Signed, sealed and delivered: No shortcuts in exercising an option to renew

Posted on Jun 3, 2014 by Dean Frith   |   Categories: Commercial & Business Law, Commercial & Retailing Leasing

A tenant’s option to renew their lease is a significant right, and one that should be handled carefully, according to commercial leasing lawyer, DEAN FRITH.

Usually the terms for exercising an option are construed strictly by landlords, and failure to comply with any requirements for exercising the option may be relied upon (and often are) by the landlord to disallow the renewal of the lease.

A recent NSW Supreme Court case highlights the importance of exercising the option to renew properly, both in the words used and how those words are communicated.

The case considered whether one line in an email amounted to an effective exercise of the tenant’s option to renew.

 

Facts of the case

The tenant, Kavia Holdings Pty Limited, carried on a seafood business under the name ‘Jordons’ from premises in Darling Harbour, Sydney. The lease contained an option to renew, and if the tenant wished to exercise the option, it was required to give notice by serving written notice on the landlord at the address specified in the reference schedule of the lease.

The tenant sent an email to the landlord stating: “I would like to have at least another 20 years with Jordons lease and tie that in with Cohibar and Watershed so that they are a composite asset in the books of Kavia.” The tenant asserted that the email represented the tenant exercising the option, which was disputed by the landlord.

 

The Court’s Decision

The Court was asked to decide whether the words used were sufficient to exercise the option, and whether communication of those words via email sufficient to constitute notice under the lease.

The Court stated that the question of whether the option was exercised validly was to be determined by whether a reasonable person in the landlord’s position would have understood from the email that the tenant intended to exercise the option lease. It was held that this requires the notice to have, at minimum, “reasonable clarity in the context and the absence of any qualification”.

The Court held that an option notice sent in the body of an email is valid as long as its contents are sufficiently clear and the name and email address of the sender is displayed clearly.

However, in this instance, the Court decided that the email was not sufficiently clear to communicate the tenant’s intention to exercise the option, and was instead merely a step in the negotiation process between the parties.

 

Lessons for tenants

The case represents a warning that more formal words are required to exercise an option. It is important that if a tenant wishes to exercise its option, that it communicate that fact in a manner that is clear and unequivocal.

Although the Court found that exercising an option via email may be acceptable, this decision should not be interpreted too widely, as it depended upon the particular wording of the lease.

 

If you need assistance with a commercial lease, including in respect to the exercise of options, please contact Dean Frith at Baker Love on (02) 4944 3322.