By Scott Williams

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 [2018] QCA 246 the facts were as fol­lows:-

  1. 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.
  2. The Lease includ­ed two (2) fur­ther option peri­ods each for five (5) years.
  3. 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.
  4. Win failed to give such notice to exer­cise the option before 31 July 2017.
  5. 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.
  6. 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.
  7. 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.
  8. The fol­low­ing day, 29 August, Win sent a let­ter to Trip­ple A accept­ing Trip­ple A’s terms.
  9. How­ev­er, when it came time to sign the new Lease, a dis­pute arose over what rent was payable under the new Lease.
  10. 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.
  11. 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.
  12. 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.
  1. 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 Scott Williams on 02 6583 0427 or swilliams@dohlaw.com.au.

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