In the matter of South Yarra Colonnade Pty Ltd v Designbuilt Industries Pty Ltd & Ors (Retail Tenancies) [2013] VCAT 266, VCAT held that a letter from a lessee indicating an intention to exercise an option under a retail lease was not sufficient to constitute a valid exercise of that option.

Facts

The lease contained an option to renew for a further term of six years.  The relevant provision of the lease provided that the option to renew could be exercised by giving notice to the lessor in writing within a specified period. 

Approximately three months before the lease was due to expire the lessee wrote to the lessor as follows:

“We write to advise you of our intention to exercise our lease option for a further 6 year period”.

12 days later the lessor responded as follows:

“We are in receipt of your letter dated 12 October 2005 wherein you have exercised your option for a further term of 6 years from 1 February 2006.  On behalf of the lessor…we acknowledge that the option has been exercised in accordance with the Lease agreement”

Nothing more was done by either party.  Upon expiry of the lease the lessee denied that it exercised the option to renew and purported to treat the lease and having come to an end.  The lessor brought a claim in VCAT.

What constitutes sufficient notice to exercise an option to renew?

In this case the issue to be determined by the Tribunal was whether the option to renew had been validly exercised by the lessee, and therefore whether the lessor could bind the lessee to a further six year term under the lease.

Ultimately VCAT held that the lessee’s notice expressed nothing more than a future intention.  Further, because the lessee failed to act on its intention to exercise the option to renew, it had lapsed.  As a result the lessee was not bound to the lease for a further term.

VCAT applied the general principle is that a lessee’s exercise of an option must be considered objectively.  The question is therefore whether a reasonable person in the lessor’s position would understand the lessee’s position as an unequivocal and clear expression that the lessee wished to exercise its option [our emphasis]. 

It is important to note that while the test is an objective one, each case will turn on its individual facts.  However in this matter VCAT found that the wording of the lessee’s letter did not represent a “clear and unequivocal” intention to exercise the option.  In addition, despite the letter from the lessor purporting to confirm that the lessee had exercised the option, nothing more was done by either party in respect of the new lease.  Like most leases the lease in this matter provided a clause for rent review if a lessee exercised the option to renew the lease.  While the lessor acknowledged the lessee’s intention to exercise the option, it failed to take any further steps within the timeframe specified by the lease in respect of determining the amount of rent payable under the new lease.

Conclusion

Each matter will turn on its individual facts and must therefore be assessed on a case by case basis, however we note the following take home messages.

  1. A lessee’s intention to exercise an option must be “clear and unequivocal”.
  2. The lessee’s position in relation to exercising an option should be put in writing.  If the lessee does not initially provide notice in writing, a lessor should request that they do.
  3. Once the lessee provides notice in writing of their intention to exercise an option to renew, the lessor must undertake the relevant processes specified by the lease in relation to the finalising the terms of the new lease.