This is a story about Piazza Trevi (the lessee) which failed to exercise its option to renew its retail lease by the required date specified in the lease agreement (Piazza Trevi v Cromwell BT Pty Ltd [2017] NSW SC 794)
In 2012 the lessee entered into a 5 year retail lease agreement and began operating the Foyer Café in the lobby of a commercial building in Kent Street, Sydney.
The lease agreement included an option to renew the lease for a further 5 years and required that the option be exercised by 31 August 2016. The lease agreement included a clause stating that “the provisions contained in this lease comprise the whole of the agreement between the lessor and the lessee and no other provisions shall be implied or arise by reason of any promise or representation…”. This is frequently called an “entire agreement clause”.
A Disclosure Statement was issued and signed and it included a reference to the exercise date of the option as 30 September 2016 (not 31 August 2016).
In 2016, the lessee was attempting to sell the business and to negotiate a new lease in conjunction with the sale. On 16 September 2016 (16 days after 31 August 2016) it instructed its lawyers to write to the lessor stating that the lessee was “…desirous of negotiating with you a new five year lease of the premises, with an option of renewal for a further 5 years”.
In subsequent discussions between the parties Mr. Jovanovski (the lessee’s director) said to the lessor’s representative Mr. Gothard “Yes, I slipped up with exercising the option, but you should honour it anyway because it was only two weeks late.”
Was the option to renew validity exercised?
The lessee argued that the Disclosure Statement had the effect of changing the stipulated deadline, but the Court did not agree for four reasons.
Firstly, the “entire agreement” clause indicated that it was the intention of the parties that the provisions of the lease constitute the entire agreement.
Secondly, the Retail Leases Act 1994 NSW (the Act) provides that the purpose of a disclosure statement is not to replace any contractual term but to act as a summary of the lease and to give fully informed consent and to ensure arm’s length independent decision making on the part of both parties, with the lessor required under the Act to provide the Disclosure Statement seven days prior to execution of the lease.
Thirdly, there was nothing in the Disclosure Statement which indicated that it was to have any contractual force.
Fourthly, any contractual significance of the Disclosure Statement was further undermined by the fact that the parties had clearly abandoned observance of the legal requirement under the Act that the lessor’s Disclosure Statement be provided seven days prior to the execution of the lease. The Disclosure Statement was instead executed the day after the execution of the lease, meaning that the parties and the lessee in particular, did not rely on the terms of the Disclosure Statement in agreeing to the lease.
The Court’s decisions on the Disclosure Statement
The Court concluded that the Disclosure Statement did not have any binding contractual force and the relevant deadline to exercise the option was 31 August 2016.
One can have a measure of sympathy for the poor lessee. It had bought the business in 2012 for $935,000. The business, being a café without anywhere to operate by late 2016, was by that time worth nothing.
The Communication of 16 September
The Court reiterated the strict requirements that must be complied with in order to validity exercise an option to renew a lease.
The judge said that the communication of 16 September 2016 had no legal effect for two reasons.
Firstly, an option to renew a lease must clearly and unequivocally express the fact that it is intended to exercise the option. The communication did not do that.
Secondly, an option will only be validly exercised if the conditions set out in the option renewal clause are strictly complied with. In this case, the so-called exercise of the option to renew was 16 days late.
Loose lips sink ships – sometimes
Whilst attempting to sell the business and negotiate a new lease, it was alleged that the lessor had said to the lessee “Don’t worry, there is plenty of time to exercise the option.” This conversation took place after 31 August 2016. The Court said that this did not amount to a waiver (that is an abandonment) of the right to strict adherence to the date by which the option to renew had to be exercised, because the date for exercising the option had passed and so there was no longer any right available to waive (or abandon).
Relief against Forfeiture
The Court said that an option to renew a lease operates like an irrevocable offer. It is not a right that gives an interest in land. The Court held that forfeiture can only operate where an interest in land exists. Therefore a failure to exercise an option is not a forfeiture of an interest in land. Accordingly, relief against forfeiture could not operate to relieve a forfeit of the lease in such circumstances.
Take Home points
- Disclosure statements do not replace the lease to which they refer.
- An exercise of an option must be done in clear unambiguous terms and strictly comply with the terms of the lease.
- Relief against forfeiture will not apply to a forfeited lease caused by failure to exercise an option to renew.
Call Leigh Adams at Owen Hodge Lawyers for all your commercial leasing needs on 9570 7844.