A recent decision in the NSW Court of Appeal has highlighted the importance of careful consideration of the lease terms when determining whether the exercise of an option to renew is binding.
In Willis Australia Ltd v AMP Capital Investors Ltd [2023] NSWCA 158, the central issue presented to the court was whether an option to renew had been effectively exercised so as to be binding upon the tenant. In particular, did all the conditions outlined in the lease need to be satisfied or was compliance with merely part of the conditions enough.
In 2014, Willis Australia Ltd (‘Willis’) as tenant and AMP Capital Investors Ltd (‘AMP’) as landlord entered a lease with a six-year term expiring 30 September 2020 for multiple levels of a Sydney premise. This lease included an option to renew for an additional four-year term or a second option to take a lease of expanded premises, introducing addition space to the agreement for four years. However, the exercise of both options were subject to certain conditions.
In December 2019, Willis chose to exercise the two options through notices by letter to AMP. At such time, not all the conditions set out in the lease had been fulfilled, including the provision of a new bank guarantee covering the expanded premises.
Some months later, Willis revoked its notice relating to expanded premises, merely 2 months before the expiry of the previous lease agreement. Subsequently, AMP commenced proceedings seeking to enforce the option for the expanded premises upon Willis.
The primary judge held that Willis had exercised the second option and was thus bound to take the new lease. It considered the option was a conditional contract, and that AMP was able to validly waive those conditions which had not been satisfied (including provision of the bank guarantee).
The Court of Appeal overturned this decision and found that, applying well settled principles of construction to the lease, all conditions set out in the lease had to be satisfied before Willis had validly exercised the option. Because Willis had failed to provide the required bank guarantee, that condition had not been satisfied, and the option was not binding. Further, AMP had no right to waive that condition under the terms of the lease.
The Court considered the prevalence of language such as “must” and “only if” in the relevant clause of the lease, and noted that all conditions set out in the lease relevant to exercising the option were to be treated equally. In determining that the conditions could not be waived, it noted that the lease specifically required that a valid waiver be in writing and signed by both parties.
The Court’s decision highlights the importance of careful consideration of lease terms in determining whether an option has been validly exercised and is binding upon a tenant.
If you have any questions in relation to this article, please do not hesitate to contact the BAL Lawyers Property team on 02 6274 0999.