It is standard practice for commercial and retail leases to include an option to extend the lease for a further term. In order to exercise the relevant option, tenant’s are usually required to give the landlord written notice of their intention to extend the term within a certain timeframe. If the tenant gives the required notice within the specified timeframe, then the parties will be bound to the Lease for the further term.
The recent case of Tripple A Pty Ltd v WIN Television Qld Pty Ltd  QCA 246 relates to circumstances where the tenant did not give the notice required to exercise an option within the required timeframe, but the parties still proceeded as if the option had been validly exercised. In this case, the tenant failed to give notice in accordance with the relevant lease and within the required timeframe that it wished to exercise the option under the lease. The parties subsequently engaged in correspondence, in which the Tenant confirmed that it would like to exercise the option and the parties agreed to extend the lease with the rent payable to be “at the current rate with no increase”. The parties subsequently disagreed as to what constituted the “current rate” of rent. The Landlord’s position was that no market review was required, as the option had not been validly exercised and accordingly a new lease was being negotiated. The Tenant argued that, by agreeing to the further term, the Landlord had waived the requirement for the tenant to provide notice of the exercise of the option within the required timeframe, and accordingly the option had been validly exercised. As a result, the rent payable should have been subject to a market review, as the terms of the lease stated that market reviews were to be conducted on the exercise of the option.
The Queensland Court of Appeal held that:
- The Landlord cannot waive the requirement to give notice exercising an option within a required time period if the relevant time period has already expired. Accordingly, the correspondence which occurred between the parties was not an exercise of the option but were rather negotiations for a new lease; and
- Despite the fact that the option had not been validly exercised, the rent payable should still be subject to a market review as the parties had proceeded on the basis that the option was validly exercised.
Accordingly, the parties to a lease, and particularly the landlord, should be aware that:
- Courts will require strict compliance with lease option exercise timeframes and landlords cannot waive the requirement to comply with the timeframes specified in the lease if a notice to exercise the option is given outside of the required timeframe;
- The parties to a lease will be treated as having entered into a new lease agreement where the relevant timeframe to exercise the option is missed; and
- If the parties conduct themselves as if the option had been properly exercised, this can impact upon the tenants’ and landlords’ rights under the new lease, including the rent payable under that new lease.