be the same as the previous lease except that the term will be for a specified period, the rent will be for a specified amount (or determined by a specified mechanism), and the original lease terms will be varied in specified ways, including deletion of the last option clause.

In a lease of commercial premises between Miwa Pty Ltd and Siantan Properties Pte Ltd, clause 17.7 obliged the landlord to pay a contribution of $45,000 towards the tenant's fitout. The lease contained an option to renew for a further three years, on the same terms except for the deletion of the option clause and other specified provisions. But the option clause did not stipulate that the landlord's obligation to contribute $45,000 was to be omitted from the renewed lease.

The tenant maintained it was entitled to a contribution of $45,000 in the renewed term as well as in the initial term. The landlord disagreed and the dispute came before the Equity Division of the NSW Supreme Court ([2011] NSWCA 297). The judge at first instance held that, giving the option clause its ordinary meaning, the renewed lease would include the clause requiring payment of the fitout contribution. However he decided that such a reading would lead to an "absurd" result and that reference to the fitout contribution should be deleted from the renewed lease along with the option clause.

The tenant appealed, and was successful. The Court of Appeal decided that clause 17.7, on a proper reading of the lease terms, was included within the renewed lease. The Court was not prepared to rewrite the agreement if that meant departing from the language used by the parties. As the tenant had contractual obligations to repair and refurbish the leased premises, the Court of Appeal felt that it was not necessarily absurd to contemplate a further contribution to the fitout applicable during the renewed term. Legal reasoning aside, it is likely that landlords will prefer the primary judge's view as to what was or was not absurd.

But not all may be lost for landlords in the particular circumstances of their lease. In Toga Pty Limited v Perpetual Nominees Limited and CFS Managed Property Limited [2012] NSWADT 80, the tenant was entitled to a gross rent-free period for the first year of the lease. There was an option for a 10 year renewal, but the option clause did not exclude the rent-free provision. The tenant argued that it should be entitled to a further rent-free year during the renewed term. The landlord opposed that position because of the contents of letters and communications between the parties before the initial lease was entered into.

The Tribunal followed the High Court's decision in Codelfa Construction Pty Limited v State Rail Authority of NSW (1982) 149 CLR 337 saying that "it is essential that ambiguity in the language of the contract be identified before a Court may have regard to the surrounding circumstances and object of the transaction." The Tribunal held that the language of the lease was plain and that, as the rent-free period was not specifically excluded from the option lease, it was included.

The question then arose, did the lease as signed accord with what the parties had actually agreed and, if not, could the lease be rectified? In looking at the particular circumstances of the subject lease, the Tribunal decided that the bargain between the parties was that there would be a single rent-free period, and it was not to recur in the renewed lease.

The retail lease at issue in this case came under the Retail Leases Act 1994 which provides that the Tribunal can only make an order rectifying a lease if the parties consent. In the absence of the tenant's consent, the Tribunal had to fall back upon the concept of fidelity of the bargain. That principle is at least partly based on the requirement that a party do all things necessary to enable the other party to have the benefit of the contract. Having regard to that, the Tribunal eventually determined that it had the power to declare the rights and liabilities of the parties, and declared that the tenant did not have a rent holiday for the first year of the option term.

In the result the landlord was successful in asserting that the rent-free period was not intended to apply and accordingly should not apply during the renewed term. The landlord succeeded because the Tribunal agreed that the lease did not mean what it said. But reaching that conclusion required recourse to complex and convoluted legal principles. It is understood that the tenant has filed an appeal.

Far better to avoid such uncertainty. In all cases it would be preferable beforehand to decide unambiguously what the terms of the proposed lease are, and to have the lease clauses give effect to that understanding. In short, to mean what you say.

If you have any queries on what notices under a lease should state, how notices should be given, the meaning of particular lease clauses, or in relation to leases generally, please feel free to contact the DibbsBarker Leasing Team leader:

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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