Is a stated intention to exercise an option sufficient to create a new agreement to lease?

In the recent VCAT decision of South Yarra Colonnade Pty Ltd v Designbuilt Industries Pty Ltd & Ors (Retail Tenancies) [2013] VCAT 266, a tenant of a retail shop sent a letter to its landlord advising the landlord that it intended to exercise its option.

When the lease was subsequently terminated, the landlord argued that the tenant had validly exercised its option, creating a new lease term.

The tenant argued, on the other hand, that the letter constituted no more than a statement of future intentions and that the option lapsed when the tenant failed to make good that intention.

The Tribunal found that the tenant had not validly exercised its option.

Senior Member Walker set out the relevant correspondence and surrounding facts as follows:

[18]            … on 12 October 2005 Mr Cumberlidge wrote to Mr Murray as follows:

“Re; exercising of lease option Shop 13 The Colonnade (554) Chapel Street, South Yarra

We write to advise you of our intention to exercise our lease option for a further 6 year period.

…

[19]            On 24 October 2005 Mr Murray wrote back to Mr Cumberlidge as follows:

“Acknowledgement of exercise of option.

Shop 13, The Colonnade, South Yarra

We are in receipt of your letter dated 12 October 2005 wherein you have exercised your option for a further term of 6 years from 1 February 2006.

On behalf of the lessor, South Yarra Colonnade Pty Ltd, we acknowledge that the option has been exercised in accordance with the Lease agreement.

Should you have any further queries, please do not hesitate to contact the undersigned”.

[20]            Nothing further was done by either side in regard to the exercise of the option or to determine what rental should be paid. In particular, no notice was served by the Landlord pursuant to Clause 14.1 to propose the market rental for the first year of any renewed term.

…

[22]            On 14 February 2006 Mr Murray wrote back to Mr Cumberlidge, confirming that the Tenant had exercised its option and that a market review of rent was due with effect from 1 February 2006. He stated in the letter that the Landlord sought a rental of $125,500 per annum and set out some calculations to justify that figure. The last paragraph of the letter states:

“We look forward to receiving your written acceptance of this proposal by return. However please do not hesitate to contact the undersigned should you have any queries”.

The landlord made a number of arguments in support of its submission that the tenant validly exercised it option, summarised at paragraph 33 of the Tribunal’s decision.

The tenant, on the other hand, argued that the plain meaning of the letter of 12 October 2005 was prospective.  Other circumstances relevant to the tenant’s argument are summarised at paragraph 37 of the Tribunal’s judgment.

After discussing authorities relevant to the issue, the Tribunal held that (emphasis added):

[38]            … I have to determine whether the option was exercised as a matter of objective fact. To find that the option has been exercised I must find that the letter, when viewed objectively, would have been understood by a reasonable person in [the landlord’s] position to clearly and unequivocally express the fact that the Tenant intended, by that letter, to exercise the option. In considering that question I must construe the letter taking into account the circumstances that the parties would have had in mind at the time.

[39]            The first such circumstance is the wording of the letter itself. As Mr McNamara said, it contains no qualification or reservation but, as Mr Frenkel pointed out, it is expressed in terms of an intention. It does not say, clearly and unequivocally, that the option is exercised. The letter on its own without more would, I think, amount to no more than an expression of a future intention.

After considering the surrounding circumstances, the Tribunal concluded that:

[46]            I cannot see that there is any circumstance that renders the letter of 12 October “clear and unequivocal”. It expresses an intention to renew the Lease but does not clearly and unequivocally do so. I therefore do not find that the option for a further term of six years was exercised.

I have been informed that it is quite common for tenants to purport to exercise options in a similar way.

Every case turns on its facts.  However, given the treatment of the letter by the Tribunal, it is prudent for:

1. lawyers acting for landlords to advise their clients to be on the lookout or correspondence expressing the tenant’s ‘intention’ to exercise an option and, if received, to seek confirmation in writing that the tenant has in fact exercised its option.  Given that a letter from the landlord’s agent confirming the exercising of an option was not found to be sufficient, landlords should be insisting on that confirmation being in writing from the tenant;  and
2. lawyers acting for tenants to advise their clients to avoid ambiguous language such as that discussed in this case to avoid inadvertently failing to exercise their option.

Thanks to Jamie Bedelis of Moray & Agnew Lawyers for his valuable input into this note.