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The Cold Hard World of Options

Commercial Law

Anyone involved in leasing of commercial and retail premises knows only too well that it is quite often a difficult space to negotiate full of fairly arcane legal concepts. Mr Justice Windeyer certainly agreed and described it as “a cold hard world” in a 1997 case on options.

One area of constant difficulty has been the exercise of options for further terms of leases.  Whilst for some time strict compliance with option requirements seemed to be not quite as important as historically, a recent decision of the New South Wales Supreme Court has reinforced the need for strict compliance with the provisions of the option clause.

In Piazza Trevi -v- Cromwell BT Pty Ltd [2017] NSW SC 794, the tenant operated a café in the foyer of a commercial building.  The option clause required at least nine (9) months’ notice of exercise of option to be given by the tenant to the landlord.   The tenant was attempting to sell its business and did have some discussions with a representative of the landlord about the possibility of a new lease should the tenant find a prospective purchaser of the business.  There was also some discussion about the time for the exercise of the option but no statements specifically waiving the need to formally exercise the option.

The tenant claimed that because of the involvement of the landlord in the discussions about a possible new lease, that strict compliance with the lease was not required and that therefore he was not required to issue a notice exercising the option in the required time frame   In essence, he claimed that the landlord was estopped due to his purported misleading and deceptive conduct or by the purported unconscionable conduct of its representative.

The Court assessed the creditability of the tenant, and much turns on that because ultimately where there was a difference in evidence it preferred the evidence of the landlord over that of the tenant.  Nevertheless it did hold that an option is no more than an irrevocable offer to make a contract, and it must be clearly and unequivocally exercised in order to be effective.  The Court also held that there will not be a binding agreement between the parties until all of the conditions set out in the option clause are strictly complied with including the time for exercise of the option, the manner of exercise and the manner of service.

A salutary warning to all – if, as a tenant, you do require a further lease then make sure you comply with the provisions of the option clause. Please see any member of our property team if you have difficulty ascertaining the requirements or the necessary time frame.