Valuations in leasing part 1: Options to renew
Thursday, 29 November 2018
Barrister William Stark, in the first of a three-part Valuations in Leasing series for Legalwise News, discusses options to renew a lease in Victoria. This article follows his recent seminar for Legalwise on Retail and Commercial Leasing. Subsequent articles will address Market Rent Reviews and Valuation Pitfalls.
As experienced practitioners know, the exercise of an option to renew requires particular care and attention to detail. The strict requirements set out in the relevant lease and the legislation must be followed carefully.
The standard form REIV Commercial Lease (May 2003 version) deals with options to renew at clause 3(f).
The standard form LIV Lease of Real Estate (Commercial Property) (August 2014 version) deals with options to renew at clause 12.1.
Section 27 of the Retail Leases Act 2003 also deals with options to renew.
In the recent VCAT decision of Leonard Joel Pty Ltd v Australian Technical Approvals Pty Ltd  VCAT 1781 (“Leonard Joel”), the Tribunal heard an application by a tenant for a declaration that it had validly exercised its option to renew.
After reviewing the relevant cases, and the facts in that case, Member Joseph made the declaration that the tenant sought.
The background facts are set out in the judgment.
The Tribunal accepted the tenant’s submission that:
(a) By virtue of s 94 of the Retail Leases Act 2003, in determining whether the tenant has exercised the option, the Tribunal must consider and apply section 27 of the Retail Leases Act 2003 (rather than clause 12.1 of the lease).
(b) In this case, the Tribunal was called upon to decide two questions:
i. When the option to renew was exercised (on 8 February 2017), was the tenant in default under the lease?
ii. If yes to the first question, had the landlord given the tenant written notice of that default?
(c) If the answer to either question is ‘no’, the tenant had validly exercised the option.
(d) Those parts of s 27(2) that disentitle the tenant from exercising the option should be construed strictly.
(e) For a notice to constitute ‘written notice’ of a ‘default under the lease’ in accordance with s 27, the notice must clearly assert an existing default so that the tenant understands that serious consequences may follow if the default is not remedied promptly.
(f) The tenant should have been told straight away in any of the purported ‘notices’ that something serious could happen. The letters from the landlord to the tenant had not contained reference to any default or breach until after the tenant had exercised the option.
At paragraph 138 of his reasons, the Member found:
"… the potential consequences to the tenant of the landlord not being required to grant the option to renew are significant and serious ... It is necessary therefore that the landlord applies some rigour in its giving of notice which should both make it expressly clear that a breach by the tenant is alleged and should be clear and consistent in its description of the nature of the breach, all of which is alleged to constitute the default."
In those circumstances, the Tribunal concluded that the landlord had not given the tenant notice about default prior to the exercise of the option and that the tenant validly exercised an option to renew the lease for a further term.
In order for a landlord to refuse a tenant’s purported exercise of an option under section 27(2) of the RL Act, the landlord must comply strictly with the requirements of the Act, including notifying the tenant in writing in clear terms that if the particular breach of the lease being relied upon is not remedied, the tenant mat lose its right to exercise the option.
William Stark has been a member of the Victorian Bar since 1998. He practises in a broad range of commercial disputes in the areas of property (especially mortgage-related property), contracts, corporations law and insolvency. William writes a blog about property law related matters. William has appeared as counsel successfully opposing a number of applications for interlocutory injunctions to restrain mortgagee sales, and successfully seeking and opposing numerous orders for the removal of caveats. William has appeared regularly at VCAT in retail tenancy and real property proceedings. William is also a nationally accredited mediator, having been involved in hundreds of mediations representing parties. In his 10 years as a solicitor, he worked with Hall & Wilcox and Mallesons Stephen Jaques. For over four years prior to coming to the Bar, William was an accredited commercial litigation specialist with the Law Institute of Victoria (being in the first intake of those specialists in late 2003). For 6 years prior to commencing articles, while studying law part- time William worked full-time for the Australian Taxation Office. Contact William at email@example.com or connect via LinkedIn.
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