Commercial common sense
The flexibility of the common law means that courts rarely deliver judgments that appear to be inconsistent with commercial common sense. The judgment of the New South Wales Court of Appeal in Willis Australia Ltd v AMP Capital Investors Ltd1 is, however, such a case.
Essentially, Willis could exercise an option to expand the area of its lease by providing:
- notice that it wished to exercise the option nine months before a lease expired; and
- a bank guarantee at any time before the new lease was to commence.
Willis provided notice of its intention to expand its lease more than nine months before the lease expired. AMP therefore terminated the lease of the tenant currently occupying that space.
Shortly before the new lease was to commence (and after the arrival of COVID-19), Willis purported to withdraw its notice exercising the option. It asserted that the option had not been validly exercised because it had not provided a bank guarantee.
At first instance, the trial judge held that AMP could waive the condition requiring timely provision of a bank guarantee because the condition was only for its benefit. Interestingly, the trial judge held that this result only followed because he characterised the option as a conditional contract rather than an irrevocable offer (addressing a long-standing controversy about the proper characterisation of options).
The New South Wales Court of Appeal disagreed. It held that AMP could not waive the requirement to provide a bank guarantee because it was not a 'condition', but merely a step that Willis could choose to take if it wished to exercise the option. The court therefore did not need to address the controversy about the proper characterisation of options.
This issue might have been avoided if the contract had been drafted so that the bank guarantee requirement was an obligation for Willis (after serving the option notice), rather than merely a requirement for validly exercising an option. One suspects that this is how the parties themselves regarded the bank guarantee requirement. However, the Court of Appeal decided that the outcome was not sufficiently absurd to justify departing from the language used by the parties.
Willis Australia Ltd v AMP Capital Investors Ltd [2023] NSWCA 158
Whether terms of option to renew lease amount to conditional contract or irrevocable offer - controversy remains unresolved
In this case, the New South Wales Court of Appeal was asked to consider whether the options in a lease agreement constituted a conditional contract or an irrevocable offer. However, the court declined to resolve the 'standing controversy' on the legal nature of an option reflecting the choice between a conditional contract or an irrevocable offer. Instead, it applied well-settled principles of construction, removing the need to characterise the relevant clause.
The court held that the lessee was not bound by the second option to take the lease for the expanded space, as it had only exercised three of the five stipulated conditions. The lessor could not waive the timely performance of the conditions, as the performance of the conditions was not a right that could be waived.
This case is significant because the Court of Appeal considered the controversial issue of the characterisation of the legal nature of an option as either a conditional contract or an irrevocable offer. The court held that it was not necessary to resolve that issue in this case, instead resolving it under principles of construction.
This case concerned a dispute over a lease agreement that commenced on 1 October 2014 between Willis Australia Ltd (as tenant) and AMP Capital Investors Ltd (as landlord) for Suite 1 of Level 15, and the whole of Level 16 of Angel Place, 117–123 Pitt Street, Sydney. The lease was for a six-year period and included two options to renew. The first was to renew the lease for a further four-year term, and the second was for Willis to take a lease of the balance of Level 15 for a four-year term.
Nine months before the expiry of the lease, Willis gave two notices by letter to AMP, advising it intended to exercise both options. Importantly, the notices satisfied three of the five conditions stipulated in the contract. The other conditions – being the provision of a bank guarantee and the absence of notice of breach – did not need to be satisfied until the expiry of the original lease.
Less than eight months later, Willis withdrew its notice for the second option. It asserted that it was entitled to do so because it had not provided the bank guarantee (being one of the conditions for exercising the option).
Justice White, sitting in the equity division of the Supreme Court, determined that the second option was a conditional contract and that AMP had validly waived the timely performance of the remaining two conditions Willis had not performed, which were wholly for AMP's benefit. Accordingly, his Honour held Willis had exercised the second option, and ordered the specific performance of the renewed lease for both options.
On appeal, the issues were whether the primary judge had erred in:
- finding Willis had exercised, and was bound by, the second option;
- characterising the relevant contractual clause as a conditional contract, such that Willis was bound irrespective of its performance of all five conditions;
- determining AMP had validly waived the performance of the final two conditions of the relevant clause not performed by Willis;
- determining the relevant clause was a conditional contract because this avoided a commercial nonsense or commercial inconvenience; and
- determining Willis no longer contended it was entitled to withdraw its notice to AMP.
As to grounds 1, 2 and 4, the court held that the text of the relevant clause in the lease agreement did not support AMP's construction of a conditional contract. The use of the words 'must' and 'only if' made plain that the landlord has an obligation to grant a new lease for the expanded space under the second option if certain conditions were met. The court held that there was no reason for the primary judge to draw the distinction between the three conditions that were satisfied and the two that were not. Having regard to the wording of the clause, each of the conditions was equal and must have been satisfied before the landlord became obliged to grant the new lease. Further, there was no necessary commercial nonsense; when Willis withdrew its intention to exercise the second option, AMP was entitled to lease the expanded space to another tenant, perhaps at a higher rent.
As to ground 3, the court held that, on the reasoning applied to grounds 1, 2 and 4, AMP had no right created under the relevant clause in the lease that was capable of being waived. For the waiver to be valid, it would have been necessary for it to be in writing and signed by both parties who were affected by it. This requirement was not satisfied and, accordingly, ground 3 was upheld. As to ground 5, the court held that it was not necessary to determine it, as Willis had accepted it added little to its primary grounds of appeal.
The court also commented on the 'standing controversy' (which remains unresolved) regarding the possibility of an option clause being characterised in one of two ways. The first characterisation is where it is construed as being an irrevocable offer by the grantor, which may be accepted by the grantee any time during the specified period. This characterisation involves the notion of there being two agreements: one involves the offer of the option remaining open for a specified period, and the other is that which is created when the option is exercised. The second characterisation is where the option is a conditional contract. This involves simply one agreement subject to one or more conditions subsequent such that if the conditions are not satisfied, that part of the agreement terminates.
Although the characterisation of an option has usually proved immaterial, the issue may be significant where there is a question of the proprietary status of an option and where different considerations arise concerning the assignment of options depending on the nature of the particular option. The court enunciated the following principles relating to the 'standing controversy':
- Whether a step required to be taken by the grantee be construed as a condition precedent or an obligation to be performed after the creation of the agreement depends on the wording of each particular instrument.
- Regard must be had not only to the terms of the clause containing the option, but also to other relevant clauses in the agreement.
- Although a requirement for payment of money may be properly characterised as a condition precedent, that requirement may be 'waived' by the grantor.
- If the option is construed as an irrevocable offer, an argument for the grantee of an option would need to be based on an implied contract arising from the conduct of the parties. There can be no reliance on the doctrines of election and promissory estoppel.
The court set aside the declarations and orders made by the primary judge, and made an order by way of restitution for all sums paid by Willis under the orders made by the primary judge.
Footnotes
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[2023] NSWCA 158.