Legal Principles for Validly Exercising an Option to Renew a Lease

Younsel

Commercial Leases

Western Australia

Tue Mar 07 20232 minute read

Disputes often arise regarding whether an option to renew a lease has been validly exercised, when a landlord wishes to terminate a lease.

It is then necessary to have regard to the terms of the lease, any other relevant documents and the particular facts and circumstances.

But what legal principles are applied to resolve the dispute?

Legal principles*

The test for determining whether a lessee has exercised an option to renew the term of the lease is whether the purported exercise clearly and unequivocally manifests an election to enter into a lease for the renewed term in accordance with the option.
If the lessee sends the lessor a letter purporting to exercise the option to renew, the letter is not to be evaluated in isolation, by reference only to the words used. It must be evaluated in the context of the circumstances of its receipt, including the dealings between the parties.
If the lessee purports to exercise the option to renew by letter, proof of the election to enter into the lease for the renewed term depends on whether a hypothetical reasonable person who received the letter, and was aware of all the circumstances of its receipt including the dealings between the parties, would fairly understand the option to be exercised.
Where the lessee’s letter merely states that it desires or intends to exercise the option to renew, the critical issue is whether, in the context of the circumstances of its receipt including the dealings between the parties, the lessee has clearly and unequivocally expressed its election, then and there, to acquire a new lease upon the terms of the option.
Each case necessarily depends on the application of the above principles to the particular facts and circumstances, including the proper construction of the document or documents in dispute.
If particular requirements of the exercise of an option are, on the proper construction of the terms of the option, intended by the parties to be essential for the effective exercise of the option, then compliance with those requirements is necessary if the exercise of the option is to be effective. The question is whether the lease, properly construed, prescribes essential requirements for the effective exercise of the option.

* The above legal principles are set out in a decision of the WA Supreme Court: Silverleaf Investments Pty Ltd v Tang & Cheng Pty Ltd [No 2] [2017] WASC 141 (26 May 2017) at [29]-[30].