Lessees beware – when your landlord does not want to recognise your option
In commercial leases, often a landlord will for various reasons not want the tenant to exercise its option to extend the lease term. Those reasons could include: Regardless, tenants should always approach the exercise of their option carefully and formally, as it is easy to lose the option right if it is not exercised properly. First, the requirements for the proper exercise of the option must be complied with strictly to avoid a situation where the landlord is not bound by the exercise. This means that the provisions of the lease dealing with the exercise of the option, and the requirements for the deliver of proper notices must be read, understood and followed. Second, the notice must be given during the “option exercise window”, as the exercise is unlikely to be binding if it is done too early or too late. If proper notice is given at the correct time, under many leases and subject to our further comments, the landlord may be able to refuse to accept the valid exercise of the option if the tenant has previously breached the terms of the lease or is in breach of the terms of the lease at the time of the exercise of the option. In this regard the rights of the parties are regulated to some extent by sec 128 of the Property Law Act which provides that – despite any stipulation in the lease to the contrary – if an act or omission of the lessee would have the effect of precluding the lessee from exercising the option, it will be deemed not to have had that effect where the option is exercised, unless during a period of 14 days next succeeding the purported exercise of the option, the lessor serves on the lessee “prescribed notice” of the act or omission, and the lessee is not successful in obtaining relief from the court against the effect of the breach. The lessee must make its application for that relief within 30 days of receiving the landlord’s notice. In other words, the tenant exercises the option and if the landlord wants to claim that it is not bound to extend the lease because of previous breaches, the landlord has to give a certain notice within a particular time and then the tenant has a limited time to apply to the court for orders excusing the effect of those breaches. A distinction however must be drawn between breaches of the lease which have occurred before the exercise of the option, and circumstances that occur after the exercise of the option. Queensland courts have held that they do not have the ability to excuse the effect of matters that occur after the exercise of the option itself. The takeaway from all of this is that: For advice in relation to leasing, please contact our commercial lawyers Peter Muller at peterm@qbmlaw.com.au, Jessica Murray at jessicam@qbmlaw.com or Megan Sarroff at megans@qbmlaw.com.au
