In Brief - A recent decision of the New South Wales Supreme Court highlights key issues faced where there is a challenge to the valid exercise of an option for renewal 

The recent Supreme Court decision of Kegran Pty Ltd v Warrik Pty Ltd [2018] NSWSC 1357 highlights some of the key issues faced by the parties where there is a challenge to the proper service of notices.

The importance of meeting pre-conditions when renewing a lease

There are a number of pre-conditions that a lessee must satisfy in order to validly exercise an option to renew. One key pre-condition is the service of an option notice within the timeframe specified in the lease. 

In circumstances where a lessee fails to fulfil a pre-condition when exercising an option to renew, the lessor may seek to deny the right of the lessee to the option lease. Courts have seen an increase in disputes related to the proper service of notices, particularly given the rise in email communication and so the trend towards serving notices via email.  

Common objections by lessors seeking to deny the right of a lessee to an option lease include that:
  • the notice was not received on time; 
  • the notice was not served correctly; or
  • there was a prior breach of the lease by the lessee.

Kegran Pty Ltd v Warrik Pty Ltd

In this case the Court ordered the specific performance of an option to renew, after the lessor challenged the exercise of the option on the basis that the notice was not properly served by the lessee.

The option to renew clause within the lease stated that the lessee would be granted an option lease of the premises provided that, not less than 6 months before the termination date, the lessee notified the lessor of their intention to exercise the option. The relevant clause contained a further condition that the lessee was not to be in default under the lease at the date of the notice. 

The lessee alleged that the option was validly exercised by way of an email addressed to the sole director of the lessor within the option exercise period. Relevantly, the notice provision required that any notice provided to the lessor be: 
a) served personally;
b) sent to the lessor's facsimile number; or
c) forwarded by prepaid security post addressed to the lessor. 

There was also an additional requirement for any notices to be addressed to the lessor at the address specified in the lease.

Notably, the lease did not contain a clause identifying email as a valid method of service. 

Service by email, even without a service by email clause?

The lessor's arguments against the notice being validly exercised included that:
  • the email was not correctly addressed;
  • the lease did not provide for service by email; and
  • that the email never came to the attention of the director of the lessor company within the required timeframe. 
The Court held that the language of the notice provisions were 'facultative and not mandatory', finding that the only conditions to be satisfied by the lessee in exercising the option were those found within the option to renew clause of the lease. 

Court finds lessee has validly exercised option to renew release by email

The Court stated that the relevant notice provisions were concerned with the subject of notices more generally and were not to be strictly applied to the exclusion of all other methods of service. As a result, the Court held that, by way of an email addressed to the sole director of the lessor within 6 months of the termination date, the lessee had validly exercised their option under the option to renew provisions of the lease.  

This case highlights that whether a lessee has validly exercised an option for renewal can depend on the interpretation of the terms of the lease when read as a whole. In a different form of lease with slightly different wording, the decision could have gone against the lessee (noting that courts generally interpret option to renew clauses quite strictly).

Although email is increasing as a fast and easy method of communication, it is important to carefully consider the terms of the lease to determine whether the benefits of notice via email are outweighed by the risk of the notice being found invalid under the provisions of the lease. 

This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2024.