Commercial leases often include an option to renew the lease at the end of the initial term, benefitting both the landlord and the tenant for the agreement to remain in place. However, certain provisions may allow the landlord to revoke the option to renew – even after it has been exercised.
A recent Court of Appeal decision has provided important insights into the consequences of a tenant’s breach of lease when exercising an option to renew a lease. The ruling clarifies that a tenant who breaches their lease after exercising the option may not be entitled to the renewed term.
The Case: Replay Australia v NightOwl
The case of Replay Australia Pty Ltd v NightOwl Properties Pty Ltd  QCA 76 involved NightOwl Properties Pty Ltd as a tenant in a premises located in Brisbane CBD. The lease included an option to renew for a further term of five years. The option clause stipulated that the tenant must not be in breach of their lease obligations at the time of exercising the option, or at any point until the expiry date of the initial lease term. This is a common condition for renewal.
NightOwl validly exercised the option to renew within the specified period in January 2020. However, subsequent to exercising the option, the tenant requested relief from rent payments due to the COVID-19 pandemic. Although no formal agreement was reached with the landlord, NightOwl unilaterally commenced paying reduced rent amounts based on their reduced turnover from April to August 2020. The tenant resumed full rent payments in September and October 2020 but failed to pay the arrears amounting to approximately $58,000.
The landlord responded to the notice of exercise of the option in December 2020, asserting that they were not obligated to grant a lease for the renewed term due to NightOwl’s breach of lease obligations before the expiry of the initial term.
Court of Appeal Decision
Upon appeal, the Court of Appeal overturned the original decision and held that the landlord’s obligation to grant a lease for the option period would only arise if all the conditions stipulated in the option clause were satisfied. In this case, as NightOwl had breached its lease obligations prior to the expiry of the initial term, the landlord was entitled to allow the initial term expire and was not obliged to grant a lease for the renewed term.
Lessons for Tenants
This decision highlights that it is critical for tenants to understand and comply with all of the conditions outlined in the option clause of their lease when exercising their renewal rights. Giving notice of the exercise of the option is often just one of the requirements.
Below are four considerations for tenants to ensure a successful lease renewal:
- Thoroughly review the option clause: Tenants should carefully examine the option clause in their lease agreement to ascertain the conditions required of them to exercise the renewal option including the often strict notice periods.
- Comply with all conditions: Tenants must fulfil all of the requirements set out in the option clause, including any obligations related to timely rent payments, maintenance of the premises, or other lease-related responsibilities.
- Seek legal advice: When exercising an option to renew, tenants should consider consulting with legal professionals specialising in commercial leasing. A lawyer can provide guidance on interpreting the lease terms, ensuring compliance, and protecting the tenant’s rights during the renewal process.
- Engage in proactive communication: Tenants should maintain open communication with the landlord throughout the lease term, particularly when requesting any modifications or relief. It is advisable to seek formal agreements with the landlord to avoid unilateral actions that could be deemed as breaches of the lease.
Contact our leasing experts for assistance in reviewing or renewing your commercial lease.