Exercising an option to renew: do not be timed out

Leases provide tenants with a specified period to occupy leased premises, and quite often include an option to renew. For a tenant, an option to renew a lease for a further term is a significant and valuable right – a right worth preserving.

In order to enjoy the right, tenants must usually satisfy preconditions. One such standard precondition is that an option must be exercised on time and this is usually strictly enforced. This article discusses this precondition, and also a decision of the Supreme Court of Tasmania concerning a tenant who was late in exercising an option.

Leases often nominate the latest date by which an option may be exercised. It is perhaps more common for a lease to specify a period during which the tenant may notify the landlord of an exercise of option, generally during the last year of the current term (for example, between six months and three months before the lease expiry date). Failure to exercise an option for renewal by the latest day allowed under the lease will typically result in the tenant losing the option, and tenants are usually unable to seek redress in these circumstances.

However, in APF Properties Pty Ltd v Robinson Investment Capital Pty Ltd [2013] TASSC 59 (APF Properties), the Supreme Court of Tasmania determined that it would be unconscionable for the landlord to refuse to grant a new term despite the tenant's failure to exercise its option on time.

Facts

A vendor sold a large property with the family home situated on the land. The contract provided for the sale of the whole property but also required the vendor to sub-divide the property and entitled the vendor to then buy back the family home from the purchaser at an agreed price.

After the initial sale was completed, the vendor was unable to subdivide the land because the local council refused to consent. However, under the subdivision legislation, the council's consent was not needed for a lease of less than 10 years. The parties overcame the subdivision restriction by entering into a lease of the land for a nine year term, with 10 options to renew (each for a period of nine years), an up-front payment of the price stated in the contract for the home and a nominal rent of $1 per year.

The vendor, now a tenant, did not exercise its first option to renew within the specified time. Relations between the landlord and the tenant had soured and the landlord brought an action to evict the tenant and obtain possession of the premises.

Issues for the Court

1. 1. Could the tenant invoke equity's jurisdiction for relief against the loss of the option to renew?
2. 2. Could the tenant rely on section 21 of the Australian Consumer Law (ACL) to obtain relief against unconscionable conduct?

Decision

In considering the tenant's claim for relief against forfeiture, the Court stated that there appeared to be no case in which equity had ever relieved against forfeiture for a tenant's failure to exercise an option to renew within time. Relief against forfeiture will only be available when the forfeiture is caused or contributed to by "unconscientious conduct by the party against whom relief is sought". The unconscionable conduct must also be more than "unconscientious conduct in some loose sense where all principles are at large".

In this case, as the landlord did not cause or otherwise contribute to the tenant's loss of its right to exercise its option to renew, the Court found that equitable relief against forfeiture was not available.

However, the tenant was successful on its second line of argument. Section 21 of the ACL provides for relief against "unconscionable" conduct in trade or commerce. The Court was adamant that, in this instance, for the landlord to deny renewal of the lease and seek to recover possession was unconscionable conduct. In particular the Court noted that, given that the landlord had been willing to sell the home plot to the tenant and the tenant had paid full price for the property under the arrangement to occupy the property for 99 years, the landlord's conduct in denying the tenant that right after only nine years was unfair and unreasonable. The Court held that the landlord's conduct in capitalising on the tenant's inadvertence contravened section 21.

While the Court considered whether relief should be refused because the 99-year arrangement was designed to circumvent the planning restrictions on subdivision, the Court ultimately decided that this did not outweigh what it perceived as the landlord's unconscionable conduct, especially when considering that the subdivision legislation did not prohibit a lease from containing valid option terms.

The Court ordered the landlord to grant a new lease on the same terms and conditions as would have applied had the tenant validly exercised its option.

Conclusion

The decision in APF Properties should not be seen as a precedent of general application, as it is a case with unusual facts and therefore can be easily distinguished. However, the decision provides an interesting example of how courts will use the law to achieve a just outcome, and is a reminder of the unconscionable conduct provisions of the ACL.

While the decision in APF Properties provided relief for the tenant in that case, the Court's decision was isolated to the particular facts in question. The basic principle remains: tenants must ensure they exercise options to renew strictly within the prescribed time. Otherwise, in the absence of very particular circumstances, the benefit of the option will be lost.

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.