Retail Tenancies List; Premature notice of exercise of option to renew lease given in name of wrong party; Lessor initially denying valid exercise of option but afterwards asserting option exercise; Whether option effectively exercised; Option not effectively exercised; Issue as to whether lease of serviced apartment regulated by Retail Leases Act 2003 not arising; Liberty to apply on other matters

Meerkin & Anor v 24 Redan Street Pty Ltd (ACN 065 372 803) (Retail Tenancies) [2007] VCAT 2182

1. Applications for orders and declarations dismissed.
2. Liberty to apply.

Mr Matthew Kennedy of Counsel, instructed by Marshalls & Dent

1. Mr & Mrs Meerkin are the owners of Unit 27, 25 Redan Street, St Kilda. This unit is part of a 52 unit complex situated at 25 Redan Street. Forty-three of those 52 units were let to interests associated with Mr Sha and Mr Chong who are directors of 25 Redan Street Pty Ltd which is the respondent in the present proceeding.
2. Mr & Mrs Meerkin executed a lease which seems to be in the standard Law Institute form July 1998 revision for a term of five years commencing 1 February 2001 and terminating 31 January 2006. The lease provided for an option to renew for one further term of five years and nominated the permitted use for the apartment as 'serviced apartments'. It seems that this and the other units controlled by the interests of Mr Sha and Mr Chong were operated as serviced apartments as part of a business known as 'Quest on Redan'. A search of the Business Names Register shows that this business name is registered in the names of Grandstar Australia Pty Ltd, Mr Sha and Mr Chong with effect from 1 April 2005.
3. The last date for exercising the option to renew was 31 October 2005.
4. A copy of the 2001 lease which is propounded for the purposes of this proceeding by those acting for Mr & Mrs Meerkin who are the applicants is of very poor quality, it seems to have been photocopied or transmitted by facsimile or both and parts of the text have not been fully printed. Since it is clear and not contested that the Law Institute standard was employed I have sought assistance from the text of that lease reproduced in Dr Croft's work 'Retail Leases Victoria'. Clause 12 of the standard form headed 'Further Terms' provides for an entitlement for the tenant to renew for a further term in the absence of unremedied breaches or consistent breaches for which the landlord has given notice, if:

12.1.3 The tenant has requested the renewal in writing not more than six months nor less than three months before the end of the term. The latest date for exercising the option is stated in Item 19.

1. The last date for the exercise of the option it will be recalled was 31 October 2005. The rent for the new lease was according to 12.2 to be determined in accordance with Clause 11 which provided for reviews to market with an independent valuer to be appointed in the event of disagreement to be nominated by the President of the Real Estate Institute or the President of the Australian Institute of Valuers and Land Economists Victorian Division. Clause 11 provided that unless the Retail Tenancy Reform Act 1998 applied to the tenancy, the valuer was required to determine a rent at least equal to the rent current before the review.
2. There were additional provisions added to the schedule of the lease form under Item 22. The first numbered 20 made the Meerkins responsible for the replacement of carpets as and when required. The second item, numbered 21, provided as follows:

The rental during the second and each year of the term thereafter (as the case may be) of this lease and during the second, third, fourth and fifth years of any further term of this lease shall be fixed by mutual agreement between the landlord and the tenant or, in default of agreement shall be 103% of the rental payable during the preceding 12 month period. The rental for the first 12 month period for each further term of five years shall be fixed by mutual agreement between the landlord and the tenant or in default of agreement such rental shall be determined by a sworn valuer experienced in valuing serviced apartments appointed by the President for the time being of the Real Estate Institute of Victoria, for the costs of such determination to be borne equally between the parties ...

1. By letter dated 19 July 2005 Richards Pei and Co, solicitor wrote to Mr & Mrs Meerkin under the heading 'Renewal of lease for Unit 27/25 Redan Street St Kilda' stating as follows:

We act for Grandstar Australia Pty Ltd (t/s Quest on Redan) in the above matter and write this letter on its behalf.

Our client gives notice that it wishes to renew the lease for the above-mentioned property for a further five years but at the same time submits its sample market rental review.

Our client has instructed and obtained a (professional) sample market valuation of Units 4 and 7, 25 Redan Street carried out by Buchanan and Co Pty Ltd.

The rental assessed at $550 per calendar month. (In terms of dimensions the units are representative of the majority of units at Redan Street.) Copy of the assessment is enclosed for your information. Our client proposes that the rental be set at $550 per calendar month for the first year of the lease and the subsequent annual rental review be based on the current rate of 3% per annum.

Please advise if you agree to this or if you wish to prepare an alternative market review kindly provide us with a copy of the valuation in due course. If you have a mortgagee please seek its written consent to renew and provide us with a copy of their letter confirming this. Further, our client would be grateful if you would provide your current phone contract (sic) number and any new forwarding addresses.

1. A number of things are to be noted as to this letter. First, the lease for Unit 27 was due to expire 31 January 2006. The earliest date for the exercise of the option to renew was 31 July 2005. There was no evidence as to the date upon which the letter dated 19 July 2005 reached Mr & Mrs Meerkin, however it is reasonable to infer that the letter reached them shortly after the date which it bore and certainly before 31 July 2005. Hence if it was intended to operate as an exercise of the option to renew, it did not conform with the requirements of the lease. Secondly, the letter was expressed to be written on behalf of 'Grandstar Australia Pty Ltd' which was not the relevant tenant.
2. On 10 January 2006 a letter was written on the letterhead of C. Tang & Associates headed 'Re: Lease at 27/25 Redan Street, St Kilda'. The letter stated:

We are agent of Robert Pei Solicitor who is away on leave until 22 January 2006.

We have obtained instruction from our client and advise that our client would only agree to a rental of $550.00 per calendar month for the first year of the further term. Our client has instructed us that you have not objected to our client's proposed market rental of $550.00 within the time allowed under the lease. Therefore, we advise that $550.00 will be the market rental for the first year of the further term.

Our client has also instructed us to write to you to request that you agree to the granting of two further options of five years each.

Finally, we advise that Mr Robert Pei will prepare the lease and forward it to you once he has returned from his leave.

1. By facsimile of 18 January 2006 from a company known as 'Ken Bruce Pty Ltd' which is a company controlled by the Meerkins, Mr Russell Meerkin stated under the heading 'Unit 27/25 Redan Street, St Kilda':

Please be advised that due to your inadequate offer to lease the above property and your very tardy efforts to negotiate or even communicate, I have given Geoff Dixon R/E authority to lease.

Under lease conditions Unit 27 must be made available for inspection.

Your false claims and lack of professionalism have been astonishing.

1. On 20 January 2006, Mr Meerkin sent a handwritten letter to the respondent:

This advice is directly from my solicitors Marshalls & Dent. Why don't you properly advise your client that rental can't decrease.

Unless your client agrees to maintaining rental at $600.56/month by 4.00 pm today please plan to vacate.

1. Later on the same day in a note which was faxed, Mr Meerkin repeated his statement that the rental could not decrease. This note was it seems addressed to the law firm acting for the respondent. It stated:

Is this you trying to justify your charges. Either accept or not by 4 pm.

1. On 18 January Mr Tang on the letterhead of C. Tang & Associates said:

We refer to your fax of even date and advise that our client has validly exercised the option for the further term and we advise that you do not have the right to lease the property to other people.

1. Mr Meerkin responded by fax as follows:
   • You have been advised months ago of change of address to Ground floor 12-14 Glenferrie Road, Malvern 3144.
   • Not surprisingly this has been ignored.
   • We completely refute your claim and advise that your client has not validly exercised option. Your client's offer was rejected last year with Robert Pei solicitors.

You and your client are now under instructions to vacate.

1. Presumably having returned from his summer break, Mr Pei sent a fax on 3 February 2006 to the Meerkins stating as follows:

There are a number of matters which must be clarified.

1. You previously alleged that our client had not validly exercised its option to renew.

Our client validly exercised its option by giving written notice to you as required by the Lease before the expiry of the date to exercise the option. Our client is entitled to renew the lease.

1. The exercise of the option is different from the question of whether you accept the rental assessment provided to you.
2. You have rejected the offer of $550.00 per month offered by our client pursuant to the valuation it obtained from a professional valuer Mr P. Buchanan. The Assessment was done as the Lease required a market review of the rent at the beginning of a new term.
3. The lease provides in clause 21 that "the rent for the first twelve month period of each new term of five years shall be fixed by mutual agreement with the landlord and the tenant or in default of agreement such rental shall be determined by a sworn valuer experienced in valuing serviced apartments ...'
4. Since you rejected our client's assessment, both parties must abide by the lease and obtain an independent assessment by a sworn valuer agreed to by both parties and according to the lease each party is to bear the cost of the valuation equally. See Clause 21.
5. In relation to our client's assessment, you asserted that the rent could not be reduced. We assume you are referring to clause 11.1.5 of the Lease General Conditions which says that the "Valuer must determine a market rent at least equal to the current rent before the review".
6. Clause 11.1.5 or any similar clause in the Lease is void under Section 12(3) of the Retail Tenancies Reform Act which applies to the lease. The Act clearly prohibits any attempt to prevent a reduction of rent.
7. To achieve a fair and reasonable solution, each party must therefore agree to appoint an independent valuer to carry out a market review of the rent.
8. Until such an assessment has been done, our client still has rights as a tenant under the old lease and the lease continues on a monthly basis until the rent issue is resolved. Therefore no action affecting the tenant may be taken.
9. If this matter cannot be resolved to the satisfaction of both sides, then clause 16 of the Lease will apply and the parties must resort to mediation (see Item 21).
10. The letter concluded by stating that Mr Buchanan's assessment of $550.00 per month 'in addition to payment of body corporate fees is very fair'. The letter then stated that:

Our client looks forward to an amicable resolution of the matter and would be pleased to have your responses soon.

1. Mr and Mrs Meerkin placed the matter in the hands of their solicitors, Marshalls & Dent. That firm wrote to Richards Prei & Co on 21 February 2006 stating that the Meerkins:

Reserve their position vis-à-vis the valid exercise of the option.

1. They then stated that upon renewal the lease would be regulated if at all, by the Retail Leases Act 2003 and they said the definition of retail premises in Section 4 of that Act specifically excluded areas intended for use as a residence, hence they said the 'underpinning' clause in the 2001 lease would be valid as to its renewal upon exercise of the option.
2. Correspondence continued through 2006 with the parties not agreeing on rental. 25 Redan Street structured its funds on a rental of $550 per month. Mr Sha told me that ultimately all the other unit owners from which his company or companies leased units at 25 Redan Street accepted a rental of $550 per month.
3. By 22 May 2006 the tenant had changed fronts on the issue of renewal. In a letter of that date from Richards Pei & Co the following appears:

The lease expired in [sic] 31 January 2006 and is renewable subject to agreement on the rental. Since the rental cannot be agreed on, our client instructed that its offer [a rental of $550 per calendar month] remains open to 3rd June 2006 (to comply with the 30 day notice to vacate the premises) and after this period it will reconsider its position. At this stage there is only a monthly tenancy under clause 10 of the old Lease [the overholding clause].

1. Meanwhile in a letter dated 19 May 2006 the Meerkins through their solicitors Marshalls & Dent had also changed front. In a letter of that date on behalf of their clients, Marshalls & Dent stated:

We accept your claim in your open letter of 3 February, 2006 that your client has validly exercised its option.

1. This letter was in response to a letter of 3 May 2006 from Richards Pei & Co on behalf of the tenants where that firm stated that unless a rental of $550 per calendar month were accepted by the Meerkins by 1 June 2006 'out client will discontinue the lease and vacate the premises'. In a letter of 30 May 2006 Marshalls & Dent roundly asserted in correspondence with the tenant's solicitors:

Your client has validly exercised its option to renew its Lease by your open letter of 3 February 2006.

1. Marshalls & Dent repeated this assertion in a letter of 6 July 2006 (though the letter refers to 'our client' as having exercised the option rather than what was meant presumably 'your client'. Marshalls & Dent prepared a deed of renewal which would renew the lease on the terms asserted to be applicable by the Meerkins. This deed has never been executed. In a letter to Marshalls & Dent of 9 August 2006, C. Tang & Associates advised that the practice of Richards Pei & Co had been incorporated into its practice. On behalf of its client it stated that the deed of renewal will not be executed. The letter continued:

The old lease provides for a market review and our client's [sic] offered two valuations for consideration but were rejected your client [sic]. Your client has also refused to provide an independent a [sic] market assessment of the rental.

Therefore our client will agree with the Lease being imposed on it.

1. Presumably the final paragraph was intended to read 'therefore our client will not agree ...' a matter confirmed in a follow up letter from C. Tang & Associates dated 14 August 2006. Marshalls & Dent then demanded payment of certain outgoings to South East Water and for the sinking fund operated by the body corporate. Correspondence continued but little new was said. The parties continued to be at odds now taking up diametrically opposed positions from the ones they originally asserted. The tenant denied that it had exercised the option to renew whilst the solicitors for the landlord asserted that the tenant had, relying on the letter from the tenant's solicitor of 3 February. A mediation before the Small Business Commissioner was unsuccessful in resolving matters. On 1 August 2007 solicitors acting for the Meerkins filed the application commencing the present proceeding. The points of claim sought the following relief:

(a) A declaration that the demised premises are not retail premises and/or that the Principal Lease between the Applicants and the Respondent demising the premises is not a retail premises lease for the purposes of the Retail Leases Act 2003.

(b) A declaration that the rental for the renewed Lease is and is to continue at the rate of $600.56 per month for the first year of the Lease [that is the rental as fixed for the final year of the 2001 lease] and thereafter shall be adjusted in accordance with the Renewed Lease.

(c) An order that the Respondent pay to the Applicants the sum of $3,671.63.

(d) An order that the Respondent pay to the Applicants such other monies including rental and Body Corporate fees and levies as may be found to be due and owing.

(e) An order that the Respondent pay the Applicants interest on any monies found to be due and owing by the Respondent to the Applicants.

(f) Such further or other orders as the Tribunal deems appropriate.

1. Pursuant to a notice given by its solicitors and dated 27 May 2007, 25 Redan Street Pty Ltd says it vacated Unit 27 with effect from 1 May 2007. the applicants do not accept that the tenancy was terminated. They say the notice amounted to a repudiation of the tenancy which they as the innocent party elected not to accept.

1. The issues which seem to arise are first, whether there has been a valid exercise of the option under the 2001 lease such that 25 Redan Street Pty Ltd is bound to a further five year tenancy in accordance with the terms of such renewed lease and secondly, whether if such renewed lease exists it is governed by the Retail Leases Act 2003. As to this second issue it is said to be significant because assuming that there is a new five year lease, if the Retail Leases Act applies then the clause in the old lease which required that the rental be no less than the rental for the previous year of the lease would be avoided and secondly certain claims made by the lessor for reimbursement of sinking fund levies imposed upon them by the body corporate would also be prohibited.

1. Mr Matthew Kennedy, Counsel for the applicant, submitted that the option to renew could validly be exercised without the parties having agreed upon a new rental. The effect of a valid exercise was to commit both parties to a new lease subject to whatever rental was produced by the rental fixation machinery to be found in the lease and its option provisions. He relied on a decision of the Court of Appeal in Antonino Guiseppina Ensabella and Sons Pty Ltd v Players on Down Under Pty Ltd [2000] VSCA 73 and Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd [1982] HCA 53; (1982) 149 CLR 600. Mr Kennedy placed reliance as had his instructing solicitors upon the letter written by the then solicitor for the tenant on 3 February 2006.
2. This letter seems to refer back to the letter of 19 July 2005 as the operative exercise of the option. It will be recalled that the July letter was written on behalf of a company other than the sitting tenant, 25 Redan Street Pty Ltd respondent in the present proceeding. The letter was expressed to be written on behalf of Grandstar Australia Pty Ltd which seems to be another of the companies controlled by Messrs Sha and Chong. Mr Sha who represented 25 Redan Street Pty Ltd appeared to make no point of this matter and I was not taken to any authorities on the issue of misnomer. Assuming without deciding that the reference to Grandstar was a mere misnomer which may be disregarded, treating the letter as having been written on behalf of 25 Redan Street Pty Ltd, I conclude nevertheless that in the circumstances the option to renew had not been exercised.
3. In B.S. Stillwell & Co Pty Ltd v Budget Rent a Car System Pty Ltd [1990] VicRp 52; [1990] VR 589 the Full Court of the Supreme Court considered the validity of a purported exercise of option to renew the lease which did not conform to the requirements of the option clause. O'Bryan J considered that the option to renew in question there constituted no more than an irrevocable offer to enter into a new lease. Unless the conditions set out in the option were satisfied by the party seeking to exercise no contract for a new lease was formed and the doctrine of waiver had no application. A 'non-conforming' exercise or purported exercise of the option according to His Honour, 'at best, amounted to a counter offer' [1990] VicRp 52; [1990] VR 589, 595. Gray J with whom Crockett J concurred said that even if the option to renew were characterised as a conditional contract rather than a mere irrevocable offer, the doctrine of waiver had no application 'if the grantee fails to perform the conditions but seeks to renew the lease, he is merely making an offer' [1990] VicRp 52; [1990] VR 589, 604. Here, as previously noted the purported exercise of the option in July was premature. It was at best a counter offer. The letter of 3 February 2006 was not according to its terms an exercise of the option to renew, rather it was an assertion that the option had been exercised in the past. Even if it could be regarded as a present attempted exercise of the option it was late, coming after the expiry of the lease. The July letter therefore was at best a counter offer. As such of course it was open to acceptance and if accepted would have led to the creation of a lease for a new five year term. The correspondence quoted above however, shows that far from being accepted the counter offer which for present purposes I assume to have been made on behalf of 25 Redan Street was not only not accepted by Mr & Mrs Meerkin but was vigorously rejected for months. It was only long after the original lease term had expired and 10 months after the July letter that in May the parties reversed themselves and the Meerkins purported to say that a new lease had been created. According to Carter on Contract:

Where no time for acceptance is prescribed in the offer, the general rule is that the offer must be accepted within a reasonable period of time. [03-120] (Service 0)

1. Without wishing to express any views as to what the maximum reasonable period might have been in the present instance, it was surely less than 10 months and one would have thought a reasonable period would have elapsed certainly by the time the 2001 lease itself had reached the end of its contractual term. It follows that no new lease for a term of years was produced by agreement between the parties.
2. I note that I have heard no argument as to any possible application of Section 12 of the Retail Leases Act 2003 to the present fact.

APPLICATION OF RETAIL LEASES ACT 2003 GENERALLY

1. In light of the conclusions that I have reached on the renewal issue, I believe it would be inappropriate for me upon the limited argument that I have heard to express a view on the difficult question as to whether a lease by a landlord of a serviced apartment for use as such by a tenant who will be offering the apartment to its own customers as a serviced apartment is governed by the Retail Leases Act 2003.

1. Since I have rejected the case as advanced by the applicants I should not make any of the orders or declarations sought by them. There remains the possibility that they may be able to make out a case for the respondents being liable for certain rental and outgoings. A relatively minor sum is sought in the points of claim, however it did not seem to me that adequate proofs were adduced to establish that such moneys were actually outstanding. I will reserve liberty to apply to enable this matter to be brought forward or to enable any other matter arising out of the above reasons to be agitated.