In July, the NSW Court of Appeal delivered judgement in Willis Australia Ltd v AMP Capital Investors Ltd  NSCA 158 in which the Court upheld Willis Australia Ltd (Willis) appeal against the initial Supreme Court decision in favour of AMP Capital Investors Ltd (AMP).
The Supreme Court had initially held that Willis was liable for the losses incurred by AMP on the basis that an option to renew was a conditional contract and AMP had validly waived the performance of the other conditions not fulfilled by Willis on the basis that they were for the sole benefit of AMP.
Willis entered a Lease with AMP with an initial Term of six (6) years expiring on 30 September 2020. The Lease contained two (2) further Options to Renew as follows:
- An Option to Renew the existing Lease for the premises for a further four (4) year term (First Option); and
- An additional option for the Tenant to take a lease for the remainder of the level the premises was located on for a four (4) year term (Second Option).
In late 2019, Willis served AMP with two notices in writing (satisfying some, but not all contractual conditions outlined in the Lease) advising that they intended to exercise both options.
In August 2020, Willis sought to withdraw its notice for the Second Option to which AMP responded stating that the exercise of the Second Option was an irrevocable offer, and Willis therefore could not withdraw their notice.
- Whether, on the proper construction of the Lease, an option to renew the Lease with the expanded space was exercised only when all five conditions specified in the clause were satisfied or alternatively, whether the option to renew was exercised (and a binding agreement to proceed to a formal lease arose) when there was compliance with merely three of the five conditions outlined in the relevant clause.
- Whether the option to renew should be characterised as an irrevocable offer or, alternatively, as a conditional contract.
In rendering its decision, the Court held in favour of Willis, overturning the initial decision of the Supreme Court in favour of AMP. The Court’s primary reasoning for their decision being that when ‘exercising’ the Second Option, Willis had only satisfied three of the five stipulated conditions in the clause. Despite AMP’s assertion that they could waive some of the conditions, the Court found that the language of both the clause and the Lease did not support AMP’s interpretation, and the conditions needed to be met for the exercise of the option to be valid.
Regarding the issue of whether an option to renew should be characterised as an irrevocable offer or a conditional contract, the Court decided it was not necessary to make a definitive ruling on this matter in this case. This was on the basis that the reading of the clause and the Lease were sufficient to demonstrate that Willis did not properly exercise the Second Option and therefore were not bound to proceed with the Lease.
So, what does this mean?
Overall, the case highlights the importance of carefully interpreting and fulfilling the conditions specified in the Lease when exercising an option to renew for both landlords and tenants, as in the event of any dispute the Court will consider the specific language and context of the Lease when determining the validity of any exercise of an option.
Specifically, the case highlights the importance for landlords to ensure that when they accept a tenants notice to exercise that they also review the terms of the Lease to ensure that they receive every other condition outlined in the clause. Otherwise, there may be the ability for the tenant to withdraw their notice in the same manner as Willis in this case. Equally, tenants need to exercise caution when it comes to exercising their option to renew to ensure that they have not missed a condition specified in the relevant clause, which would give the landlord the potential ability to invalidate the exercising of the option.