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Exercising the option to renew a retail or commercial lease? Don't get caught out.

Property Law News | October 2014

In leases which contain an option to renew the lease a tenant can take advantage of favourable terms of an existing lease, including favourable rent terms, and security of tenure for business premises. The terms governing the exercise of the option to renew commonly provide a strict time frame within which the tenant can notify the landlord of its intention to renew the lease. This time frame is commonly within a 3 month period which extends between 6 months and 3 months BEFORE the end of the lease term. If the tenant misses the time frame then the landlord can refuse to renew the lease. The other snag in the exercising of the option is how you do it. Most leases prescribe the method of notifying the landlord as reference to s.170 of the Conveyancing Act [not particularly helpful to most tenants!] or "in writing" by way personal service or post or sometimes by "facsimile transmission". These methods of service of a notice to exercise the option appear to be quite antiquated these days, however most standard leases still exclude "email'.

The Supreme Court in 2011 in the case of Kavia Holdings Pty. Ltd. V. Suntrack Holdings Pty. Ltd. [2011] NSWSC 716 decided that notice to the landlord to exercise the option to renew by email may comprise valid service of the notice.

The "hitch" in email service of the notice to exercise the option may catch unwary tenants by surprise. If you send a notice by email then the notice must be restricted to the "exercise of the option to renew". Any attempts by the tenant to seek changes to the terms of the lease or try to negotiate other terms will or may invalidate the effectiveness of the notice.

In the case of Kavia, the tenants were the operators of Jordan's Seafood restaurant at Darling Harbour. The tenant sent an email to the landlord within the prescribed 3 month period to exercise the option to renew the 10 year lease for a further 20 years. The only snag here was that in the email the tenant attempted to "hedge its bets, impose its own qualifications or point to the need for further negotiations". Justice Pembroke ruled that for the emailed notice to be effective it must be clearly expressed as an unqualified notice to exercise the option to renew the lease for the term prescribed in the lease document. In particular the court stated that the notice should not be able to be characterised as "simply a step in the negotiation process, rather than a notice of an exercise of the option to renew".

To be certain of the effective exercise of the option Forum Law advise that email is not the recommended form of service of a notice, unless this is a prescribed method of service in a lease. A strict adherence to the methods of service prescribed in the lease document is always preferred.

Forum Law, property lawyers in the inner west can advise and assist tenants and landlords on the terms of their leases to enable businesses to find workable solutions to secure their premises in any area of New South Wales or Australia. The lawyers at Forum Law have strong experience in retail and commercial leasing for small medium and large business clients.

Forum Law is an active member of several reputable law and industry associations. We have recently obtained ISO9001 accreditation.