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.
