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Intention to exercise option and re-negotiation

This case also was about an exercise of an option and subsequent negotiation. Here, the lessee seems to exercise its option, but also asks for a longer term and some other changes. A rent review process commenced which was not resolved. The lessee purchased an alternate premises and moved their business. They argued that they had not exercised the option and were only holding over on a month-to-month basis. In this case, the Court found that the option had not been exercised.

Intention to exercise option and re-negotiation

PG Kazis Nominees Pty Ltd v Bakers II Pty Ltd [2018] SADC 48

The lessee exercised its option within the required time, using the following words: “I am writing to inform you of our intention to extend our lease … We would like to add another 5 by 5 year lease to the existing lease.”

The lessee wrote another letter the following day which was expressed as a notice “of our intention to exercise our second option.”

It is clear and settled law that expressing an intention to exercise an option is not the same as exercising the option. On some occasions, a letter only expressing an intention to exercise an option can constitute the exercise of an option, but there needs to be clear and unequivocal surrounding circumstances demonstrating that the lessee has exercised the option. The judge quoted a case where it was remarked that an option “is nearly always a ticklish thing” (CJ Jordan in Mackay v Wilson) and remarked that each case in the long history or option cases has its own facts and circumstances.

The letters sent by the lessee were clearly only notices of intention, and not an exercise of the option. The Court also found that the surrounding circumstances did not show clearly and unequivocally that the lessee exercised the option. The lessee had sought to re-negotiate key elements of the lease, and had included other qualifications that were “too substantial to be described as constituting an absolute and unqualified request to renew the current lease”.

The lessor sought to argue that the lessee should be estopped from denying it exercised the option. The lease called for a market review to determine the rent for the first year of the option lease. The lessor had arranged for a valuer to determine the market rent and proposed a rent to the lessee. The lessee objected to the proposed rent. A second valuation was undertaken, and the lessee commenced paying rent in accordance with the lessor’s notification of the new rent.

The Court found that although the lessor was proceeding largely in accordance with the provisions of the lease in relation to determining the rent for the option term, it did not inform the lessee that its actions were on that basis. The lessor’s actions could also be construed to be consistent with a determination of the rent for a new lease, not being the option lease. The Court found that the lessor could not reasonably assume that the lessee believed that the valuation process was for the option lease, and as such, the lessor was not successful in its estoppel argument.

The Court found that the lessee had not exercised the option, and so was entitled to terminate the lease by one months’ notice and move its business to alternate premises that it had purchased.