Lessors Beware: Is a Tenant’s Stated Intention to Exercise an Option to Lease Binding?

Landlords may see their tenants writing to advise them of “our attention to exercise our lease option” as a done deal. But in South Yarra Colonnade Pty Ltd v Designbuilt Industries Pty Ltd & Ors (Retail Tenancies) [2013] VCAT 266, the Tribunal held that such stated intention to exercise an option to lease was not sufficient to create a binding agreement. So what went wrong?

Background of the Matter

The Tenant had a six-year lease with an option for a further term of six years. Towards the end of its initial lease term, the Tenant gave the Landlord written notice to exercise its option. In that notice, the Tenant wrote: “We write to advise you of our intention to exercise our lease option for a further six-year period.”

The Landlord subsequently wrote to acknowledge receipt of that notice but did not otherwise provide new lease documents or determined the market rent under the lease provision until after the lease expiry date.

Upon receipt of the Landlord’s notice of the new market rent, the Tenant argued that it never exercised its option, and the initial notice which it gave to the Landlord should be construed merely as an intention to exercise its option in the future, but it has not, in fact, exercised its option.

What Did the Tribunal Decide?

The Tribunal found in favour of the Tenant and agreed with the Tenant that its written notice did not constitute a clear and unequivocal exercise of the option. The tribunal also looked to the facts of the matter and found that:

• The Tenant failed to act on its intention to exercise its option to renew by not responding to the Landlord’s letter confirming its position that it had exercised its option.
• The Landlord did not determine the market rent review for the new lease within the timeframe stipulated by the Lease and also did not issue new lease documents until after the lease expiry date.

Key Takeaways

Whether you are a landlord or tenant, the key takeaway from this case is precise communication. Even though the Tribunal held that each case turns on its facts, it’s still important to take necessary steps to ensure that the validity of an option is not lost due to a fault in the process.

For a tenant, if you intend to exercise your option, you must state in your notice that you are exercising your option to renew your lease as oppose to stating your intention to do so. Such a statement of intent can be construed as ambiguous and unclear. For landlords, it is prudent to obtain written confirmation from the tenant that it has exercised its option. To avoid unnecessary obstacles that could undermine the enforceability of the new lease, ensure that you address any other matters within the stated timeframe such as determining rent for the new lease.

Questions? Get in touch with our commercial leasing team on 1300 544 755.