A recent Queensland Court of Appeal case raises some interesting issues surrounding the valid exercise of an Option Lease for commercial premises.
In Tripple A Pty Limited v Win Television Queensland Pty Limited  QCA 246 the facts were as follows:-
- Tripple A Pty Limited (Tripple A) entered into a five (5) year Lease of commercial premises to Win Television Queensland Pty Limited (Win) on 1 November 2012.
- The Lease included two (2) further option periods each for five (5) years.
- The original Lease included a standard provision that in order for Win to validly exercise the first option to renew, Win needed to give written notice to Tripple A at least three (3) months before the termination date of the Lease, that is before 31 July 2017.
- Win failed to give such notice to exercise the option before 31 July 2017.
- On 8 August 2017 the agents acting for Tripple A sent Win a reminder letter seeking to know whether they wished to exercise the option.
- Win replied on 10 August stating that they wanted to remain in the premises for five (5) more years and asked Tripple A to confirm the terms for the new Lease.
- On 28 August 2017 Tripple A’s agent sent Win a further letter acknowledging Win’s wishes to exercise the option and confirmed that Tripple A would offer a five (5) year Lease with no increase or decrease in the current rent.
- The following day, 29 August, Win sent a letter to Tripple A accepting Tripple A’s terms.
- However, when it came time to sign the new Lease, a dispute arose over what rent was payable under the new Lease.
- Win relied upon the fact that the original Lease had a provision that if the Option Lease was exercised, the rent for the first year of the Option Lease would be a market rent. They believed the market rent would be considerably less than the existing rent for the premises in view of the rents being offered for similar premises in the area.
- Tripple A naturally argued that the rent should be the current rent which had been agreed upon by Win in their letter of 29 August.
- So what did the Court say?
There were three (3) questions the Court had to decide:-
- Could an option to renew be validly exercised out of time?
- Could a Landlord waive the strict compliance with the Lease’s requirements on how to exercise the Option Lease; and
- What rent was payable for the new lease.
- In short, the Court held as follows:-
- No, an option to renew could not be validly exercised out of time or otherwise inconsistently with the terms of the Lease. This is because an option to renew is characterised at law as either:-
- A conditional contract which will only come into force if the tenant meets the Landlord’s strict requirements; or
- An irrevocable offer by the Landlord to the Tenant that the Tenant can accept only by complying strictly with the requirements to exercise the option.
This means any conduct by the Tenant that does not comply with the requirements in the Lease is a counter offer to the Landlord, which means that any new terms subsequently entered into form a new Lease. This means that the Lease before the further five (5) year term was a brand new Lease even though the parties proceeded as if the option had been exercised.
(b) A Landlord may be able to waive their requirements for the exercise of an option before the time to exercise the option has passed although this is unclear at law because a Landlord is not entitled to have the Tenant fulfil the requirements. A Landlord cannot waive the requirements for the exercise of an option once the time in which the option can be exercised has been and gone. In this case, Tripple A could not waive their requirements for the exercise of the option because the first correspondence in relation to the option was on 8 August 2017 being eight (8) days after the time limit had expired.
© In spite of the answers to (a) and (b) above stating that the option was not and could not have been validly exercised, the Court held that the rent to be applied was the current market rent. The Court took this view because:-
- The parties had proceeded on the basis that the option had been validly exercised which meant that the parties had agreed that the new Lease would include the same provisions as the original Lease with respect to the market rent review due to these provisions having been applied if the option had been exercised; and
- Tripple A’s written statement on 28 August 2017 that the rent would be the current rent with no increase was not a valid notice of the applicable market rent in accordance with the market review provisions of the original Lease. As a result, it was entitled to apply for a rental review.
The implications of this case highlight the importance firstly for a tenant to exercise an Option Lease within the time provided and, secondly, if the tenant does not exercise the Option within that time but the Landlord agrees to a new Lease being entered into, the terms of the new Lease must be clear from the outset in order to avoid any dispute regarding the rent or any other essential term of the new lease.
If you would like to discuss any issues you may have with respect to commercial leasing, please contact Donovan Oates Hannaford on 02 6583 0400 or firstname.lastname@example.org.