Australia: Failed exercise of option to renew lease

The Tenant verbally exercised an option to renew a lease of premises with the Initial Landlord.  The premises was sold to the Current Landlord on 13 May 2016 (after the expiry of the Lease). The Tenant claims the Current Landlord is estopped from denying that she validly exercised the option.

Background

Ko v CKAS Enterprises Pty Ltd [2018] NSWSC 1876

Ms Ko ("Tenant") claims that CKAS Enterprises Pty Ltd ("Current Landlord") is estopped from denying that she validly exercised an option to renew her lease for a premises ("Demised Premises"). The option was contained in a registered lease dated 13 September 2010 granted to Sung Pak ("Initial Tenant") by S & D Jabbour ("Initial Landlord") ("Lease"). The Lease was for a term of 5 years commencing 13 September 2010 and expiring 12 September 2015.

Clause 4.4 of the Lease is the critical provision for the purpose of this case which provided that the lessee could exercise the option only if the lessee served on the lessor a notice of exercise of option not earlier than the first day stated in item 12D in the Schedule (being 6 months from expiry of the Lease) and not later than the last day stated in item 12E in the Schedule (being 3 months from expiry of the Lease).

Clause 12.4 of the Lease provided that, other than under a new lease, if the lessee continued to occupy the Demised Premises, the lessee would become a monthly tenant and must go on paying the same rent and other money in the same way under the Lease.

In June 2011, by way of Deed of Assignment, the Initial Tenant assigned the Lease to the Tenant.  The register showed the Tenant as lessee following the registration of the Transfer and recorded that the Lease expired on 12 September 2015 and contained an option of renewal for 5 years.

In May 2016, after the Lease had expired, the Demised Premises was sold by the Initial Landlord to the Current Landlord.

Exercise of option

In late June 2015, the Tenant alleged a conversation took place between the Tenant's husband and the Initial Landlord whereby the Initial Landlord is alleged to have asked the Tenant's husband if they wanted the Option to which the Tenant's husband replied yes they would and asked the Initial Landlord if they needed to do anything to which the Initial Landlord is alleged to have said "not now" and that his solicitor ("Solicitor") will write to them.  The Initial Landlord denies this conversation took place.

In August 2015, the Initial Landlord wrote to the Tenant advising an increase in the rent of $50 (meaning new rent was $950 per week) as at 2 October 2015, which was after the Lease had expired.  Shortly after receipt of this letter, the Tenant consulted a conveyancing clerk at a legal firm who sent a letter on 11 September 2015, 1 day before the Lease expiry date, to the Solicitor advising them of the conversation between the Tenant and the Initial Landlord and confirming this discussion took place in June 2015 verbally exercising the entering into of the 5 year option term of the Lease and that the Initial Landlord accepted and requested a new lease for 5 years with an option for 5 years be drafted.

The Initial Landlord, while in Lebanon on holiday, told his daughter he was not prepared to grant a new lease.  When the Initial Landlord returned from Lebanon, he advised the Tenant of his intention to sell the Demised Premises.  The Tenant alleges to have told the Initial Landlord that they wanted to renew the Lease and exercise the option.  The Initial Landlord then responded saying "I can't give you a new lease because I'm selling the property and you got your option" [at 24].

In December 2015, the Tenant's conveyancing clerk spoke to the Solicitor in which the Solicitor stated "The option has been exercised and your client is already paying rent increased by CPI according to the letter given by the lessor to your client".  When asked by the conveyancing clerk about the request for a new lease, the Solicitor advised "it won't be necessary as there is nothing to amend at all. The current lease describes all terms and conditions. Rental increase of CPI is given by the lessor anyway".

Sale of the Demised Premises

In March 2016, the Current Landlord as purchaser, in their affidavits, stated they asked the Initial Landlord whether the Lease had been renewed to which they say the Initial Landlord replied "I never received any request for a further 5 year option to the lease ... so the Lease was not renewed...".  The sale of the Demised Premises was completed in May 2016.

On 13 May 2016, the Solicitor sent a "Notice of Attornment" to the Tenant advising of the sale and to pay rent to the Current Landlord.  No mention was made of the nature of the tenancy.

On 24 May 2016, the Tenant received a letter from the Agent giving directions for the payment of rent and again no mention was made of the nature of the tenancy.

On 17 June 2016 and 20 June 2016, the Tenant received another letter from the agent increasing the rent to $2,000 + gst and $2,500 + gst (respectively). The Tenant refused to pay the increase.

On 22 June 2016, the agent for the Current Landlord sent to the Tenant a notice under s129 of the Conveyancing Act 1919 (NSW) requiring the remedy of breaches to the Lease (the breaches were with respect to a development consent and an occupation certificate for the use of part of the Demised Premises for outdoor dining and complying with an easement for car parking).

In July 2016, Termination Notice was issued to the Tenant.  This Termination Notice prompted the Tenant to commence these proceedings seeking interlocutory relief and a final order declaring that the s129 Notice and the Termination Notice were invalid or in the alternative, the Tenant sought relief against forfeiture of the Lease.  The Current Landlord filed a cross-claim seeking a declaration that the Tenant failed to exercise the option to renew the Lease and that the purported notice of exercise of the option to renew the Lease, contained in the letter dated 11 September 2015 from the conveyancing clerk was ineffective.

Court Decision

The Tenant asserted that the option was exercised by that letter or in the alternative, by reason of the conversation with the Initial Landlord in June 2015 whereby the Initial Landlord allegedly accepted that the option had been exercised or alternatively that the Current Landlord is estopped from departing from a common understanding or an agreed assumption that the Tenant had validly exercised the option or that the Initial Landlord had waived the requirement for strict compliance with the terms of the Lease.

Emmett AJA considered that it was more likely than not that there was some mention of the exercise of the option with the Initial Landlord. Emmett AJA continued by saying [at 42]:

"Had there been a discussion in which Mr Jabbour [Initial Landlord] said, on behalf of himself and his wife, to the Tenant, or Mr Cho acting on behalf of the Tenant, that there was no need for the Tenant to exercise the option to renew in accordance with the terms of the Lease and, in reliance upon that statement, the Tenant failed to give formal written notice of exercise of the option, the Lessors (Initial Landlord) may well have been estopped from denying that the option to renew had been exercised.  However, in circumstances where any possible statement to that effect was made after the time for formal exercise of the option had elapsed, I do not consider that there is any basis for the Lessors (Initial Landlord), or their successors in title, being estopped from denying that the option had been validly exercised."

The Court found that although the Initial Landlord did suggest that the Tenant did not have to do anything and that his Solicitor will write to them, it was a failure by the Tenant to not formally exercise the option in accordance with the terms of the Lease.

The Tenant's argument was the Current Landlord acquired the reversion with knowledge of the existence of the Lease and Transfer however, Emmett AJA reiterated the option was not validly exercised and that Tenant was in occupation under the "holding over" provision of the Lease.  The Current Landlord asserts that it is entitled to the benefit of s42 of the Real Property Act 1900 (NSW) (Estate of registered proprietor paramount) in so far as there is no recording of the renewed term on the Register.  The holder of an unregistered interest may obtain relief against the registered proprietor if the conduct of the registered proprietor creates an equity that the holder of the unregistered interest may assert against the registered proprietor.  However, in the present case, the Tenant had no unregistered interest as the option to renew had not been validly exercised.

The Tenant noted that in none of the communications was it asserted or suggested that the Tenant had failed to exercise the option to renew or that the Tenant was no more than occupying the Demised Premises on a monthly tenancy.

The question then raised was "whether it is possible to conclude, from the conduct of the parties and the communications between them, that the Tenant occupied the Demised Premises on the basis of a common assumption by the Tenant and the Current Landlord, that the occupation was under a renewed lease for a term of 5 years and not under the holding over provision in clause 12.4 of the Lease".

It was noted in the judgment that the two letters dated in June 2016, both headed "Rent Review" were inconsistent with the existence of a new lease as clause 4.6 states any new lease was to be in the same terms as the Lease except for the rent (amongst other things).  The rent review was to be by reference to CPI and not reference to "current market rent" as stated in the letters. However, Emmett AJA found it curious as to why a notice would be given under s129 of the Conveyancing Act 1919 (NSW) in relation to a monthly tenancy and also in respect to the Notice of Termination which would have been a simple matter for the Current Landlord to give notice in terms of clause 12.4 of the Lease terminating the monthly tenancy by way of holding over.  These would have been more appropriate under the assumption of a renewed lease.

The Tenant, based on the assumptions above (that they had in fact exercised their option) incurred expense in applying for a Complying Development Certificate (which would be a benefit to the Current Landlord) and in commencing proceedings in respect of the s129 Notice and Notice of Termination.

Conclusion

Emmett AJA concluded the Current Landlord was entitled to a declaration that the Tenant did not exercise the option to renew and therefore is on a monthly tenancy.  Although His Honour did consider that it would be appropriate for the Current Landlord to pay to the Tenant reasonable compensation for the costs incurred in applying for a Complying Development Certificate (which would be a benefit to the Current Landlord) and filing the summons in these proceedings on the basis that the Current Landlord had acted as though the option lease was valid and had encouraged the Tenant to incur those expenses.

Although His Honour found the exercise of the option to be invalid, this was due to the timing of the conversations between the parties which took place after the expiry of the last day that the option for renewal could be exercised i.e. 3 months prior to expiry of the Lease, meaning notice needed to be given before 12 June 2015, however the conversations took place apparently end of June 2015.

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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Authors
Paul Carroll
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