Option term: strict compliance is a must!

By Milad Gerayelou, at Hillhouse Legal Partners
| 2 min. read
property & projects

Key takeaways

  • When negotiating the terms of a lease, careful attention must be given to the terms of the option to renew or extend clause of the lease. Any particular requirement that would make the tenant completely lose the option should be negotiated, and ideally, removed. For example, if the clause states there must not have been any breaches of the lease during the term.
  • The option clause (and any other relevant provision) must strictly be complied with when exercising the option. For example, the clause may require the option to be exercised within a stipulated timeframe.
  • If there are such conditions, then additional considerations should be given to the methods the lease permits notices be given. Some leases only permit notices by hand delivery, post and fax, where email is excluded. In this instance, a notice given by email is not a valid notice under the lease as it does not accord with the requirements of the lease.
  • If you are the landlord and receive a purported exercise of the option, you should seek professional legal advice as to whether the tenant has properly exercised the option and if you are required to grant the tenant a further term. Seeking assistance early is the key.
  • If you are the tenant, you should seek professional legal assistance with the exercise of the option to ensure the option is properly exercised and is valid; otherwise, the landlord may not be required to grant the additional term with limited to no recourse against the landlord as this is “… merely a consequence of the parties’ bargain”. [1]

Background

Replay Australia (Replay) was the landlord of a commercial premises at 123 Albert Street, Brisbane where NightOwl Property (NightOwl) was the tenant. The lease was due to expire on 13 October 2020 and contained an option to renew or extend the term for a further term of 5 years.

NightOwl exercised the option in early 2020 within the option exercise period. NightOwl did not receive any substantive response to its exercise of the option until after the expiry of the lease on 13 October 2020.

When COVID happened, NightOwl wrote to Replay requesting a rent reduction but no agreement was reached. Nevertheless, NightOwl decided to unilaterally reduce its rent payments.

As of midnight of the initial term of the lease (i.e. 13 October 2020), NightOwl was in arrears of rent due to its failure to pay part rent for April, May, June, July and August 2020.

After the expiry of the initial term, the solicitors of Replay wrote to NightOwl advising Replay was not obliged to grant a new or extended lease as NightOwl had decided to unilaterally reduce its rent payments and was otherwise in breach of the lease after it exercised the option to renew and at the expiry of initial lease term.

Replay’s solicitors pointed out that NightOwl had not fully complied with the requirements of the option to renew or extend clause, specifically, relating to there being no unremedied breaches at the end of the term and NightOwl having at all times observed and performed its obligations under the lease.  

Trial

NightOwl was successful at trial on the issue of the Court’s jurisdiction to grant equitable relief against forfeiture. Replay appealed the Court’s decision on the basis the trial judge erred in deciding that equitable relief against forfeiture was available to NightOwl. 

Outcome

The Court of Appeal considered the grounds of appeal by Replay and stated:

  • It is irrelevant whether an option to renew or extend is an irrevocable offer or a conditional contract. If the tenant is in breach and not compliant with the option to renew or extend provisions and the landlord accepts the exercise of the option, that is an acceptance by the landlord of the tenant’s offer to extend or renew the lease.
  • Once time to perform an obligation under the option to renew or extend has passed, there is nothing to waive (by reference to NightOwl’s assertion that Replay had waived NightOwl’s breach).
  • The lease came to an end at the end of the initial term (i.e. 13 October 2020) by effluxion of time which was merely a consequence of parties’ bargain.
  • Equitable relief against forfeiture was not available to NightOwl because there was no action of Replay to relieve against – the option was not validly exercised by NightOwl in the first place and the lease expired.

Hillhouse Legal Partners can assist you with your property lease so please feel free to contact us on (07) 3220 1144 or email the writer at milad@hillhouse.com.au.

[1] Replay Australia Pty Ltd v NightOwl Properties Pty Ltd [2023] CA 76, [53].

The information in this blog is intended only to provide a general overview and has not been prepared with a view to any particular situation or set of circumstances. It is not intended to be comprehensive nor does it constitute legal advice. While we attempt to ensure the information is current and accurate we do not guarantee its currency and accuracy. You should seek legal or other professional advice before acting or relying on any of the information in this blog as it may not be appropriate for your individual circumstances.