Case update: exercising options in commercial leases

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In the recent decision of the Queensland Court of Appeal in Tripple A Pty Ltd v WIN Television Queensland Pty Ltd [2018] QCA 246 (Tripple A Case), Justice Bowskill delivered the leading judgement that reviewed the legal rules applicable to the exercise of an option to renew a lease, in the context of a rent dispute between the parties.

This article will look at the facts in the Tripple A decision, the court’s conclusions, and some takeaway messages for commercial landlords and tenants.

What were the facts in this case?

Tripple A Pty Limited (Tripple A) and WIN Television Qld Pty Ltd (WIN) entered into a 5-year lease of premises in Rockhampton in Queensland.  The lease commenced on 1 November 2012, and included two options to renew, each for a further period of 5 years.

The lease included a provision that stated that in order for WIN to exercise the option to renew the lease, WIN must give a written notice of its intention to exercise the option to the Landlord at least 3 months before the expiry date of the lease (i.e. on or before 31 July 2017).

WIN did not give a notice to exercise the option before 31 July 2017.  Instead, the following occurred:

  1. on 8 August 2017, Tripple A’s agent sent a reminder letter to WIN asking them if they wished to exercise the option to renew;
  2. on 10 August 2017, WIN replied saying that they wished to remain in the premises for 5 more years, and asking Tripple A to confirm the new lease terms;
  3. on 28 August 2017, Tripple A’s agent sent a letter to WIN acknowledging that WIN wished to exercise the option, and stating that Tripple A would offer a new 5-year term at the current rent with no increase or decrease; and
  4. on 29 August 2017, WIN replied confirming that WIN accepted Tripple A’s terms.

Having reached this agreement, when it came time to sign the lease documents the parties disputed what rent was payable under the new lease.

WIN argued that the rent for the new lease should be the market rent for the premises, because the parties had proceeded on the basis that the option to renew had been validly exercised and the original lease stated that the rent at the beginning of each option lease was to be reviewed based on current market rent.  WIN believed that the current market rent would be substantially lower than the existing rent for the premises, based on the rent of other premises on offer in the area.

Tripple A argued that the rent that should apply was the current rent under the original lease as at 31 October 2017, because this was what Tripple A had proposed on 28 August 2017 and WIN had accepted in their letter of 29 August 2017.

What did the Court decide?

To reach a conclusion on the question of which rent applied, the Court needed to answer three questions:

  1. Can an option to renew be validly exercised out of time or otherwise inconsistently with the requirements in the lease?
  2. Can a landlord waive strict compliance with the requirements to exercise the option?
  3. On the facts of this case, what amount of rent was payable by WIN?

Justice Bowskill answered these questions as follows:

Can an option to renew be validly exercised out of time or otherwise inconsistently with the requirements in the lease?

No, an option to renew cannot 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:

  1. a conditional contract which will only come into force if the tenant meets the landlord’s strict requirements; or
  2. 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.

Accordingly, 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 meant that the lease in the Tripple A Case for the further 5-year term was a brand new lease, even though the parties proceeded as if the option had been exercised.

Can a landlord waive strict compliance with the requirements to exercise the option?

A landlord may be able to waive the requirements for the exercise of an option before the time to exercise the option has passed, although this is uncertain at law because a landlord is not entitled to have the tenant fulfil the requirements.  The landlord cannot waive the requirements for the exercise of an option once the time in which the option can be exercised has passed.  In the Tripple A Case, Tripple A could not waive the requirements for the exercise of the option because the first correspondence in relation to option was on 8 August 2017, 8 days after the time limit expired.

On the facts of this case, what amount of rent was payable by WIN?

Even though, due to the answers to questions 1 and 2, the option was not and could not have been validly exercised, the rent that applied was the current market rent.  This was because:

  1. the parties had proceeded on the basis that the option had been validly exercised. This meant that the parties had agreed that the new lease would include the same provisions as the original lease with respect to a market rent review, because these provisions would have applied if the option had been validly exercised; and
  2. 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 rent review provisions of the original lease. Accordingly, WIN was entitled to have the rent reviewed.

Implications of the Tripple A Case

The Tripple A Case highlights the importance for a tenant of exercising an option within time, and for both parties of ensuring that where an option is exercised, it is clear that the option has been exercised, and where a new lease is entered into, it is clear that it is a new lease and what terms will apply to that lease.

If a tenant does not exercise an option within time, they risk being left without a lease if the landlord will not agree to enter into a new lease.

If the parties proceed with a new lease without making the terms of that lease clear from the outset, they are likely to end up in dispute as to the key terms of that lease further down the track.  The terms that a court will consider are contained in the lease may not be what the parties expect.

At Bryks Lawyers, we are experienced in drafting and negotiating commercial and retail leases for both lessors and lessees.  Contact us today to see how we can assist you!

This information is for information purposes only and is not legal advice. You should obtain advice that is specific to your circumstance and not rely on this publication as legal advice. Please contact us if you wish for us to advise you on any issue you may have arising from this publication.

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