When exercising an option, clarity is king!

Case Note

South Yarra Colonnade Pty Ltd v Designbuilt Industries Pty Ltd & Ors [2013] VCAT 266

The Issue:

Does this statement equal an enforceable exercise of option by a Tenant: "We write to advise you of our intention to exercise our lease option for a further 6 year period"? You might be surprised to find that the answer is No!

What Happened:

The Landlord owned a building containing multiple retail premises in South Yarra. The Tenant leased one of these premises. The Tenant had a lease for 6 years from 1 February 2000 with an option for a further term of 6 years. The Lease contained usual provisions that required the Tenant to exercise its option by written notice to the Landlord within an allotted timeframe.

On 1 August 2005, the Managing Agent sent the Tenant a reminder that it had until 31 October 2005 to exercise its option. On 12 October 2005, the Tenant sent a letter to the Managing Agent that included the statement: "We write to advise you of our intention to exercise our lease option for a further 6 year period" and did not otherwise seek to vary any terms of the Lease.

The Landlord subsequently acknowledged the exercise of the option by letter to the Tenant and, on 14 February 2006, then wrote to the Tenant to propose the new market rent.

On 21 February 2006, the Tenant verbally objected to the market rent and stated that it had retained a Tenant's advocate to assist with the "potential renewing of the Lease". The Tenant argued that it never exercised its option and had only wanted to indicate in the 12 October 2005 letter that it may exercise the option in the future (which it later said was subject to it later being satisfied with the rent review).

The Landlord argued that the Tenant had validly exercised its option and supported its position with its letters to the Tenant confirming the exercise (which the Tenant did not respond to). It also noted that, in subsequent negotiations, agreement was reached on rent and the Tenant remained at the Premises at the agreed rent with annual rent reviews until June 2010. (The dispute on the option arose as part of a wider dispute in 2010.)

VCAT found in favour of the Tenant and agreed that the Tenant's "intention to exercise" was merely an intent to do something in the future, which differs from it actually exercising the option. Importantly, VCAT found this irrespective of the Tenant actually remaining on the Premises until 2010.

VCAT looked solely at the 12 October 2005 letter from the Tenant, and found that the letter was not a "clear and unequivocal" exercise of option and therefore was unenforceable by the Landlord.

Practical Tip:

From both parties' perspectives, it is important to know what you mean and communicate it clearly, unambiguously and in writing. In exercising an option or seeking to enforce an exercise of option, beware of statements of intent or any purported variations of terms not factored into the option right, as such statements can undermine the validity of an exercise. If there is a possible ambiguity, it is also important not to assume that silence means agreement. You need to have express written confirmation from the other party to avoid the pitfall faced by the Landlord in this case.

The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

Liability limited by a scheme approved under Professional Standards Legislation.