A recent Court of Appeal decision has confirmed that a tenant who breached its lease after exercising an option to renew was not entitled to a lease for the renewed term.
Nightowl Properties Pty Ltd was the tenant of the premises in the Brisbane CBD. The lease contained an option to renew the lease for a further 5 years. The clause granting the option required not only that notice of exercise of the option be given during a particular period, but also that Nightowl was not at the time of giving the notice of exercise, or at any time up to the expiry date of the initial term of the lease, in breach of its obligations under the lease:
Nightowl gave notice exercising the option to renew in January 2020, within the period prescribed by the lease.
Subsequent to giving the notice of exercise of the option, Nightowl requested that the Landlord grant relief from the obligation to pay rent during 2020 as a result of the COVID-19 pandemic. No formal agreement was reached with the Landlord, however, Nightowl unilaterally decided to pay reduced amounts on account of rent and outgoings, in line with the reduction in its turnover, from April to August 2020. Nightowl resumed full rent and outgoings payments in September and October 2020, but did not pay the arrears from April to August. At the time the lease expired on 13 October 2020, Nightowl was in breach of its obligation under the lease to pay rent, to the tune of approximately $58,000.
When the Landlord did finally respond to the notice of exercise of option in December 2020 (after the lease had expired in October), it asserted that it was not obliged to grant a lease for the renewed term, as Nightowl had not complied with the conditions for the grant of a lease for the option period (namely, to not be in breach of its obligations after exercise of the option and before the expiry date of the initial term).
In the first instance, the Supreme Court found in favour of Nightowl and exercised its jurisdiction to grant equitable relief against forfeiture of the option. However, the Landlord appealed and the trial judge’s decision was overturned.
The Landlord asserted on appeal that because the option to renew was not validly exercised (as not all of the conditions of exercise of the option had been met), Nightowl was not entitled to call on the Landlord for the grant of a further lease.
The Court of Appeal held that the Landlord’s obligation to grant a lease for an option period would only arise if each of the conditions set out in the clause granting the option were satisfied.
The takeaway for tenants is that they should ensure that they are familiar with the entire option clause in their lease and be careful to satisfy all of the conditions set out in that clause for effective exercise of the option. Correctly giving notice of the exercise of option is likely to be one of a number of conditions required to be satisfied in order for a further term to be granted. Failure to comply with all of the conditions stated in the lease may result in the landlord not being obliged to grant a lease for the renewed term.
For further information please contact Amanda Tolson, Director.