The lease of the Astor Theatre in Mt Lawley came to an end after the Supreme Court held that the notice the tenant gave to the landlord in order to exercise its option for a further term did not constitute a valid exercise of the option.

On 28 August 2014 the Supreme Court of Western Australia delivered its decision in Astor Theatre WA Pty Ltd v Zimmermann Investments Pty Ltd [2014] WASC 329 regarding the purported exercise of the option.

Background

Zimmermann (landlord) leased the Astor Theatre to Astor Theatre WA Pty Ltd (tenant) with a term commencing in 2009 and expiring on 1 September 2014.  Mr Connell and Mr Denman were also parties to the lease, as guarantors.

The clause of the lease dealing with the option was fairly typical in that the tenant was required to exercise its option not more than 6 months, nor less than 3 months, before the expiry of the term.  If the tenant was not in default, the landlord was obliged to renew the lease for the further term on the same terms and conditions as set out in the lease.

The guarantee clause in the lease provided that the liability of the guarantors was not affected by any extension of the term and that the landlord’s obligation to grant the further term was subject to the guarantors’ guaranteeing the tenant’s covenants under the lease for the further term.

The tenant gave a notice purporting to exercise the option within time however the notice stated that the exercise of the option was subject to and conditional on the requirement for a personal guarantee from one of the guarantors being waived during the further term.

This was not acceptable to the landlord and the notice was rejected.  The tenant sought a declaration from the court that the notice was valid and the lease had been extended for the further term.

Decision summary

The Court held that the option was not validly exercised.  To be effective the notice was required to be an unconditional request by the tenant rather than what was in effect an offer to take a lease for the further term on different terms and conditions.

Implications

This case reinforces the well established principles regarding exercise of options to renew.

An option to renew is, in effect, an offer that can be accepted by the valid exercise of the option.  If the pre-conditions of an option are complied with  a new lease for the further term will be granted.

The implications of the case are of particular importance in the current market.  As it is a tenant’s market we are seeing tenant’s attempting to negotiate a better deal at the time of exercising an option.  Tenant’s must be aware that a conditional exercise of an option is, in effect, not an exercise of the option but a counter offer.  It is open to the landlord to accept or reject the counter offer.

On the other hand, landlord’s must be aware that if a lease is to be varied on exercise of the option it is prudent to have the tenant enter into a binding agreement evidencing the extension and variation as soon as possible.  Until agreement is reached between the parties in relation to the terms and conditions applicable to the further term, there has been no enforceable exercise of the option to renew the lease and the tenant will have the right to withdraw its “counter offer”.