In brief - Landlord's communication with tenant leads to tenant being deemed to have exercised the option
In a recent case, the Queensland Supreme Court decided that an option was deemed to be exercised by a tenant even though the option has been exercised beyond the last date of the period provided in the lease. The tenant was entitled to a renewal of the existing lease, not a new lease on new commercial terms.
The effect of this decision means that a landlord who communicates with their tenant after the last date for the exercise of option to the effect that a renewal of the existing lease has been granted, then this may be at the expense and detriment of the landlord, particularly if it has other plans for the premises.
In this case the tenant did not exercise the option within the prescribed time as provided in the lease.
Acting on the words of the landlord, the tenant sent a letter to the landlord exercising its rights to an option for a further term. The landlord argued that the notice of exercise of option was too late, null and void and that the lease had expired.
The Court acknowledged that the tenant had not exercised the option within the correct time frame and that the option had lapsed. However, based on the actions and behaviour of the landlord, which included the tenant sending a letter to the landlord as suggested by the landlord and the landlord sending a letter to the tenant accepting the valuer's assessment of the market rent, the tenant was entitled to the lease for the further period.
Landlords need to make decisions about premises in advance
The lesson to learn from this is that a landlord must think beforehand of its intentions with respect to the premises as the lease comes up to its expiry date. If it accepts a tenant exercising an option at a much later time, then it must be sure that it wants to use the existing lease or to renew the lease at all.
Alternatively, the landlord must make it clear that the option period has lapsed and the landlord must then advise the tenant of its intentions, ie offer of a new lease with different commercial terms or provide a notice of termination requiring the tenant to vacate the premises.
Tenants must take care to diarise dates for exercise of an option
Each tenant must ensure that it diarises the exact dates for exercise of an option to prevent being caught in a situation where the landlord has allowed it to stay in the premises but can make an offer of a new lease with far stricter commercial terms to the detriment of the tenant, or require the tenant to vacate.
Article by Adelina Tama, Solicitor
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