Disputes between Landlords and Tenants when exercising options

In Queensland, it is common for leases to contain an option to renew, whereby upon expiry of the initial lease term, the Tenant may take up a pre-agreed further term to remain in the premises.

The procedure that a Tenant must follow is usually specified in the lease and involves giving a written notice to the Landlord within a set period prior to the lease expiry date.

The notice, if properly given is binding on the Landlord where:-

1. The Tenant has correctly followed the option procedure in the Lease; or
2. The Landlord has, by its conduct, impliedly accepted, granted or acknowledged the Tenant’s right to a further option period.

In addition, once the Tenant has given a valid notice of its option exercise, it can be quite difficult for that notice to be revoked, unless the Retail Shop Leases Act 1994 (Qld) and its regulations (“the Act”) applies to the lease (explained below).

Our lawyers act for both Landlords and Tenants and regularly deal with leasing disputes surrounding the exercise of options. The facts of each case are always very different, however we have set out below some common issues that arise in connection with the matters:-

1. The starting point is to carefully review the procedure set out in the Lease for the Tenant to exercise their option. In particular:-
   1. Has the Tenant delivered the notice within the required timeframe?
   2. Has the Tenant served the notice to the addresses as stipulated and required by the Lease and using the required methods (hand delivery, registered, express or ordinary mail, email, fax etc).

If the Tenant fails to provide notice within the required timeframe or fails to deliver by the prescribed methods of delivery, then arguments could be raised questioning the legitimacy of the exercise of the option and it being binding on the Landlord.

2. The content of the Tenant’s notice must also be carefully examined. For example:-

1. 1. Has the Tenant used plain, unequivocal language confirming the option exercise?
   2. Have any conditions been imposed on the exercise? For example, if the option states that it is subject to receipt of a discount in rent or other lease payments or the Landlord undertaking works or performing an action (or refraining from doing so), the notice could be invalid and not binding.

3. Often a lease will state that the option is only capable of being exercised by the Tenant if they are not (or have not been) in default. In Queensland, there is legislative relief afforded to a Tenant who is met with this response to an option exercise notice by their Landlord. Section 128 of the Property Law Act 1974 (Qld) provides that if the Landlord denies the Tenant the right to exercise an option due to default, the Landlord must, within fourteen (14) days from receipt of the Tenant’s notice, issue their own notice which specifies what the default is and that the Landlord intends not to allow the exercise of the option as a result. If the Landlord fails to issue its own notice within this fourteen (14) day timeframe, the right to deny the option exercise (assuming the formalities in the Lease for giving the exercise notice are complied with) will be lost, even where the Tenant remains in default. Where the Landlord does issue such a notice, the Tenant has one (1) month to apply to the Court for relief allowing the option exercise.

4. Where the Lease is subject to the Act, there are further issues that may arise. For example:-
   1. Pursuant to section 21E of the Act, where a Landlord receives a valid option exercise notice from a Tenant, they must issue a Lessor Disclosure Statement to the Tenant within seven (7) days. It is important to note that:-
      1. Within fourteen (14) days from receipt of the Lessor Disclosure Statement, the Tenant has the right to withdraw their notice exercising the option;
      2. If a Landlord:-
         1. Fails to issue a Lessor Disclosure Statement at all; or
         2. Issues a Lessor Disclosure Statement that is defective; pursuant to section 21F of the Act, an aggrieved Tenant may be entitled to terminate the renewed lease within six (6) months of the commencement date and may also have a right to claim compensation for loss or damage suffered.

1. 1. Where a Lease provides for a market rent review upon the exercise of an option, section 27A of the Act allows a Tenant to issue an early determination notice to the Landlord, seeking determination within three (3) to six (6) months before the lease expiry for leases that are greater than 1 year in duration and for a lease that is less than 1 year, between one (1) to three (3) months prior to expiry. This section of the Act applies irrespective of any other timeframe contained in the Lease for the Landlord to provide their market rent determination. Once the Landlord has issued that determination, the Tenant will have another 21 days to exercise their option, irrespective of the timeframe for option exercise contained in the Lease. There are mechanisms by which this section may be contracted out of and further advice should be sought from Marino Law on a case by case basis in this regard.
   2. Pursuant to section 46 of the Act, a Landlord must remind a Tenant in advance of when their option period is approaching. This must be done at least two (2) months and not later than six (6) months before the start of the Tenant’s option period. Failure to do so does not afford termination rights to the Tenant, but may attract monetary penalties on the Landlord of up to 40 penalty units (at the date of publication, up to $5,338.00).
   3. Where there is no option attached to a Lease to which the Act applies, then section 46AA of the Act requires a Landlord to give a Tenant written notice at least three (3) months but not more than six (6) months prior to the Lease expiry, offering to either renew or extend the Lease (and propose the terms) or alternatively, advise the Tenant that no renewal is being offered and they must vacate. If the Landlord fails to do this, a Tenant may serve a notice asking for an extension prior to the lease expiry date. If the Tenant serves this notice, then the Act will apply so as to automatically extend the Lease for a further period until six (6) months after the Lessor gives the requisite notice. This additional period is also capable of being terminated by the Lessee on the giving of thirty (30) days’ notice.

As can be seen from the above, there can be a minefield of legislative and contractual provisions that can significantly impact the rights of Landlords and Tenants in so far as option periods are concerned. Further, not all leases are afforded the protection given to Tenants in the Act.

Irrespective of whether you are a Landlord or a Tenant, if an option is shortly approaching in your own Lease or you are presently engaged in a dispute regarding an option, you should obtain expert legal advice. For a no obligation discussion, please do not hesitate to contact one of our experienced property lawyers today.