Jong v Advanced Dental Services Pty Ltd

headnote [This headnote is not to be read as part of the judgment] The appellant, Ms Jong, owned premises at Blackwall Street, Woy Woy. On 27 May 2009 she let the premises to MJ Jong Pty Ltd; the lease was later assigned to the respondent, Advanced Dental Services Pty Ltd. The lease was for a term of five years, terminating on 26 May 2014, with two options to renew for periods of five years. The lease also contained provisions requiring that the lessee have a guarantor. On 6 January 2014, the appellant wrote to the principal of the respondent via email, noting that the lease was expiring shortly, there was an option to renew for 5 years and the time frame in which the option was required to be exercised. The appellant requested that the respondent advise "immediately if you are re-signing for another 5 years or if you wish to vacate at that time". The respondent replied on the same day that he "would like to renew the lease for another term". Some further discussion of the terms of the renewal occurred in the subsequent months, but no further lease was executed or registered. The relationship between the parties subsequently broke down. The respondent gave notice of its intention to vacate the premises on 13 January 2015 and vacated on 28 February 2015. The appellant let the premises to a third party in December 2016. The appellant commenced proceedings in the District Court, alleging that the respondent had exercised the option to renew the lease and claiming damages arising from the purported repudiation in the amount of $147,000. The trial judge dismissed the claim and gave judgment in favour of the respondent on the basis that the respondent had not exercised the option to renew. The following issues were raised on appeal: (i) whether the respondent had exercised the option to renew by the email of 6 January 2014; (ii) whether the purported renewal was ineffective due to the absence of a further guarantee as required by the lease; and (iii) the appropriate quantum of damages to be awarded. The Court (Basten JA, Meagher JA and Brereton JA) dismissed the appeal and held: In relation to issue (i): (Per Basten JA, Meagher JA and Brereton JA):

1. The exercise of an option under a lease requires identification of what the lease required for its valid exercise, and an intention to exercise clearly and unequivocally expressed in accordance with the terms of the option:[7], [45]-[47], [54]. Ballas v Theophilos [No 2] (1957) 98 CLR 193; [1957] HCA 90; Carter v Hyde (1923) 33 CLR 115; [1923] HCA 36; Quadling v Robinson (1976) 137 CLR 192; [1976] HCA 31; Hagerty v Hills Central Pty Ltd [2018] NSWCA 200; Prudential Assurance Co Ltd v Health Minders Pty Ltd (1987) 9 NSWLR 673; Young v Lamb [2001] NSWCCA 225; (2001) 10 BPR 18,553, applied. (Per Meagher JA and Brereton JA)
2. As the owner's email referred to "re-signing" of the lease, it was not confined to the exercise of the option. Accordingly, the tenant's reply could not be construed as definitively affirming the exercise of the option, as he may have intended to negotiate a renewal of the lease: [50]-[51], [54].
3. As the option was not validly exercised, the appeal must be dismissed: [52], [54]. (Per Brereton JA):
4. The subsequent conduct of the parties, as reflected in email correspondence, indicates that the exercise of the option was viewed as being under consideration and discussion. This reinforces the conclusion that there was no valid exercise of the option: [68], [74]. (Per Basten JA):
5. The appellant's email drew attention to the option with specificity, and the respondent's reply was in the affirmative. Subsequent emails confirmed the terms of the option, which supports the view that it had been exercised: [15]-[17], [26].
6. The exercise of the option did not give rise to an enforceable agreement, as no lease was subsequently registered and the lessor did not seek equitable relief to enforce the renewal. Accordingly, there is no basis to enforce the terms of the lease: [31], [36]. Conveyancing Act 1919 (NSW), ss 127, 170; Real Property Act 1900 (NSW), s 41. Chan v Cresdon Pty Ltd (1989) 168 CLR 242; [1989] HCA 63, considered. In relation to issue (ii): (Per Basten JA and Brereton JA):
7. While the guarantee was likely solely for the benefit of the lessor and capable of being waived, this could not be relied upon by the appellant as there was no express waiver of the requirement for a guarantee. However, the issues do not need to be decided, there otherwise being no enforceable agreement: [34]-[36], [77]. Issue (iii) did not arise.

Judgment

1. BASTEN JA: The appellant, Ms Yeeh Yong Jong, owns premises at Blackwall Street, Woy Woy. On 27 May 2009 she let the premises to MJ Jong Pty Ltd. The lease was later assigned to the respondent, Advanced Dental Services Pty Ltd, which ran a dental clinic at the premises. The lease was for a term of five years, terminating on 26 May 2014, but with two options to renew, each for a period of five years. On 13 January 2015 the respondent gave notice of its intention to vacate the premises; it in fact did so on 28 February 2015. The appellant let the premises to third parties in December 2016.
2. On 26 June 2017 the appellant commenced proceedings in the District Court alleging that the respondent had exercised the first option to renew the lease, extending its term to 26 May 2019, and had repudiated the lease by vacating the premises prior to the termination date of the renewed lease. She claimed damages calculated by reference to the rent which would have been payable under the renewed lease, from the date of repudiation up to the end of the rent free period of the new lease to the third parties. She also claimed the difference between the rent receivable under the renewed lease and the lower figure payable under the new lease. Finally she claimed a sum for maintenance and making the premises good after the departure of the respondent. The total claim was in the order of $147,000.
3. Pursuant to a judgment delivered on 6 May 2019, Wass SC DCJ dismissed the appellant's claims and gave judgment in favour of the respondent. The basis of the judgment was that the respondent had not in fact exercised the option to renew, had therefore continued to occupy the premises on a monthly basis after 26 May 2014, and had validly terminated the tenancy by giving one month's notice of its intention to vacate.
4. The judgment rested on three findings. First, exercise of the option required the lessee to provide a guarantor of his obligations under the extended term, which he did not do. The option was therefore not effectively exercised. Secondly, the lessee did not give clear and unequivocal written notice of the exercise of the option, as required under the lease. Thirdly, if the option were held to be exercised, the lessor nevertheless failed to prove that she had mitigated her loss, as expressly required under the terms of the lease, and therefore could not recover damages.
5. In her notice of appeal, the appellant challenged each step in the reasoning of the trial judge, and sought judgment in an amount of $124,498.41. (The claim for the cost of maintenance and making good the premises was abandoned at the trial.) For reasons explained below, in my view the option was exercised, but that does not assist the appellant, because no further lease eventuated. Although the reasoning of the trial judge with respect to mitigation, as an alternative basis for rejecting the claim, may be doubted, it is not necessary to address that challenge.

Exercise of option to renew - legal principles

1. It was not suggested that legislation, such as the Retail Leases Act 1994 (NSW), applied to the lease. [1] Accordingly, the question of whether the respondent had exercised the option to renew turned on the application of general law principles. These principles were recently explained by Leeming JA in Hagerty v Hills Central Pty Ltd. [2] It was suggested in Hagerty that cases may involve two separate inquiries, namely "(a) whether a contract was formed following the exercise of the option, and (b) whether that contract has been repudiated." [3] However, the present case is better understood as involving three questions, namely (a) whether an option has been exercised; (b) whether a contract resulted from the exercise of the option, and, if so, (c) whether that contract has been repudiated. The significance of the distinction between (a) and (b) is that there may be an agreement resulting from the exercise of the option, which is repudiated or abandoned before the proposed new lease is executed.
2. General law principles require that a purported exercise of an option must express clearly and unequivocally an intention to exercise the option in accordance with the terms of the option. [4] It follows that the legal effect of a purported notice exercising an option must be considered by reference to the terms of the contract conferring the option and by reference to the terms of the notice by which the option was said to be exercised. The notice will take effect in accordance with its language, as it would be understood by a rational hypothetical recipient "in the circumstances of its receipt". [5]
3. It is convenient to start with the terms of the lease which conferred the option. The key provisions were to be found in cl 19 which relevantly provided as follows: 19. Option of Renewal 19.1 Offer of Renewal Where an option term or terms are specified at Item 6 of the First Schedule, the Lessor offers a renewal of this Lease to the Lessee for such further term or terms, and on the conditions specified in this clause and unless the Lessee accepts such offer strictly in accordance with the provisions contained in this clause, this offer shall lapse. … 19.4 Conditions of exercise of option The Lessee may only accept this offer and exercise the option or options of renewal if in each such case: (a) the Lessee shall have served on the Lessor written notice of exercise of this option during the period specified in Item 11 of the First Schedule, before the date of expiry of the term of this Lease being renewed; and (b) there is no subsisting breach of any lease covenants by the Lessee at the date of service by the Lessee on the Lessor of the notice of exercise of this option and also at the date of expiry of the term of this Lease being renewed. 19.5 Guarantee for Lease for option term (a) If this Lease is guaranteed by the Guarantor, then any renewal of this Lease is conditional on the Guarantor under this Lease entering into a guarantee in the form contained in Clause 17 of this Lease in respect of the option term. (b) If the Guarantor, or any of the Guarantors, under this Lease is unable or unwilling to enter into a guarantee in respect of the option term, the Lessee may provide a guarantee in accordance with paragraph (a) from another person who is an acceptable new guarantor, to the Lessor. (c) An acceptable new guarantor is a person who is respectable and is: (i) not less sufficiently financial than the Guarantor; and (ii) a director of the Lessee. (d) The Lessor will consider the Lessee's request to provide an acceptable new guarantor for the renewal of this Lease promptly and will not unreasonably refuse or delay its consent to the substitution of that person as a guarantor. (e) If the Lessee is unable to provide a guarantee in respect of this Lease, for the option term either by the Guarantor or by an acceptable new guarantor, the Lessee shall be deemed to have failed to effectively exercise the option for renewal of this Lease and the Lessee is not then entitled to a renewal of this Lease for the option term. 19.6 Conditions of Renewal (a) The offer of renewal which the Lessee may accept under this clause is for the renewal of this Lease for the further term of years specified in Item 6 in the First Schedule from the day after the date of expiry of the term of this lease being renewed, at a rent which shall be the greater of that determined in accordance with paragraph (b) of this clause and the rent payable under this Lease immediately before the expiration of the term of this lease being renewed and otherwise containing identical covenants to the covenants of this lease subject to the following alterations: (i) … (ii) The annual rent to be specified in Item 2 of the First Schedule shall be the rent determined in accordance with paragraph (b) of this clause. (b) (i) Within twenty eight (28) days after the Lessee shall have served on the Lessor notice of exercise of this option, the Lessor shall give written notice to the Lessee of the rent which the Lessor considers to be the current market rent for the first year of the option term. (ii) The Lessee is entitled to accept the Lessors assessment of the current market rent for the first year of the option term by written notice served on the Lessor within fourteen (14) days after the service of the Lessor's notice under paragraph (i) and that amount shall be the rent for the first year of the option term. (iii) If the Lessee does not accept the Lessor's assessment of the current market rent, then the rent for the first year of the option term shall be determined in accordance with the procedure and on the terms specified in clause A2 of the Second Schedule. (iv) If the parties agree on the current market rent after it shall have been referred for determination in accordance with paragraph (iii) of this clause, that shall be the rent for the first year of the option term and the rent determination shall not be concluded. 19.7 Payment of rent and outgoings whilst rent is determined (a) After exercise of this option, until the rent for the option term is determined, the Lessee will continue to pay the rent and outgoings as and when payable under the lease being renewed at the rate at which they are payable during the last year of the term of the lease being renewed. (b) Within twenty eight (28) days after the rent for the option term is determined, the parties will adjust and pay any shortfall or excess in the rent and/or outgoings paid from the commencement of the option term up to the last day for rent payment before the rent determination. 19.8 Registration of lease for option term (a) After the Lessee has effectively exercised this option and the rent for the option term has been determined, the Lessor's solicitor shall submit for execution a lease or a variation, renewal or extension of this Lease (as the case may be) incorporating the lease conditions for the option term, which shall be executed promptly by the Lessor and by the Lessee and shall (if applicable) be registered. (b) The Lessee shall pay the Lessor's legal costs and disbursements of and relating to the renewal of the particular term of this Lease in accordance with clause C.5 of the Second Schedule."
4. The first requirement to be complied with by the lessee was the service on the lessor of a "written notice of exercise of this option" during the period specified in item 11 of the schedule which was a period commencing six months prior to the expiration of the term of the lease and ending three months before the expiration date. The written notice relied upon in the present case was given on 6 January 2014, that is just under five months before the termination date and therefore within the specified period. The respondent accepted that giving notice by email involved service on the lessor of a written notice. [6] It took issue with the proposition that the notice was properly described as a notice "of exercise of this option". It will be necessary to return to that issue in considering the terms of the email exchange on 6 January.
5. Clause 19.6 identified the date of commencement of any term of renewal and provided in par (a) that the rent shall be determined in accordance with par (b). Pursuant to cl 19.6(b), the lessor was required to give written notice of the rent within 28 days after being served with a notice of exercise of the option. The rent so identified might be accepted by the lessee or challenged, in which case there was provision for determination of the appropriate figure.
6. Thirdly, cl 19.8 provided for the registration of a lease for the term of the renewal. The relevant lease document was to be prepared by the lessor's solicitor and submitted to the lessee for execution. Clause 19.8(a) recognised that the clause would only take effect after the option has been effectively exercised and the rent had been determined. (Clause 19.7 recognised that that might be after the termination of the earlier term.) The reference to "effectively" exercising the option in cl 19.8(a) reflected the language of cl 19.5(e) which referred to the failure of the lessee to provide a guarantee for the option term in which case the lessee "shall be deemed to have failed to effectively exercise the option for renewal of this lease". The lease provided in cl 17 (and schedule 1) for there to be a guarantor. The guarantor of the lease when originally issued to MJ Jong Pty Ltd was a relative of the appellant. When the lease was transferred to the respondent, there was a transfer of the guarantee. Accordingly, at the time of exercising the option for renewal, the lessee's obligations were guaranteed and cl 19.5 was engaged. The requirements of the lease with respect to the guarantee were set out in cl 17. The final paragraph of cl 17 read as follows: "17. 7 Option of Renewal If this Lease shall contain an option for a further lease and the Lessee shall exercise such option the Lessor's obligation to grant such a lease shall be subject to the [guarantor] guaranteeing the Lessee's obligations under such lease and indemnifying the Lessor in respect thereof in the terms of the guarantees and indemnities contained in this Part."
7. When clauses 17.7 and 19.5 are read together, it is clear that when both were engaged, as they were in the present case, the effective exercise of the option to renew was subject to a guarantee being provided, either by the original guarantor, or by an acceptable alternative guarantor. However, it is also apparent that this was not a precondition to exercising the option by giving written notice of the exercise of the option. Clause 17.7 envisaged that there would be three cascading events, being, in order, (i) the exercise by the lessee of the option; (ii) the provision of a guarantee and (iii) execution of a lease by the lessor. It is not necessary to determine for present purposes whether the guarantee was to be provided before the rent was determined (although that seems unlikely); it is sufficient to note that provision of the guarantee was a condition of the lessor's obligation to grant the renewed lease: cl 17.7.

Exercising the option

1. The principal of the respondent was Mr Saif Hayek. On 6 January 2014 Ms Jong wrote to Mr Hayek (by email): "Dear Saif I have reviewed the lease and it expires In April 2014 [sic]. It states in the lease that exercising the option for another 5 years must be done 3-6 months prior to the end of the term. Please advise me immediately if you are re-signing for another 5 years or if you wish to vacate at that time. Regards Yeeh Yong"
2. Ms Jong clearly mistook the termination date of the lease (26 May 2014) and, in stating that the lease terminated in April, assumed a greater urgency in the giving of notice, which, on the false hypothesis, would have been due no later than 25 January. In any event, Mr Hayek responded the same day in the following terms: "Hi Yeeh Yong, Yes I would like to renew the lease for another term Regards, Saif Hayek".
3. Mr Hayek's response must be read in the context of the email to which it was responding. Neither email was in legal terms but the question raised by Ms Jong, (i) identified the lease which was undoubtedly the lease between the appellant and the respondent, (ii) identified the provision in the lease requiring that the option for a further renewal of five years be exercised within a specific period (correctly identified); and (iii) sought advice as to which of two options Mr Hayek wished to adopt. The phrase "re-signing for another 5 years" was unmistakably a reference back to exercising the option for five years identified in the previous sentence. The other alternative was to vacate the premises.
4. Mr Hayek's response did not identify any third possibility. It answered in the affirmative that he wished to renew the lease for another term.
5. Whilst accepting that a lawyer might have formulated the response to Ms Jong in different terms, it is difficult to identify a rational understanding of the exchange, other than as an exercise of the option. It may be that Mr Hayek did not appreciate how the lease operated, [7] and may have been surprised if advised that indicating his intention to take up the option to renew the lease bound him to that course. However, his understanding of his legal obligations does not determine the objective consequences of his action. In fact, it is not possible to infer from the subsequent email exchanges what either party understood as to their legal obligations under the lease: their statements took contradictory positions over time, as perceived to be advantageous in their financial skirmishes.
6. The trial judge took a different view. The relevant part of her reasoning was as follows: "[78] The request made by the plaintiff on 6 January 2014, which drew the response upon which the plaintiff relies as a valid exercise of the option, was for Mr Hayek to advise if he wished to exercise the option or alternatively if he wished to vacate the Premises when the lease expired. It is notable that these two options did not include an option for the defendant to renegotiate a new lease, one which would in my view have been equally open given that that the lease was about to expire. [79] Given that theoretical third option, Mr Hayek's response, 'Yes I would like to renew the lease for another term' is not in my view clear and unequivocal notice to exercise the option under the provisions of the lease, as opposed to a response to the posed question which simply indicated that the defendant desired to renew the lease 'for another term'. There is no reference by Mr Hayek to exercising the option, there is no reference to a five year period, there is no reference to the Clause 19 of the lease under which the option was to be exercised. In support of that construction, it did not appear to either party at that time to be a notice under the lease, as opposed to a mere indication from the defendant that he wished to renew (see for example the plaintiff's emails of 10 March 2014 and 9 May 2014)."
7. In substance, there are three separate reasons proffered for concluding that Mr Hayek's response was unclear and equivocal. The first was that the two options proffered by Ms Jong did not refer to a third possibility, namely that the respondent might wish to negotiate a new lease. It may be true that there was a third option, but Mr Hayek did not propose it. If a person is offered an apple or an orange and says "an apple please", the rational bystander would surely infer that he expected to receive an apple, not a banana. Mr Hayek's response was clear and unequivocal.
8. Secondly, while it is true that there is no express reference in Mr Hayek's response to exercising the option, to a five year period, or to cl 19 of the lease, it does not follow that, in context, his statement did not involve each element. That is because the brief query to which he was responding referred to the lease, the option, the time for exercise of the option and the period of five years. His answer adopted that alternative proffered which referred to those matters. It cannot be said that the "option" was not properly identified because it was not referred to as the option identified in cl 19.1 and item 6 of the first schedule. If Ms Jong had not referred in her email to those matters, it might well have been necessary for Mr Hayek to do so, because there would be no helpful context to identify with clarity the purpose of the notification. As it was, Ms Jong had clearly identified the context with sufficient precision to provide clarity to the response.
9. The third reason advanced by the trial judge, and the reason which was most extensively discussed on the appeal, was that the parties did not understand that a notice had been given under the lease as opposed to a "mere indication from the defendant that he wished to renew", no doubt at some point in the future. There are a number of answers to this proposition.
10. First, as already noted by reference to cll 17.7, and 19, the giving of notice was not a self-contained event; it triggered a cascading series of events comprising a process which, if properly completed would result in the registration of a new lease. An element of futurity was therefore inevitably built into the giving of the notice.
11. Secondly, whilst context is to be taken into account in construing a written notification, the immediately relevant context is that which accompanies or precedes the notification. Because neither the parties' subjective intentions, nor their subjective understandings of what has happened, is determinative of the effect of the notice, subsequent conduct, though not inadmissible, should be viewed with caution.
12. Thirdly, the subsequent conduct which the trial judge relied upon was an exchange of emails, starting with an email from Ms Jong on March 10 in the following terms: "Hi Saif As per your Instruction, I will indicate to my lawyer that you wish to exercise the next option of the lease and that the rent will be $45,020.35, in accordance with the 3% increase. If you have any objection please notify me immediately. Regards, Yeeh Yong".
13. There was no evidence of any written notice given prior to 10 March seeking to exercise the option other than the email exchange on 6 January. As the period within which the option was to be exercised had terminated on 26 February, a reasonable inference to be drawn from the email of 10 March was that, in Ms Jong's subjective view, the respondent had complied with the obligation to give written notice of the exercise of the option within the period which she herself had identified in her email of 6 January. Furthermore, although she was late in complying with her obligation to give written notice of the rent, pursuant to cl 19.6(b)(i), the apparent purpose of the email on 10 March was to give such notice. Finally, again belatedly, on May 9, Mr Hayek responded: "Yes YeehYong I can confirm the renew of lease as per your previous email (starting at $45,020.35 and then Increasing by 3% every year from there one [sic]) Regards, Saif Hayek".
14. In my view, the two aspects of subsequent conduct relied upon by the trial judge are only consistent with each party then believing that the option to renew had been exercised, and not the contrary.
15. It follows, that to the extent that the trial judge based her conclusion on the proposition that no written notice of exercise of the option had been given within the prescribed period, that conclusion was erroneous.

Effect of exercising option

1. The next evidence after that discussed above with respect to communications between the parties was an exchange of emails on 20 and 21 May in which there was reference to a dispute as to who was responsible for the costs of certain maintenance work and which concluded with Mr Hayek's email in the following terms on 21 May: "Then we are going to court and I still have 7 days to decide not to extend the lease I am sick of this and it will have to stop". The relevance of this material is not to identify the subjective intentions of the parties at that time, but rather to note that nothing further happened with respect to the execution of a new lease prior to the expiry of the original lease on 25 May 2014. Nothing, it appears, had been discussed at any stage about a guarantor for the further five year term. Nor did it appear that Ms Jong had instructed her solicitors to prepare a lease in registrable form to be submitted to the lessee for execution, pursuant to cl 19.8(a). Such a lease was, it appears, first provided to Mr Hayek on 1 September 2014. It was not executed by him.
2. In the meantime, although no guarantor had been obtained by the respondent in compliance with cll 17.7 and 19.5, it is at least arguable that no guarantee could have been executed until the lease was prepared in registrable form. The obligation to obtain a guarantee related to payments "under the lease"; while the point was not addressed in argument, it would seem likely that the proper construction of the obligation to obtain a guarantee related only to a registered lease enforceable at law, in accordance with the reasoning in Chan v Cresdon Pty Ltd. [8] No such lease was executed, let alone registered. However, assuming that the lessee had an obligation to provide a guarantee at some stage, absent which the exercise of the option would not be effective, the best that can be said from the perspective of the lessor was that the deeming provision in cl 19.5(e) had not had effect because the time for executing the guarantee had not arrived. On the other hand, the reason it had not arrived was because there were further steps to be taken by the lessor. An alternative view is that the any agreement to enter into a renewal of the lease was abandoned.
3. It is common ground that if the steps taken by the lessee did not amount to the exercise of the option, after 26 May 2014 it must have been in occupation under a tenancy determinable at will by one month's notice in accordance with s 127(1) of the Conveyancing Act 1919 (NSW). In that event, the lessor's claims for damages would fail.
4. The lessor's claim depends upon there being an enforceable agreement with respect to the renewal of the lease for a period of five years pursuant to an exercise of the option. Assuming that the lessee had exercised the option, there was at best an agreement to lease which, on one view, was not terminated by vacating the premises, but was repudiated by his refusal to execute the lease presented to him on 1 September 2014. That case was not run. What was run, albeit somewhat hesitantly, was the proposition that the exercise of the option gave rise to an agreement to lease and hence an equitable lease which in turn was repudiated by termination by the lessee vacating the premises. This reasoning depended upon the proposition that, although s 41 of the Real Property Act 1900 (NSW) rendered the unregistered five year lease ineffective to create a legal or equitable estate or interest in the land, before registration, the section does not avoid the contract or render it inoperative. [9] Thus the reasoning in Chan continued, "an antecedent agreement will be effective, in accordance with the principles of equity, to bring into existence an equitable estate or interest in the land. But it is that antecedent agreement, evidenced by the unregistered instrument, not the instrument itself, which creates the equitable estate or interest." Yet, as Chan made clear, "the court's willingness to treat the agreement as a lease in equity, on the footing that equity regards as done what ought to be done and equity looks to the intent rather than the form, rests upon the specific enforceability of the agreement." [10] However, the lessor did not at any stage seek equitable relief to enforce the agreement. The case for the lessor, at its highest, must be that if, prior to vacation of the premises, proceedings had been brought in equity, the lessee would have been ordered to execute a lease in the form consistent with the terms and conditions specified in cl 19 with respect to the first renewal. There were a number of hurdles in the way of accepting such a case; in any event, the case appears not to have been run in those terms in the District Court, nor were the difficulties addressed in this Court. It must be rejected. It follows that, even if the lessee did exercise the option, there is no basis upon which the lessor can now enforce against the lessee the terms of a lease which was never executed, after possession was terminated by the lessee.

Absence of guarantee

1. The trial judge rejected the lessor's claim primarily on the basis that, the lessee not having provided a guarantee (or at least a guarantor willing to give a guarantee), cl 19.5(e) operated of its own force to vitiate the exercise of the option. On the appeal, the lessor contended that the guarantee was purely for her benefit and that she was entitled to waive any such requirement.
2. The trial judge rejected that argument on the basis that "[i]t could readily be contemplated that the existence of a guarantor might also be for the benefit of the defendant [lessee], such that in the event of a breach by the defendant the guarantor could be called upon to meet any liability, rather than the defendant." [11]
3. If it were necessary, I would accept that, understood in its contractual context, the requirement for a guarantee was entirely for the benefit of the lessor. However, what the lease did not envisage was that it might be the lessor, rather than the lessee, who was seeking to enforce the exercise of the option. Nor, as a matter of fact, is it clear that at any relevant time the lessor did waive the requirement for a guarantee. Before the trial judge, it appears that reliance with respect to waiver was placed upon (i) the sending of a letter on 21 August 2014 setting out the rent payable pursuant to cl 19.6(b)(i) (not for the first time and in different terms to the earlier amount) and (ii) providing on 1 September 2014 a registrable copy of a "variation of lease" to be signed by the lessee. However there was no express waiver in either letter, the question of the requirement for a guarantee having been ignored by the parties at all stages prior to vacation of the premises by the lessee.
4. In my view the case can be disposed of without determining the operation of cl 19.5(e) (what is meant by saying the lessee was "unable" to provide a guarantee?), the time at which the obligation arose, whether the obligation could be waived by the lessor and whether the obligation was waived by the lessor.
5. Rather, the result reached by the trial judge can be upheld on the basis that, although notice of exercise of the option was given on 6 January 2014, thereafter the parties failed to take the necessary steps to create a registrable lease until long after the original lease had terminated. If it be assumed that the "variation of lease" provided by the lessor's solicitors to the lessee under cover of the letter of 1 September 2014 (a copy of which was not in evidence) fulfilled, belatedly, the obligations of the lessor, it has not been established that equity would have granted orders in the nature of specific performance at the instance of the lessor in relation to the execution of that document.
6. It should be noted that the lessor clearly had significant difficulties in pleading a case entitling her to the damages she sought. Ultimately the belated application to rely upon an "equitable lease" was left unresolved and appears to have been addressed inadequately in both the evidence and the submissions in the District Court. However, the pleading point was of some importance, not merely to give notice to the respondent as to the case it had to meet, but because, if properly pleaded, closer attention might have been given to the curious consequences of the lessor attempting to enforce the exercise of the option against the lessee in terms where the steps necessary to give effect to that process were either ignored or not undertaken in a timely fashion.

Conclusion

1. Although on a somewhat different basis to that relied upon by the trial judge, the decision below should be upheld and the appeal dismissed. The appellant must pay the respondent's costs in this Court.
2. MEAGHER JA: I have had the benefit of reading Basten JA's judgment in draft. I agree with the orders his Honour proposes but not with his Honour's conclusion that the option was validly exercised. My reasons for concluding that the option was not validly exercised, and an agreement for lease not made, follow. That conclusion alone justifies the dismissal of the appeal with costs.
3. The terms of the option are extracted by Basten JA at [8] above. Clause 19.1 contains an offer of "renewal" of the lease "on the conditions specified in this clause" and provides that "unless the Lessee accepts such offer strictly in accordance with the provisions contained in this clause, this offer shall lapse". The relevant provision is cl 19.4 which states that the lessee may "only accept this offer and exercise the option" if it has served on the lessor a "written notice of exercise of this option" during a specified period, here relevantly between 26 November 2013 and 26 February 2014, the term of the lease otherwise expiring on 26 May 2014.
4. The exchange of emails, the latter of which is relied on as constituting the acceptance of the offer of renewal and exercise of the option, is extracted by Basten JA at [13]-[14] above. Those emails are brief and it is convenient to set them out in these reasons.
5. On 6 January 2014 the landlord, Ms Jong, emailed Mr Hayek, the principal of the tenant company, saying: I have reviewed the lease and it expires in April 2014. It states in the lease that exercising the option for another 5 years must be done 3-6 months prior to the end of the term. Please advise me immediately if you are re-signing for another 5 years or if you wish to vacate at that time.
6. Mr Hayek responded on the same day: Yes I would like to renew the lease for another term.
7. The offer is to renew the lease for a further term of 5 years at a rent as determined in accordance with cl 19.6(b) and, subject to the necessary alterations described in cl 19.6(a), on identical covenants to those contained in the original lease. The effect of a valid exercise of the option is that an agreement for lease is made on those terms: Gerraty v McGavin (1914) 18 CLR 152 at 163 (Isaacs J); [1914] HCA 23; Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27; [2009] HCA 41 at [8] (French CJ).
8. Whether the option has been validly exercised depends, first as a matter of construction on what is required for its valid exercise and, secondly on whether the conduct of the person purporting to exercise it has satisfied those requirements.
9. As to the first question, the subsequent conduct of the parties cannot change the construction of the agreement conferring the offer. In order to exercise the option the lessee was required to serve a written notice by which it "accepts such offer" (cl 19.1) within the specified time (cl 19.4). Strict compliance with that condition was necessary for the option to be validly exercised (cl 19.1).
10. Answering the second question involves an enquiry as to whether the email response of 6 January 2014 communicated the tenant's absolute and unqualified acceptance of the offer to renew: Ballas v Theophilos (No 2) (1957) 98 CLR 193 at 196 (Dixon CJ); [1957] HCA 90; Quadling v Robinson (1976) 137 CLR 192 at 200-201 (Gibbs J); [1976] HCA 31. It is not sufficient that the communication is of a "mere statement of future intention" as distinct from being "an operative act" exercising the option: see Young v Lamb [2001] NSWCCA 225 at [28] (Stein JA, Mason P and Hodgson JA agreeing); (2001) 10 BPR 18,553 where the relevant communication was preceded by the lessor's inquiry "will you be taking up the option on your unit?" to which the answer was "yes" and followed by a request that the lessee "put that in writing".
11. As Isaacs J said in Carter v Hyde (1923) 33 CLR 115 at 126; [1923] HCA 36, in a case such as the present: … the appropriate question is that of Romer J in Jones v Daniel (1894) 2 Ch at 335, namely, "Now, what would anybody when he received that letter fairly understand to be the meaning of it?" I add, of course, "in the circumstances of its receipt".
12. In other words, the enquiry concerning the purported exercise of the option seeks to identify objectively what a reasonable person in the circumstances of the recipient would have understood the tenant's 6 January 2014 email to mean. More generally, in the context of an offer and acceptance analysis, the questions are "what a reasonable person in the position of the offeree would make of an alleged offer, and what a reasonable person in the position of the offeror would make of an alleged acceptance": J D Heydon, Heydon on Contract (2019, Lawbook Co) at [2.40], citing Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 549-550 (Gleeson CJ, Hope and Mahoney JJA agreeing).
13. Ms Jong's email of 6 January 2014, having referred to the option and noted that it had to be exercised during a limited period, asked Mr Hayek to let her know what he was proposing to do in relation to the renewal or "re-signing" of the lease. Whilst the first paragraph focusses on the exercise of the option, the recipient might reasonably understand that enquiry as also accommodating a "re-signing" resulting from a negotiated renewal. In doing so, the recipient would have observed that although the first paragraph refers to the option and when it had to be exercised, the following request did not confine itself in terms to whether Mr Hayek proposed to exercise that option, leaving open the possibility of a negotiated renewal. Furthermore at the time the email was sent Ms Jong was not entitled to insist on certainty as to whether the option was to be exercised, making it more likely that her request was to be understood as enquiring more generally as to Mr Hayek's intentions in relation to the renewal of the lease.
14. Mr Hayek's response takes the form of a statement of what he would "like" to do. Although his answer "yes" is in response to Ms Jong's question whether he is "re-signing for another 5 years", his statement that he "would like to renew the lease" describes a present state of inclination or preference. It is not in terms a communication of an absolute and unqualified acceptance of the offer of renewal and does not purport to constitute an exercise of the option. And there is nothing in the immediate context of the email exchange which suggests otherwise.
15. In my view the primary judge did not err in concluding that the option was not validly exercised.
16. BRERETON JA: I have had the benefit of reading in draft the judgments to be delivered by Basten JA, in which the background is explained, and by Meagher JA.

Was the option exercised?

1. I agree with Meagher JA that the primary judge did not err in concluding that the option was not validly exercised, with the consequence that no agreement for lease was made. I agree with his Honour's reasons, which of themselves provide sufficient basis for that conclusion. However, I would add that I regard the conclusion as also supported by the subsequent conduct of the parties. As His Honour explains (at [45]), the question whether an option has been exercised is, in substance, a question of whether the offer of a new term (the option) contained in the lease has been accepted in accordance with its terms, so as to create a contract. It is therefore a question whether a contract was formed - as distinct from a question of the meaning of the contract - and on such a question, post-contractual conduct is admissible. [12] In this case, the relevant subsequent conduct is indicative that the parties neither intended nor understood the correspondence of 6 January 2014 to operate as an effective exercise of the option, as distinct from an expression of a current intention to do so sometime in the future.
2. On 10 March, the appellant Lessor Ms Jong sent an email to Mr Hayek of the respondent Lessee, as follows: Hi Saif As per your Instruction, I will indicate to my lawyer that you wish to exercise the next option of the lease and that the rent will be $45,020.35, in accordance with the 3% increase. If you have any objection please notify me immediately. Regards, Yeeh Yong.
3. In April and May, the parties were in dispute about who was responsible for payment of invoices for repairs, and the extent to which the lessee was entitled to carry out works without the appellant's consent. On 9 May, Ms Jong sent an email which concluded (emphasis added): You have to let me know if immediately if [the plaintiff's position on conducting certain works, which was in dispute] is agreeable and if you are going to exercise the option to renew the lease, which finishes on 26/05/14.
4. The reasonable inference to be drawn from that email is that at least Ms Jong did not understand the option already to have been validly exercised. Mr Hayek responded, on the same day: Yes YeehYong I can confirm the renew of lease as per your previous email (starting at $45,020.35 and then Increasing by 3% every year from there one [sic]) Regards, Saif Hayek.
5. Disputes over responsibility for repairs and maintenance continued through May. On 20 May, the Ms Jong put forward what she said was her final offer, asserting: The agreement that we have is formalised in the lease contract that we have both signed.
6. Mr Hayek responded on 21 May: Then we are going to court and I still have 7 days to decide not to extend the lease.
7. While, in the context of their present positions, that might be seen as self-serving, it is notable that it did not produce a response that the option had already been exercised.
8. The lease expired on 26 May. On 13 June, Ms Jong sent an email noting that the lease had expired on 26 May and asking: What is your decision? I give you 5 days to reply…
9. Discussions between Ms Jong and Mr Hayek about renewing the lease - including his proposal to renew the lease for a period of only 12 months - continued in May and June 2014. On 16 June, Mr Hayek wrote to Ms Jong, noting that he had already talked to her about renewal of the option, and stating that he would renew the lease for one year, and would consider the remaining four years, "at the same rent, until we resolve our problems"; otherwise he would terminate the tenancy by May 2015. Mr Hayek then listed a number of conditions for entering into a new lease for a five year period, including reimbursement for the invoices he had already paid, having some works done to the guttering, and having the property repainted.
10. On 17 June, Ms Jong responded that she was not prepared to enter into any negotiations on the conditions of the lease, and that it was a "take it or leave it" proposition. She asked: Are you renewing for 5 years or are you going on a month-to-month? Your lease has expired as of the 26th May and I need your answer immediately.
11. This is inconsistent with any understanding that the option had already been validly exercised.
12. On 18 June, Mr Hayek wrote to Ms Jong: If I go on month to month bases you will have to comply with the statutory notice period of 3 months. It seems that it is getting harder and harder to get an agreement with you, I will go with the month to month bases until we can find middle ground.
13. Ms Jong responded on the same day: It seems clear to me that you have no intention to exercise your option to renew for 5 years. I have given you multiple chances to allow me to organise the option, always to have issues come up. I accept your last email to go on month to month. Technically, I believe you are on a month to month anyway as you have not exercised the five year option. I also agree that we are having difficulty finding a middle ground and so I hereby give you notice to vacate the premises in one month. I know it takes time to organise things, so I will give you a few extra days so that your final day will be the 22nd July 2014.
14. On 19 June, Mr Hayek wrote to Ms Jong: My statutory notice period is 3 months and I will make sure that every condition that you and Mun [the guarantor] had signed on will be fully inforced [sic]. I will try to vacate before the 22nd of July but you can't force me to do so! and the more inflexible you are the more difficult I will be!"
15. Thus, up until this point - three weeks after the lease had ended and more than three months after time for exercise of the option had expired - both parties were proceeding on the basis that whether or not the option would be exercised was still under consideration and discussion. Not only is there nothing to suggest that either party intended, or understood, the emails of 6 January 2014 to constitute an effective exercise of the option such as to create a binding contract, but the tenor of the correspondence as a whole is quite to the contrary. The parties conducted themselves as if there was not a binding contract for a new lease.
16. That position changed only later on 19 June, after Mr Hayek had consulted his solicitor, and he wrote to Ms Jong: I just had a chat to my solicitor and he said none of this is legal or binding! He said as notice has been given and we are well into the 5 years term the termination of the tenancy can only be done upon mutual agreement and he said that if you insist on one sided decision for termination of tenancy then we will take it to the supreme court as it is illegal. ... He also advised that the only way I should agree to a mutual termination is after you provide a letter attesting to what we will agree on and confirming the extension of the Restraints. ... … In order for me to agree to the 22nd of July date I need an email from you by end of day tomorrow otherwise I do not agree to any notices or termination.
17. Mr Hayek wrote again on 20 June: As you have not replied to my email, This is to advise that as you are not interested in my offer we will be staying in the practice for another 5 years as there is no mutual agreement.
18. On 21 June, Ms Jong sought more time to consult with her lawyer, which Mr Hayek allowed, adding: It's just that I cannot agree to any date without a fully discussed and agreed on deal.
19. On 25 June, Mr Hayek again wrote to Ms Jong, asserting that he had exercised his option to renew by his email of 6 January 2014. Later that day, Ms Jong replied, rejecting the argument that there had been a valid exercise of the option: ... it has taken a couple of days for my lawyer to get back to me. Unfortunately my position has not changed and you have been given your notice to vacate the premises, which stands. If you're interested in staying beyond the 22nd of July the only way you may legally do so is by signing a new lease with new conditions and new terms as the previous lease has expired.
20. By this time, both parties had obtained legal advice, and were adopting positions which presumably reflected that. Thus from 19 June, while Mr Hayek contended that there had been a valid exercise of the option, that position was rejected by Ms Jong. Later still, these positions would be reversed in the litigation.
21. In my view, the positions adopted by the parties after 19 June 2014 are of no assistance in informing a judgment as to whether a contract was made on 6 January 2014: by then they were in dispute on the question, and their positions were informed by their interests in that dispute and guided by legal advice. However, the positions they adopted between 6 January 2014 and 19 June - before there was dispute about whether the option had been exercised - are far more informative as to whether a contract had, objectively viewed, been made. Between 6 January 2014 (when, on the appellant's case, the option was allegedly exercised), and 19 June (well after time for exercise had expired, and indeed after the lease itself had expired), the parties conducted themselves as if the option had not been exercised, and as if there was no binding contract. In my judgment, that shows that the emails of 6 January 2014 were not intended or understood by the parties at the time to be a valid exercise of the option such as would give rise to binding contractual relations, and reinforces the conclusion, reached independently of the post-contractual conduct, that there was no valid exercise of the option.

The non-provision of a guarantee

1. While the conclusion that the option was not exercised suffices to require that the appeal be dismissed, I also agree, with Basten JA, that it fails for the additional reason that the non-provision of a guarantee of the Lessee's obligations had the consequence that there was no specifically enforceable agreement for a new lease.
2. Clause 19.5 of the lease provided: 19.5 Guarantee for Lease for option term (a) If this Lease is guaranteed by the Guarantor, then any renewal of this Lease is conditional on the Guarantor under this Lease entering into a guarantee in the form contained in Clause 17 of this Lease in respect of the option term. (b) If the Guarantor, or any of the Guarantors, under this Lease is unable or unwilling to enter into a guarantee in respect of the option term, the Lessee may provide a guarantee in accordance with paragraph (a) from another person who is an acceptable new guarantor, to the Lessor. (c) An acceptable new guarantor is a person who is respectable and is: (i) not less sufficiently financial than the Guarantor; and (ii) a director of the Lessee. (d) The Lessor will consider the Lessee's request to provide an acceptable new guarantor for the renewal of this Lease promptly and will not unreasonably refuse or delay its consent to the substitution of that person as a guarantor. (e) If the Lessee is unable to provide a guarantee in respect of this Lease, for the option term either by the Guarantor or by an acceptable new guarantor, the Lessee shall be deemed to have failed to effectively exercise the option for renewal of this Lease and the Lessee is not then entitled to a renewal of this Lease for the option term.
3. Contrary to arguments advanced for the appellant, it cannot be accepted that a lessee who was able, but chose, for whatsoever reason, not to provide a guarantee, did not engage clause 19.5(e): in the context, "unable to provide" means "does not provide". And although the clause is silent as to when the guarantee must be provided, in my view it is implicit that it must at the very latest be before the commencement of the new term, as there is no entitlement to a new term unless a guarantee has been provided. It may be that clause 19.5(e) was intended to operate for the benefit of the Lessor, but it was drawn to have automatic effect, rather than to confer on the Lessor an election. It may be that the Lessor could waive the requirement, or extend the time, but there is no suggestion that it did so. Thus, as the respondent did not provide a guarantee for the option term prior to the commencement of the new term, it is therefore deemed to have failed effectively to exercise the option for renewal - even if it had otherwise done so.
4. On that second basis also, the appeal must fail.

Conclusion

1. I therefore agree that the appeal should be dismissed, with costs.

Endnotes

1. As noted below, provisions in the Real Property Act 1900 (NSW) and the Conveyancing Act 1919 (NSW) were tangentially relevant.
2. [2018] NSWCA 200.
3. Hagerty at [38].
4. See Ballas v Theophilos [No 2] (1957) 98 CLR 193 at 196 (Dixon CJ); [1957] HCA 90; Prudential Assurance Co Ltd v Health Minders Pty Ltd (1987) 9 NSWLR 673 at 677C (Kirby P), 681E (Samuels JA) and 683G (McHugh JA).
5. Carter v Hyde (1923) 33 CLR 115 at 126 (Isaacs J); [1923] HCA 36. See also Prudential Assurance at 679D (Kirby P); 681F (Samuels JA), 683 (McHugh JA).
6. See Conveyancing Act, s 170(1)(e) and (2A).
7. See email at [28] below.
8. (1989) 168 CLR 242; [1989] HCA 63.
9. Chan at 257.
10. Chan at 252.
11. Primary judgment at [75].
12. Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153; [2001] NSWCA 61 at 163 [25] (Heydon JA), and the cases there cited. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 20 December 2019