Sea One North Pty Limited v lgnazia Pty Limited

Supreme Court of NSW|2024-03-18|Before: Peden J

ex tempore JUDGMENT

This is an option dispute. The plaintiff, Sea One North Pty Limited (Sea One), submits as tenant it did not exercise an option to renew registered lease AM2058R, dated 7 July 2016. The defendant, Ignazia Pty Ltd (Ignazia), submits that Sea One did exercise the option by way of a 5 June 2023 email sent by Mr Chris Barbour, the sole director of Sea One, to Mr Stephan Ippolito, agent of Ignazia.
The critical provision for the option to renew is contained in cl 22.1 of the lease, which provides as follows: 22. OPTION TO RENEW 22.1 Option for renewal If the Lessee desires a lease of the Premises for the further term set out in Item 8 of the Appendix and gives to the Lessor not more than twelve (12) and not less than six (6) months' notice in writing to that effect prior to the expiration of the Term then, subject to clause 22.2 and to any Guarantor under this Lease covenanting to continue their guarantee of the obligation of the Lessee, the Lessor must grant to the Lessee a lease of the Premises for the further term commencing on the day following the date of expiration of the Term. The lease for the further term is on the same terms and conditions as this Lease except that: (Multiple Options): if the number of options specified in Item 8A of the Appendix is: one, then this subclause 22 and Item 8 and Item 8A of the Appendix are deleted; or greater than one, then the number of options in Item 8A of the Appendix is reduced by one; (Variables): Items 3, 3A, 4A, 48, 4C, 5A, 58 and 6A of the Appendix are changed to incorporate the terms of the further lease set out in item 8 of the Appendix; and (Update): Items 10, 11 and 12 of the Appendix are amended in accordance with the reasonable requirements of the Lessor."
Items 8 and 8A of the appendix to the lease, as referred to in cl 22.1, provide as follows: ITEM 8 Option Term: One (1) option for a further lease of five (5) years Rent Commencement Date The Commencing date of the Option Term Commencing Date: 15 December 2023 Terminating Date: 14 December 2028 Base Rent in Option Term: The Base Rent payable immediately prior to the Commencing Date for the Option Term increased by 3 % Market Review Dates in Option Term: Not applicable CPI Review Dates in Option Term: Not applicable Percentage Review Dates in Option Term: Each anniversary of the Commencing Date of the Option Term. ITEM 8A Number of Options: One (1)

Sea One is a franchisee of a day spa business called Endota Spa and operates a day spa from the leased premises. In early 2023, Sea One needed to renew its franchise agreement. The franchisor required Sea One to undertake refurbishment work in respect of the leased premises, in accordance with Endota Spa brand guidelines. The scope of those works were not initially settled and became more detailed over the early months of 2023.
From January 2023, Mr Ippolito began to make inquiries with Mr Barbour as to whether Sea One would exercise its option.
Correspondence between the parties concerning the option continued in April 2023. On 3 April 2023, Mr Ippolito sent Mr Barbour an email stating: Hi Chris Hope you had a nice weekend. Just wanted to see if there was any further update from head office? I've spoken to the family and we will need to know by the option expiry whether Sea one North wishes to take up its option. Have a great day and happy to discuss further.
On 18 April 2023, Mr Barbour and Mr Ippolito engaged in text message correspondence concerning the future of the leased premises: Mr Ippolito: Hi Chris. Hope all is well We have been approached by a tenant to take 124 jersey road. Have you had any feedback from endota head office? Cheers Mr Barbour: Hi steffan Yes renewal process formally underway with HO, and they are aware that we need to get to closure by end-May (I'm reasonably confident of positive outcome) Will update you as it progresses Cheers Chris
In May 2023, Mr Barbour engaged in correspondence with Mr Dennis Kalofonos of Sydney Property Finders, concerning the negotiation of new terms for a lease of the premises. On 8 May 2023, for example, Mr Barbour and Mr Kalofonos engaged in the following text message correspondence: Mr Barbour: Morning Dennis. I was speaking with endota franchisor on Friday and they are supportive of the process we spoke about re you working on renegotiating Jersey Road lease. Did you want to send me your email address and I will send thru [sic] current lease details so you that as baseline [sic]. Appreciate your assistance Chris Mr Kalofonos: Hi Chris, that's good news. Please send to [email]. Cheers Dennis
However, this interaction was not disclosed to Ignazia at the time.
On 5 June 2023, and in response to Mr Ippolito's email of 3 April 2023, Mr Barbour sent Mr Ippolito the email in question in this dispute, which reads as follows: Hi Steffan Hope all is well. Just a further update re: the lease @ Jersey Road. I've now had the scope of the refurb works finalised with the franchisor .... all of the works can be categorised as internal refurb (eg. flooring, joinery, internal painting, internal signage, furniture and the like) ... at least nothing that requires external approval ... just a hefty amount of $$ ! So I am fine to now formally exercise the lease renewal option. And in terms of getting to an agreed set of renewal terms, I have asked Dennis Kalofonos to assist with the process (Dennis has been unwell recently but I understand he will back on deck this week and will make contact with you to progress). Many thanks Chris Barbour
On the same day, Mr Ippolito responded to Mr Barbour including, "Thanks Chris for the email and for exercising the option". Mr Barbour did not respond to Mr Ippolito's response, he says because he considered that Mr Kalofonos would be in contact with Ignazia to negotiate new terms of lease. However, it is accepted by the plaintiff that his subjective belief is not relevant to the question to be determined.

Was the renewal option exercised

In Hagerty v Hills Central Pty Ltd (2018) 19 BPR 38,853 at [41], Leeming JA described a twostep test for determining whether an option has been validly exercised (McColl and Macfarlan JJA agreeing): … the first question is, as a matter of construction, what have the parties agreed as to the requirements of the valid exercise of the rights created. The second question is whether the conduct of the person purporting to exercise the option satisfies what is required. …
It is well established that the valid exercise of an option must be absolute and unqualified. The purported exercise of an option will not be absolute and unqualified if it would involve a variation of the terms of the option. The purported exercise of an option which merely misstates the terms of the option exercise process may, however, be valid. In Quadling v Robinson (1976) 137 CLR 192 at 201, Gibbs J put these points as follows (citations omitted): …[I]t is clear that the exercise of the option, to be valid, must have been absolute and unqualified and must have bound the respondents to perform the very terms set out in the option. … However, it is not always easy to determine whether the purported exercise of an option should be understood as attempting to vary the terms of the option or as intending to accept its terms without modification, notwithstanding that they may have been misdescribed, or notwithstanding that the grantee of the option may have indicated that he intends to perform the contract in a manner for which the terms of the option do not provide. Thus although a notice misstates the terms of the option which it purports to exercise, it may nevertheless amount to an unqualified and unconditional exercise of the option … On the other hand, if the grantee of an option sets out his own erroneous understanding of the option, and then purports to exercise the option as so understood, there will (speaking generally) be no effective exercise of the option … It must of course depend upon the proper construction of the document by which the grantee purports to exercise an option whether it amounts to an absolute and unqualified acceptance of the rights and liabilities conditionally created by the option.
In Prudential Assurance Co Ltd v Health Minders Pty Ltd (1987) 9 NSWLR 673 at 677 (Prudential), Kirby P observed that, when determining whether there has been an absolute and unqualified exercise of an option, the appropriate question to ask is what someone who received correspondence containing the alleged exercise of the option would have fairly understood to be the meaning of that correspondence, in all the circumstances of its receipt. The test is objective. Therefore, Mr Ippolito's understanding of the 5 June email is unhelpful to the determination of the issue.
Here, the main procedural requirement imposed by cl 22.1 of the lease for the exercise of the option is the requirement that notice of its exercise be given in writing. I accept that this requirement can be met by email communication and no party suggests otherwise: see eg Kavia Holdings Pty Ltd v Suntrack Holdings Pty Ltd [2011] NSWSC 716 at [33] (Pembroke J).
The lease was also expressed as, "subject to cl 22.2 and to any Guarantor under this lease covenanting to continue their guarantee of the obligation of the Lessee". The plaintiff did not rely upon that proviso of cl 22.1 for any purpose.
Reference was made in submissions to Willis Australia Ltd v AMP Capital Investors Ltd [2023] NSWCA 158 and Jong v Advanced Dental Services Pty Ltd [2019] NSWCA 318, which were said to be distinguishable and not applicable in the circumstances of this case. For that reason, I do not deal with them any further.
The real issue is whether the 5 June email would have been fairly understood by a recipient in the position of Ignazia as involving an absolute and unqualified exercise of the right of renewal conferred by cl 22.1 of the lease. The email was sent to Ignazia in circumstances where Sea One had only just clarified the extent of refurbishment works required by the franchisor. Ignazia was aware of this.
Against this background, and reading the email as a whole, I accept Sea One's submission that the words, "So I am fine to now formally exercise the lease renewal option", would be fairly understood by a recipient as communicating that a path had been cleared for the future exercise of the option and not that the option was thereby being exercised, or alternatively that the path was clear for a future new lease being entered into.
I consider that this reading of paragraph four of the email is bolstered by the fifth paragraph of the email, in which Mr Barbour does not speak with finality one would expect in relation to an unequivocal exercise of an option to renew, but instead envisages a process by which the parties will be, "getting to an agreed set of terms". The process is to be achieved with the assistance of Mr Kalofonos. I consider there would be no need for the assistance of Mr Kalofonos, a real estate agent, if what Mr Barbour was agreeing to was a simple exercise of the option on known terms.
In relation to the lease, there was no need for any further negotiation of any terms. Instead, all terms had been determined, other than Ignazia retaining a discretion to vary the insurance required and the length of the guarantee. However, in circumstances where the lease imposed a continuing guarantee on the guarantor it would appear unlikely, viewing it at a high level, that Ignazia would be able to exercise a discretion in that regard, but I make no final conclusion on it as no submissions were received.
I do not accept Ignazia's submission that in the context of the email as a whole Mr Barbour's use of the word, "formally", is sufficient to mean that a reasonable recipient would understand he was intending to immediately exercise the option. Nor do I accept that the submission that it is a mistake to read the fourth paragraph of the email as unqualified by the fifth paragraph. I consider it is appropriate to have regard to the fact that the fifth paragraph commences with the word, "And", which therefore naturally flows from the basis upon which the language in paragraph four is used. It is not an unqualified exercise of the option, but instead sets out the writer's proposed process for moving forward.
I also have regard to the fact that Mr Barbour does not refer to cl 22 at all. I reject the submission that paragraph five is Mr Barbour's mistaken setting out of the process involved in the exercise of the option. To the extent that it is relevant, I consider the facts in Prudential to be quite different to the facts here, where in that case the tenant purported to exercise the option, referencing cl 3.02. What followed after that reference was a correct description of part of the operation of that clause. Here, there is a complete departure by Mr Barbour from the operation of cl 22 in the context of the lease as a whole.
I do not accept that Mr Barbour is merely misstating the operation of cl 22 in referring to, "getting to an agreed set of renewal terms", by way of a "process", with the assistance of a third party. I therefore consider Sea One's desire to negotiate terms is inconsistent with, or would require the variation of, the actual terms of cl 22.1, and is not an absolute and unequivocal exercise of that right.
Again, for those reasons, I reject Ignazia's submission that the words, "getting to an agreed set of terms", in the fifth paragraph should be analogised to language such as, "We intend to", exercise the option to renew, which have in other cases been considered sufficiently absolute: see eg Prudential at 676F (Kirby P).
I also reject the submission that the fifth paragraph of the email would be interpreted by a reasonable recipient as, "a reference to the administrative task of the drawing up of the variation of lease documents", and that it is more likely that Sea One intended to exercise the option given that there were only ten days left to do so under the terms of cl 22.1. I do not accept that the administrative task of drawing up documents would require a third-party real estate agent to be involved in, "an agreed set of renewal terms", and that speaks against Mr Barbour anticipating the documentation being received from Ignazia's lawyers and possibly being reviewed by its own.
For those reasons, I am satisfied that the plaintiff ought to succeed, and I therefore make orders in accordance with the summons numbered 9 and 10.

Orders

The Court: 1. Makes a declaration that the plaintiff has not exercised the option to renew provided in Clause 22.1 of registered lease no. AM2058E dates 7 July 2016. 2. Orders the defendant to pay the plaintiff's costs as agreed or assessed.

Amendments 08 April 2024 - Amend paragraph [15] pursuant to slip rule. 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: 08 April 2024

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