Late exercise of lease option is not an exercise of option at all

Option terms in leases often require a tenant to provide the landlord with written notice that they wish to remain within the premises for a further term within a specific time period (e.g. at least six months but not more than nine months prior to the expiry of the current term of the lease). Generally speaking, if a tenant gives the required notice within time, the parties are then bound to a lease for the option period. 

However, what happens when a tenant misses the required option exercise time period but gives written notice at a later point in time?: 

1. Can the tenant and the landlord continue to act as if the option had been properly exercised (i.e. can the landlord “waive” the requirement to exercise the option within a specified timeframe)?
2. In the circumstances that the parties act on the basis of 1 above, and despite the option not being properly exercised, what is the starting rental amount for that further term? Is it an amount agreed between the parties, or some other amount? 

Whilst the parties may act as if the option had been exercised within the required time, a recent Queensland Court of Appeal case (Tripple A Pty Limited v WIN Television Qld Pty Ltd [2018]) shows that the landlord cannot waive the requirement for a tenant to exercise the option within the timeframe specified in the lease, once the timeframe has passed. Any agreement between the tenant and the landlord to lease the premises is to be treated as a new lease, rather than an exercise of option under the “old” lease. 

In the case of Tripple A Pty Limited, the relevant option exercise time period was ‘at least three months before the expiry of the lease, but not more than six months prior to the expiry of the lease’. The notice to exercise the option was not given in the required timeframe. A week after the exercise timeframe had expired, the parties engaged in correspondence regarding the option term in the lease and the rent payable for that further term.  At that point, the parties had agreed in emails that the rent would be “at the current rate with no increase”. As a result of the parties subsequently being unable to agree on the amount of starting rent payable for the further term (because they fell into dispute about whether the “current rate” was subject to a market review), the tenant commenced litigation in the District Court of Queensland.  

The Court of Appeal held that, as the option exercise time period had been missed, the parties had agreed to a new lease. The remaining dispute was then in respect of the starting rental amount for that new lease. 

The (old) lease provided that, had the option been properly exercised, the starting rent of the further term was to be the current market rent for the premises, subjecting the existing rent paid to a market review. The Court of Appeal, despite finding that a new lease had been agreed between the parties, held that the starting rent was to be the current market rent, given the parties had proceeded on the basis that the option had been properly exercised. This finding was made by the Court despite the parties initially agreeing in email correspondence that the starting rent for the further term was to be “at the current rate with no increase”. 

This finding by the Court required the rent payable for the new lease to be subject to a market rent review, even though it had appeared the parties had agreed (in correspondence) on the starting rent. 

What you need to know

1. Courts will interpret lease option exercise timeframes strictly and will not treat landlords as having waived the requirement to comply with the timeframes specified in the lease if a notice to exercise the option is given out of time.
2. In the circumstances where the relevant timeframes are missed, the parties will be treated as having entered into a new lease agreement.
3. The parties’ subsequent conduct in negotiating and agreeing the terms of the new lease, including if the parties conduct themselves as if the option had been properly exercised, can impact upon the parties’ rights under the new lease, including the rent payable under that new lease.

All of the above illustrates the importance of exercising the option under a lease within the time specified to avoid potential uncertainty for the parties to the lease. In this case, attempting to exercise the option late led to litigation in the District Court and Court of Appeal, which ultimately considered complex legal issues.  

Should you need any advice as to whether an option period has been properly exercised, please do not hesitate to contact HopgoodGanim Lawyers’ Property or Dispute Resolution teams.