By Anthony Herro -
Snapshot
- The decision in Kavia Holdings Pty. Limited v Suntrack Holdings Pty. Ltd [2011] NSWSC 716 states that email may constitute valid service of the exercise of the option to renew a lease in writing
- The notice will not be deemed ‘absolute and unqualified’ if the tenant tries to hedge its bets, impose qualifications or point to the need for further negotiations
- Email is still not recommended as a form of service. Tenants are best served by following a conservative course by acting strictly in accordance with the lease
A business, particularly a retail business, is dependent on its lease. A profitable business with only two years of the lease term remaining cannot command the same purchase price as the same business with five years remaining. For a tenant who has negotiated an option to renew, it is critical that – if the tenant wishes to exercise its option – it does so correctly, strictly in accordance with the lease.
Occasionally tenants have a misinformed view and think verbal communication is sufficient, but this does not amount to valid exercise of an option. Solicitors must be mindful, when acting on a purchase of a business subject to a lease which contains an option, to comprehensively advise their clients of the existence of the option and how to correctly exercise it.
It can be financial disaster for a client to pay $500,000 for a business with a lease for two years, with a five-year option, and to fail to exercise the option in time or in accordance with the lease. The outcome could be that the landlord can negotiate unreasonable terms for a new lease or refuse to grant any additional term at all, such that the value of the business is greatly diminished. It is very important to avoid these pitfalls by providing clients with a detailed letter of advice after settlement in relation to the option to renew, and then follow this up with a further discussion on the importance of properly exercising the option. It is always recommend that one take a conservative view by strictly complying with all the requirements of the lease.
