PG Kazis Nominees Pty Ltd (the Landlord) entered into a retail lease with Bakers II Pty Ltd (the Tenant). The term of the lease was for 5 years commencing on 1 March 2003 with options for two further terms of five years each. The Tenant exercised the first option to renew which expired on 28 February 2013. In this case, an issue arose as to whether the second option to renew was exercised by the Tenant or if the Tenant was “holding over” on a month to month Tenancy.
The lease provided for a two step process of renewal – firstly for written notice by the Tenant to the Landlord of its intention to renew during a window between 6 and 9 months prior to expiry and a further notice of exercise of option not less than 3 months prior to expiry.
On 3 May 2012, (being before the relevant notice window) the Tenant advised the Landlord of its intention to extend the lease for a further 5 years but requested some modifications to the terms. The Landlord did not respond to the Tenant’s letter.
Further, the Lease required a market review of the rent which ultimately was never resolved. Discussions and two rental valuations were undertaken by the parties but no agreement was reached. The Tenant of its own accord began paying rent in accordance with the second valuation.
The Tenant proceeded on the basis of an assumed monthly Tenancy and provided notice to terminate the lease on 30 September 2015 and vacated the premises.
The Court held that the lease was not validly renewed for a second term as the option had not been validly exercised.
The 3 May 2012 letter sent by the Tenant expressed an ‘intention’ and not a ‘request’ to exercise the option which was required under the lease.
Further the letter was not provided in the correct time period and there was no evidence of the time requirements being waived by the Landlord.
The modifications to the terms requested by the Tenant in the 3 May 2012 letter were held to be too substantial to be considered an absolute and unqualified request to renew the lease on the ‘same terms and conditions’.
When exercising an option, a Tenant needs to comply with the required notice provisions and needs to do more than express an intention to renew. A Landlord should ensure that a Tenant has provided clear notice of exercise of option and that the terms are of sufficient certainty that they are capable of specific performance.
In the event a Tenant purports to exercise its option before the notice window specified in the relevant lease, if a Landlord wishes to accept the early exercises, the Landlord should acknowledge that notice and provide a waiver in respect of the required time period.
In the event of any ambiguity around the Tenant’s intentions regarding purported modifications to the terms, it is important that a Landlord acknowledge acceptance of the purported renewal (if desired) and respond in a timely manner to negotiate any requested modifications. Silence does not constitute an agreement.
Jurisdiction: South Australia
Date delivered: 11 May 2018
Property type: Retail
Penny Telfer, Senior Associate
Jessica Merola, Lawyer