Although commercial leases commonly require a renewal option to be exercised within a specific period prior to an expiry date, a provision specifying its exercise at least six months before but not more than nine months prior, may well trip up an inattentive tenant.
That’s what occurred to a Broadbeach bottleshop tenant whose lease expired on 28 February 2014 and because it had omitted giving notice between 31 May and 31 August 2013, faced the risk of losing its five year renewal option.
But in November 2013 the landlord’s agent L. J. Hooker Surfers Paradise sent a notice under Retail Shop Leases Act s 46 asking the tenant to advise its intentions as regards the option. It stated:-
In accordance with the terms and conditions of Lease, you have a further lease term of five years with a rental review to market.
That notice was itself out of the time within which s 46 required it be given, namely at least two months but not longer than six months before, the “option date”, ie by at least 30 June 2013. Although a penalty applies, there are no civil consequences for the late notification under s 46.
The tenant nevertheless replied to the notice that it “hereby exercises its option to a further term of five years commencing 1 March 2014”.
The landlord then proposed that rent for the first year of the new term be the “the same as in the previous year”, a proposition which the tenant rejected, insisting on the market review.
Had the tenant rejected landlord’s offer of a new lease? Could it rely on its acceptance of the offer contained in the 26 November letter?
According to Supreme Court Justice Debrorah Mullins, the original option had lapsed she ruled and “if parties thereafter agree to the lessee exercising an option as if it were still available to be exercised, the correct characterisation of that further agreement is that the parties have agreed to a new lease, rather than a renewed lease arising from the exercise of the option”.
The 26 November letter created an offer to enter into a new lease on identical terms – as if the option were exercised and including a requirement to determine market rent – as in the former lease.
The tenant had accepted that offer and the parties were required to have a market determination of the new rent.
The fact that the tenant had continued to pay rent at the rate it was paying when the lease had expired – which was consistent with the having accepted the landlord’s offer to keep the rent for the first year the same as previously – “does not modify the legal effect of the relevant exchange of correspondence”.