Option for renewal

n to renew the lease for a further term. Usually, the renewed lease will be the same terms and conditions as the existing lease, save for an adjustment to the rent in the manner prescribed, and less the option that has been exercised. Strict compliance The tenant’s entitlement to exercise the option will be contained in a clause in the lease. Such clauses set out the procedure to follow, and the conditions required, for the tenant to exercise the option. It is well settled that in order for an option to be validly exercised, a tenant must comply strictly with the terms set out in the option clause and, in particular, the procedural requirements for exercise of the option. As one judge famously[1] put it: “If the language used really means that it is a condition of effective exercise of option that the notice must be on blue paper and delivered by a man in a clown suit, [then] pink paper or a woman in a pixie suit will not be effective. There must be compliance; there is no allowance for taking some other non-complying course, even if it appears to achieve the same result.”  Common terms in option clauses  Most option-for-renewal clauses will require: Written notice to the landlord stating the tenant’s intention to exercise the option That notice is to be given within a prescribed timeframe  Compliance with certain renewal criteria, which may include having not been in material and persistent breach during the initial term No unremedied breaches of the lease at the time of exercising the option. A tenant must comply with the requirements of the option clause to exercise the option to renew.  It is pertinent at this juncture to note that legislation in some states requires retail landlords to give notice to a tenant ‘reminding’ the tenant of the deadline for the exercise of the option to renew[2]. Failure to do so may lead to an extension of the time period within which the tenant is entitled to exercise the option.  If a tenant’s notice to exercise an option is late or defective, or if the tenant is in breach of the lease at the time of exercising the option[3], or the tenant has persistently defaulted despite having been given written notice[4] or after the exercise of option but before expiry of the initial term[5], the right to exercise an option for renewal may be lost.  Recent case In the recent Queensland case of Replay Australia Pty Ltd v NightOwl Properties Pty Ltd[6], the Court of Appeal considered whether relief should be granted to the tenant, NightOwl, which had sought to exercise an option to renew its lease. At the time of giving written notice exercising the option, NightOwl had not complied with all of the prescribed conditions for the exercise of the option. The lease then expired, and the landlord declined to recognise the option as having been exercised.  Although NightOwl had provided written notice of its intention to exercise the option within the necessary time period, at the time that notice was given, NightOwl was in breach of the lease. NightOwl had not paid the required rent over a five-month period during the Covid-19 pandemic and had not reached an acceptable payment arrangement with the landlord (having regard to the applicable Covid-19 legislative requirements, which are (fortunately) beyond the scope of this article).  The lease-prescribed option conditions, including that if NightOwl wished to exercise its option, then in addition to giving written notice of the exercise, NightOwl was obliged to have strictly observed and performed the provisions of the lease during the initial term. And further, that there must have been no unremedied breach of the lease at the time of the exercise.  In response to the option exercise notice, the landlord served a notice to remedy the breach of the lease, requiring NightOwl to pay the arrears[7]. Whilst NightOwl promptly paid the arrears following receipt of the notice, the initial term of the lease had by then expired. The landlord took the position that, notwithstanding the arrears had been paid, it was not obliged to grant NightOwl a renewal of the lease due to NightOwl’s failure to strictly comply with the conditions set out in the lease clause for an effective exercise of the option.  Trial decision NightOwl was seeking a declaration that it had validly exercised the option for renewal. The trial judge granted NightOwl “equitable relief against forfeiture of the option”. In basic terms, this meant NightOwl was entitled to a revival of its entitlement to exercise the option. The reasoning was that whilst NightOwl had lost its contractual right under the lease to exercise the option (for failure to have complied with the conditions), as NightOwl was a leaseholder, it held a proprietary interest in the land and in equity arising from its option to renew the lease, which was contained in the lease and, therefore, relief was available.    Appeal The Court of Appeal rejected the analysis of the trial judge. It said that for NightOwl to obtain relief, there had to be an identifiable “interest” in respect of which relief could be granted. The starting point was whether NightOwl had satisfied the requirements to be entitled to exercise the option. There was no dispute that NightOwl had not validly exercised the option, because at the time it served its notice to renew, NightOwl was in breach of the lease by being in arrears. There was also no dispute that by the time NightOwl remedied the arrears, the initial term of the lease had already expired.  The Court held[8] that the fact that there were breaches of the lease up to and at the date of its expiry, meant the landlord was not obliged to grant the new lease. The option was an agreement to grant a further lease, but it was conditioned on NightOwl’s performance of the conditions set out in the clause. Absent the performance of those conditions, no entitlement to a further term arose. The Court stated that[9]: “Only by performing the conditions prescribed for the exercise of an option could the offer to grant a further lease be accepted or the conditional contract be performed.” As to the requirement for the conditions of an option to be strictly complied with, the Court stated that once the time for performance of the conditions for exercise of the option had passed, NightOwl had no proprietary or equitable interest in which relief could be obtained[10]. Once the option was not validly exercised by NightOwl and the lease had expired, there was no action that could be taken against the landlord in which relief could be obtained[11]. It follows that had NightOwl complied with the conditions for exercising the option and/or remedied any breach prior to the lease expiring, NightOwl would likely have had a right of renewal that constituted an interest in land, and relief may have been available. The Court stated that:[12] “The difficulty for NightOwl in the present case arises from the fact that the Lease expired in circumstances where the option was not validly exercised. At the expiry of the Lease, NightOwl remained in arrears of rent…It was, therefore, not by any act of (the landlord) that the Lease came to an end but simply from the effluxion of the time. This was merely a consequence of the parties’ bargain.” Conclusion Option-to-renew clauses in a lease will set out the terms and conditions under which a tenant may elect to renew the lease for a further term. Strict compliance with those terms and conditions is required to exercise the option validly.  In the case of Replay Australia Pty Ltd v NightOwl Properties Pty Ltd, the Court of Appeal found that the tenant failed to comply with the terms and conditions for renewal that entitled it to exercise the option effectively. Absent strict compliance with those terms and conditions, and with the lease having expired, no proprietary interest existed in the land that could be the subject of relief. So, as to whether an option to renew can be validly exercised if a tenant is in breach of the lease where the lease says it must not be, the answer is[13], generally speaking, no. This article by Deren Hassan, Principal at Russell Kennedy was first published in SCN magazine.  Source references: [1] Bryson JA in Comdox No 24 Pty Limited v Robins [2009] NSWSC 367. [2] See s44 Retail Leases Act 1994 (NSW); s21E Retail Shop Leases Act 1994 (Qld); s28 Retail Leases Act 2003 (Vic). [3] See s27(2) Retail Leases Act 2003 (Vic). NB: the existence of a breach at the time of exercising an option may not necessarily be fatal to the exercise of an option under retail leases legislation in Queensland, South Australia, Western Australia and New South Wales. For New South Wales, see also s133E of the Conveyancing Act 1919, which generally provides that breach of certain obligations does not preclude the exercise of an option, except in certain circumstances. [4] See s27(2) Retail Leases Act 2003 (Vic) [5] See, for example, clause 20(10) Fair Trading (Code of Practice for Retail Tenancies) Regulations 1998 (Tas). [6] [2023] QCA 76. [7] The breach notice was served on the basis that the landlord reserved all rights. [8] At paragraph 37. [9] At paragraph 38. [10] At paragraph 40. [11] At paragraph 42. [12] At paragraph 53. [13] This article is for information and educational purposes only and is not a substitute for legal advice.