Options require strict compliance

In brief - Retail lease case provides important lessons for lessees and lessors in regard to options 

There have been many instances of court decisions on the nature of options and parties' obligations in regard to options. The most recent of these—Piazza Trevi v Cromwell BT Pty Ltd [2017] NSWSC 794—which involved an option for a lease of cafe premises is particularly interesting because the Supreme Court provided an in-depth assessment of what an option is and what is required to exercise an option.

Option in retail lease for cafe specifies requirements for exercising option 

The lease related to Foyer Cafe in Kent Street, Sydney.

The lessee had entered into a retail lease which contained an option requiring at least nine months' notice of exercise of the option.

Approximately 18 months prior to the expiry of the lease term, the lessee sought to sell the cafe business without any success.

There were discussions with the representative of the landlord in relation to the possibility of a new lease if the cafe business was sold, and discussions about the time for the exercise of the option.

Did landlord's actions amount to estoppel, misleading and deceptive conduct or unconscionable conduct? 

The lessee alleged that, due to the conduct of the lessor, strict compliance with the lease was not required and that the landlord's actions during the discussions and negotiations amounted to estoppel, misleading and deceptive conduct or unconscionable conduct. This means that the landlord could not require strict compliance with the lease in relation to the exercise of the option.

The majority of the decision deals with the Court's assessment of the credibility of the plaintiff and the defendant and their respective consultants and advisors, and ultimately the Court held that the defendant lessor was to be believed where there was conflict with the plaintiff's evidence.

Nature of an option contract and compliance requirements given in-depth consideration by Court

It was held that an option is no more than an irrevocable offer to make a contract.

As Windeyer J remarked, in 1997 Burrell v Cameron, "when it comes to options, it is a cold hard world".
In the Piazza Trevi v Cromwell BT Pty Ltd case the Judge held that a purported exercise of an option must clearly and unequivocally express the fact that it is an exercise of the option. 

Further, an option can only give rise to a binding agreement between the parties if, and only if, all of the conditions set out in the option are strictly complied with. This includes the time for exercise of the option, the manner in which the option is to be exercised and the manner of service of the notice of exercise of option.

Outcomes of the Piazza Trevi v Cromwell BT Pty Ltd case

Ultimately, the plaintiff in this matter failed and "lost everything", as it did not have a buyer for the business and did not have a lease.

The Court held that the conduct of the lessor in discussions did not in any way amount to a variation of the clear rights of parties under the lease or a waiver of the requirement for strict compliance with terms of the lease with respect to exercise of the option.

What to consider when negotiating and exercising an option

The provisions of a document with respect to an exercise of an option to give rise to the building contract need to be carefully considered before the option itself is negotiated, and need to be even more carefully considered at the time of exercise to ensure that all specified criteria are met. 

The courts are adamant that, when it comes to options, strict compliance in every sense is required to ensure that the party with the benefit of the option receives the benefits that exercise of the option would confer. The courts' attitude is simply that "near enough is not good enough".

You must always, therefore, take time to look at the procedural and temporal requirements with regards to exercise of any option. It is important that this is done well before the exercise date to ensure that these requirements are strictly adhered to, so that you can get the benefit of the contract which will come into being on the effective exercise of that option.