When a tenant decides to exercise an option, the lease generally contains a mechanism for how their rent is to be determined, and once this is determined –how it would be payable from the start of the option lease... But what exactly happens in situations where the rent review provisions are deemed void under the Retail Leases Act ?
This exact circumstance came about in a recent case where the NSW Court of Appeal overturned a Tribunal decision, which rendered a rent review clause under an option lease void.Where an essential term (in this case, the rental determination) is deemed invalid, the entire lease is rendered unenforceable!
What exactly is an ‘Essential Term’?
An essential term is ultimately a vital condition of the contract.Essential terms would include the parties to the lease (the lessee and the lessor), the term of the contract and the rent due to be paid by the tenant.A lease cannot operate legally without the essential terms being valid, and any breach whatsoever of essential terms gives the innocent party the right to terminate the contract.
Pozetu Pty Ltd v Alexander James Pty Ltd
What are the facts of the case? Here, we’re taking a look at the recent case of Pozetu Pty Ltd v Alexander James Pty Ltd  NSW 208 – for which a decision was handed down in favour of Alexander James Pty Ltd.
The Lessor, Pozetu Pty Ltd and the Lessee, Alexander James Pty Ltd both entered into a five year retail lease for a shop located in the Eastern-Sydney suburb of Woollahra.This particular lease contained a provision that gave the Lessee an option to renew for a further five years.As the initial lease came to an end, the Lessee decided to utilise its option to renew – at which point an option lease was created in order for the renewal to take effect.
As the parties had not actually come to an agreement regarding the market rent under the option lease, the Lessee was paying rent from month to month.The Lessee eventually provided a notice to the Lessor of their intent to leave the premises and thus end the lease.The Lessor sought for damages in the Court for repudiation on the part of the Lessee.
What were the issues?
The court looked carefully at whether the option lease was legally valid.Clause 4.2 of the option lease stated that the rent was to be determined through two methods; of which the highest amount produced would define the rent.
The clause was vastly out of line with section 18(3)(c) of the Retail Leases Act 1994 , which states that a provision is void if it "provides for base rent to change on a particular occasion in accordance with whichever of 2 or more methods of calculating the change would result in the higher or highest rent".
Under the Act, the market rent review clause was rendered void. Important to note here is that due to the fact that the rent was an essential term,
there was consequently no existing lease binding the two parties after the initial lease had terminated.Under these circumstances, the Lessee had the
legal right to leave the premises provided that they gave one month's notice to the landlord.
Why does this matter?This case is just one example, but it really does show the importance of the parties agreeing to an essential term under a retail lease.The lease must be consistent with the Retail Leases Act in that it can’t give the landlord the right to choose whatever would get them the highest financial return from a range of rent types when it comes to a rental review.The lease can only specify one method of rent review at any one time.
In cases where both parties don’t agree to either the rent amount, or the method to determine the rent payable – the lease actually contravenes the Retail Leases Act, and the clause in the contract is in turn rendered void.As rent is an essential term (not just in this case, but always!), its absence meant that there could legally be no lease at all.
What can you take away from this case?As has been made clear by Pozetu Pty Ltd v Alexander James Pty Ltd  NSW 208, when entering into a tenancy agreement - it is vitally important for both parties to:
1. Make sure that all the essential terms (i.e. rent) are clearly agreed upon by both parties; and,
2. Be careful and make sure that clauses do not contravene the Retail Leases Act.
Authors: Andrew Grima, Dean Claughton & Kristina Tato