An option to renew a lease will only be enforceable when the lease provides a valid means of determining rent payable
In Pozetu Pty Ltd v Alexander James Pty Ltd  NSWCA 208, Pozetu Pty Ltd (the Lessor) sought to enforce Alexander James Pty Ltd’s (the Lessee) exercise of the option to renew their lease. Applying s18 of the Retail Lease Act 1994 (the Act), the Court found that the option to renew provision was invalid and unenforceable because the provision did not contain a term which validly determined the rent payable. The Court also did not allow the Lessor to change arguments submitted at the initial tribunal hearing.
In 2003, the Lessor entered into a lease with the Lessee for a shop in Woollahra. The lease was to last for five years and included a provision which provided the Lessee with an option to renew the lease. The clause in question stated that the rent payable under a renewed lease would be the “greater of current market rent and 105% of the rent in the last year of the previous term”.
In 2008, the Lessee exercised the option to renew the initial lease. However, in March 2009, the Lessee gave the Lessor notice of their intention to quit the lease of the Woollahra shop.
The Validity of the Option to Renew
Section 18(3)(c) of the Act stipulates that a provision of a retail shop lease is void when the provision provides for the base rent rate to change on a particular occasion and the means of calculating the rent out of the methods suggested in the provision would result in a higher or highest rent. In this case, the provision in the lease stated that the rent payable would be the “greater of” the two mechanisms specified to determine rent payable.
The Court therefore found that the provision was void under the Act and meant that an essential term of the contract was absent. Hence, the option to renew was unenforceable.
Changing Arguments on Appeal
At initial hearings, the Lessor argued that the option to renew provision breached the Act, yet attempted to argue to the contrary at the Court of Appeal. The Court emphasised that proceedings in the Tribunal are “not to be regarded as a rehearsal for an appeal”, nor should an appeal be viewed as a “fresh opportunity” to adjust one’s case. The Court therefore did not allow the Lessor to change arguments made at the Tribunal as it would have been against the interests of justice.
There are two key lessons to note from this case:
- Provisions which provide an option to renew a lease should also provide a valid mechanism to determine the rent payable under a new lease
- Parties should develop the arguments they submit to an initial hearing body very carefully. Submissions which contradict arguments made at initial hearings are unlikely to be permitted.
Gary Newton, Partner
Khushaal Vyas, Law Clerk