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Caution Advised in Exercising Lease Options

Recently, the NSW Court of Appeal issued a significant ruling in the case of Willis Australia Ltd v AMP Capital Investors Ltd [2023] NSCA 158. This judgment, overturning a prior decision by the Supreme Court, highlights the importance for both landlords and tenants to proceed with care when exercising lease options.

What are lease options?

In numerous retail and commercial lease agreements, an option to renew the lease is commonly included. This provision grants the Lessee the right to request a new lease from the Lessor for an extended term.

Typically, the Lessee holds the decision-making power regarding whether to exercise their option. This empowers the Lessee to choose between continuing their occupancy under the current lease or allowing the lease term to expire, thus terminating their occupation of the premises.

The renewed lease, often referred to as the option lease, largely maintains the terms of the current lease. Any clauses slated for removal upon renewal are outlined in the current lease. Additionally, the existing lease typically stipulates the method for determining the initial rent in the option lease.

Facts of the Willis Australia Ltd v AMP Capital Investors case

The case revolved around a lease agreement between Willis and AMP, initially set for six years until September 30, 2020, with two additional options to renew. One option allowed for the renewal of the existing lease for four more years, while the other permitted the tenant to lease the remaining space on the premises for an additional four years.

In late 2019, Willis notified AMP of its intention to exercise both options, albeit not fulfilling all contractual conditions outlined in the lease. Subsequently, in August 2020, Willis attempted to retract its notice regarding the second option, prompting AMP to argue that this notice was irrevocable.

Key issues

The court deliberated on two primary issues:

  1. Interpretation of Conditions: Was the option to renew validly exercised only upon satisfying all conditions outlined in the lease clause, or was compliance with a subset of conditions sufficient to establish a binding agreement?
  2. Characterisation of the Option: Should the option be viewed as an irrevocable offer or a conditional contract?

Court Decision

The Court ruled in favour of Willis, rejecting AMP’s argument, and overturning the initial decision. The Court emphasised that Willis had only met three out of the five specified conditions when exercising the second option. Despite AMP’s contention that it could waive certain conditions, the Court held that the language of the lease did not support this interpretation, requiring strict adherence to all conditions for a valid exercise of the option.

Regarding the characterisation of the option, the Court refrained from making a definitive ruling, deeming it unnecessary given the clear failure of Willis to properly exercise the second option.

Implications of the ruling

This ruling illustrates the importance of meticulous interpretation and fulfilment of lease conditions when exercising options to renew. Landlords must ensure that acceptance of a tenant’s notice to exercise aligns with all terms outlined in the lease clause. Failure to do so could enable a tenant to retract their notice, as demonstrated by Willis in this case. Similarly, tenants must exercise caution to ensure compliance with all specified conditions, as failure to do so could render their exercise of the option invalid in the eyes of the landlord.

In essence, the case serves as a reminder that any dispute over the validity of exercising lease options will hinge on the specific language and context of the lease agreement, highlighting the need for careful attention to detail by both landlords and tenants alike.

If you have any questions, please feel free to contact our experienced team of Commercial lawyers.

Important Disclaimer: The content of this article is general in nature and for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication



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