Notice requirements under a commercial lease

Commercial leases often contain an option for a further term and normally have strict notice requirements about how to exercise the option.  What could go wrong if a lessee fails to comply with the option notice requirements?

What results from failing to comply with a commercial lease option term notice requirement?

A lessee can be at the mercy of the lessor who may have no obligation to grant a further lease term.  The only option for the lessee is to then engage in commercial lease dispute litigation (Commercial Lease Dispute).

Failing to exercise the option within time is usually fatal, but who the notice is directed to, the address where it is sent to and its method of service are fertile grounds for Commercial Lease Dispute litigation.

Notice to be directed to the lessor

In Rivers (Australia) Pty Ltd v Mainscar Pty Ltd [2012] QSC 63, the lessee sent an email to the centre manager, purporting to exercise the commercial lease option for a further term.

The lease provided the notice to exercise the option had to be provided:

  • in writing;
  • at least six months prior to the expiration of the lease term; and
  • to the landlord care of the address shown in the lease.

While the email satisfied the requirements in respect of both form and timing, the centre manager’s address was not listed in the lease.  The Court noted the email was incapable of constituting a valid exercise of the option as it had been sent to someone who was not the landlord’s nominated agent for that purpose.

Address where the notice must be sent to

In FAI General Insurance Company Ltd v Parras & Ors [2002] NSWCA 334, clause 31(14) of the lease specified an address for service of any option notice, while Item 1 of the lease reference schedule specified the time for the exercise of the option and that notice had to be provided in writing.

There was no dispute as to the timing or form of the notice, but it was forwarded to the lessor’s principal place of business, not its registered office as required by clause 31(14).

The Court of Appeal said clause 31(14) was facultative, not mandatory, in that it did not prescribe an exclusive method for service of any notice, but only methods which may be availed to give notice.

What was mandatory was that the notice be provided in accordance with Item 1 – that it be exercised in writing within the required time-frame.

However, the lessee’s non-compliance with clause 31(14) sounded in a damages claim by the lessor.

In Kegran Pty Ltd v Warrik Pty Ltd [2018] NSWSC 1357 the validity of the exercise of the option was disputed because, clause 21 of the lease specified the time for the exercise of the option and that notice had to be provided in writing, while clause 19(4) provided that any notice would be sufficiently served if sent personally, sent to the lessor’s facsimile number or forwarded by prepaid security post addressed to the lessor.

The lessee purported to exercise the option by way of an email to the landlord.

The Court accepted expert evidence that the email was received by the landlord’s email server and would have been downloaded to any computer or device thereafter connected to the landlord’s email account.

Clause 19(4) was held to be facultative not mandatory and as clause 21 had been complied with, the option had been validly exercised.

Form of notice

In Powell & Powell v Bochas Pty Ltd [1995] QCA 511 the Court of Appeal held that a purported oral notice of the exercise of an option communicated to the lessor, where the lease required the notice option to be exercised in writing, was invalid.

The Court found on the evidence there was no unequivocal waiver by the lessor of the requirement for the notice of option to be exercised in writing.

Of course, there may be other grounds to dispute whether a notice of exercise of an option was valid, such as whether the notice was exercised upon posting of the notice to the lessor as opposed to the lessor receiving the posted notice.  Each case will turn on its individual facts.

Takeaways

An interest in land created by a lease can be a valuable asset.  The remaining term of a lease, including any options there-under, are factors taken into account when valuing a business.  Depending on the type of business conducted, having no lease can mean there is no business at all.

A lessee should ensure that its rights under a commercial lease are protected by complying strictly with the notice obligations imposed, including the timing and method of notice when exercising any option.

Further references

Rivers (Australia) Pty Ltd v Mainscar Pty Ltd [2012] QSC 63

FAI General Insurance Company Ltd v Parras & Ors [2002] NSWCA 334

Kegran Pty Ltd v Warrik Pty Ltd [2018] NSWSC 1357

Powell & Powell v Bochas Pty Ltd [1995] QCA 511

Further information

If you need assistance in relation to any matter related to a Commercial Lease Dispute, please telephone me for an obligation free and confidential discussion.

Mitch Brown Dip.T.,BA.,LL.B.,MQLS.Mitch Brown - Dundas Lawyers
Legal Practice Director
Telephone: (07) 5646 9174
Mobile 0420 205 105
e: mbrown@dundaslawyersgc.com.au

Disclaimer

This article is not legal advice. It is general comment only.  You are instructed not to rely on the commentary unless you have consulted one of our Lawyers to ascertain how the law applies to your particular circumstances

Dundas Lawyers
Street Address Suite 12, Level 9, 320 Adelaide Street Brisbane QLD 4001

Tel: 07 3221 0013

Send this to a friend