Commercial Property Blog

Legal Tips and Traps

What to Keep in Mind when Exercising your Option to Renew a Lease

Posted by Andrew Grima on 18 Apr 2019

Assisted by James Duff.

The Supreme Court of NSW recently handed down a decision in the case of Kegran Pty Ltd v Warrik Pty Ltd [2018] NSWSC 1357, which highlights a number of important steps for tenants to take in order to validly exercise their option to renew a lease.  

The Plaintiff (Tenant) and the Defendant (Landlord) had entered into a lease agreement for a five-year term, with the option to renew for a further term of five years.  

In 2014, the Tenant sought to exercise the option to renew in accordance with the terms of the lease.  The Tenant provided notice of its intention to exercise the option to the Landlord via an email. 

The Landlord did not dispute its receipt of the email, however submitted that the email was not a sufficient method of service, thus the Tenant had not validly exercised its option to renew.  

Reasoning

With reference to the case of Kavia Holdings Pty Ltd v Suntrack Holdings Pty Ltd [2011] NSWSC 716, the court stated that an email can indeed constitute a written notice.  

In addition, the Supreme Court found that clause (19) of the lease, which was concerned with the sufficient service of notices was "facultative, not mandatory".  In other words, the clause did not prescribe exclusive methods of service available to the tenant, and as such, the email was seen as a sufficient service of the notice to renew.

The court accepted that the Tenant had called and spoken with the Landlord several days after having served notice, likely bringing the email in question to the attention of the Landlord.  The court in turn saw this as evidence that the Landlord had successfully 'received' the notice.

Final outcome

The court held that the email was a valid exercise of the Lessee's right to renew the lease, as it was addressed to the Director of the Lessor, and had been provided within the specified timeframe.  
This particular case highlights that the valid exercising of an option relies significantly on the interpretation of the terms, when read within the context of the lease.  Whilst this case demonstrated that the email was a valid method of service, it is important to note that this is not always the case.

Subsequently, the court ordered the specific performance of the option to renew, meaning that the Lessor would be obliged to uphold its contractual duty to have the premises available for a further term, as stipulated in the lease agreement.

Key takeaways

Paramount to the decision in Kegran Pty Ltd v Warrik Pty Ltd [2018] NSWSC 1357 was the interpretation of the terms of the lease.  This brings to the forefront the fact that it is crucial for tenants and landlords alike to keep in mind that it is essential for options to be exercised in accordance with the terms of a lease.

To avoid unnecessary proceedings, as occurred in this particular matter, there are a number of essential rules that a tenant must be aware of when opting to exercise an option to renew a lease.  

These include:

  • Service of the notice must take place within the timeframe specified within the lease;
  • For the notice to be effective, the lessee must clearly and unequivocally express the fact that they intend to exercise their option;
  • With the exception of the postal rule (where acceptance is made when the mail is sent, rather than when it is received), the notice of exercise must be received by the landlord in order for it to be validly exercised; and
  • The mode of service should be conducted in accordance with the guidelines specified within the lease.

It is important to remember that tenants have specific obligations when exercising an option to renew.  If you require assistance in negotiating a lease, or are seeking advice in relation to validly exercising an option, please don't hesitate to get in contact with Coleman Greig's Commercial Property Team