A hidden trap in s 28 notices

(1) If a retail premises lease contains an option exercisable by the tenant to renew the lease for a further term, the landlord must notify the tenant in writing of the date after which the option is no longer exercisable—

(a) at least 6 months; and

(b) no more than 12 months—

before that date but is not required to do so if the tenant exercises, or purports to exercise, the option before being notified of the date.

(2) If subsection (1) requires the landlord to notify the tenant but the landlord fails to do so within the time specified by that subsection—

(a) the retail premises lease is taken to provide that the date after which the option is no longer exercisable is instead 6 months after the landlord notifies the tenant as required; and

(b) if that date is after the term of the lease ends, the lease continues until that date (on the same terms and conditions as applied immediately before the lease term ends); and

…

There is an unresolved issue over what is required in a s 28(2)(a) notice. In particular, it is unclear which date it needs to state – the date in the lease deed or the last date for the exercise of the option as extended by sub-s (2)(a).

In Beds for Backs v Palace Pty Ltd (Retail Tenancies) [2006] VCAT 2677, Deputy President Macnamara (as he was then) held that:

… The notice which sub-section 2(a) deals with has a number of features necessary, first, it must be a notice that is late and out of time. If it were on time it would be in compliance with sub-section (1). Secondly, however, the notice must be ‘as required’ to adopt the phrase which appears at the end of the paragraph. What does ‘as required’ mean. In my view, it means that it must be in accordance with sub-section (1) in all respects save that it is late. What sub-section (1) requires is a notice which faithfully records the contractual terms of the lease. The letter of 22 September 2005 does that. It is in all respects the notice required by sub-section (1) except, that it is late. Sub-section (2)(a) assumes that the notice will be as required except that it is a notice that is late. The counter argument to this would reside in the phrase which begins paragraph (a) of sub-section (2) ‘the retail premises lease is taken to provide …’. That is there is an effective statutory amendment to the lease. It might be said that that statutory amendment introducing the further six month period is supportive of the view put by Mr Piraino. The matter is I think far from clear. With some hesitation however I conclude that the proper construction of the sub-section is that the words ‘as required’ refer back to sub-section (1) hence the notice or the letter of 22 September 2005 is an effective notice for Section 28(2)(a) and the fact of it being late extends the period during which the option to renew may be exercised to a date being six months thereafter presumably to 22 March 2006. I am not concerned for the moment to distinguish whether one counts the first day, the last day, whether it is the 21st or the 22nd of March because it is clear that on no day in March or thereabouts was any notice of exercise of option given. It would follow from that conclusion as to the correct meaning of Section 28 that the contractual term of the lease is about to expire and there is no entitlement on the part of Mr Piraino to exercise an option to renew. ….

This decision suggests that the s 28(2)(a) notice need not specify the extended last date for exercising an option and need only state the date specified in the lease deed for exercising an option.

However, in Xiao v Perpetual Trustee Company Ltd [2008] VSC 412, Vickery J in the Supreme Court of Victoria held that (emphasis added):

80 Under s.28(2)(a) of the RLA, which operates in this case, the retail premises lease is taken to provide that the date after which the option is no longer exercisable is to be six months after the landlord notifies the tenant “as required”. The requirement is for a notice under s.28(2)(a) to comply with the critical twin requirements of s.28(1) I have identified, that is the notice must be in writing and specify the date after which the option is no longer exercisable. It is only a notice in this form which would trigger the running of the six month period under s.28(2)(a) of the RLA.

81 It would follow that in this case, the date after which the option is no longer exercisable is the date implied in the Lease by operation of s.28(1)(a), that is six months after the landlord notifies the tenant as required. Section 44 of the ILA relevantly provides that:

(a) In an Act, unless the contrary intention expressly appears:

(b) a reference to a month shall be construed as a reference to a calendar month.

82 Accordingly, in this case, if the date of notification of the tenant Mr Xiao was either 6 or 7 December 2007, six calendar months from those dates would be either 6 or 7 June 2008, in which case the notice should have specified either of those dates as being the dates after which the option was no longer exercisable. However, the notice did no such thing. It incorrectly specified that the option was “not capable of being exercised after 3 June 2008. After that the option lapses.” [Underlining added]

83 In the circumstances, only one conclusion is open – the 4 December 2007 letter was fundamentally defective as a notice under s.28 and did not constitute notification “as required” for the purposes of subs.(2)(a) of that section.

This decision suggests that a sub-s 28(2)(a) notice will only be valid if it states the last date for exercising an option as extended by operation of that sub-section.

The decision in Beds for Backs was recently followed by Senior Member Lothian in LEGFIN Pty Ltd v Anthony (Building and Property) [2015] VCAT 986 at [60] to [63].

Unfortunately, Vickery J does not appear to have been made aware of the decision in Beds for Backs, nor does Senior Member Lothian appear to have been made aware of Xiao.

Consequently, it remains unclear which date a sub-s 28(2)(a) notice needs to state and it is prudent to include both dates when drafting a notice.

However, sub-s 28(2)(a) extends the last date for exercising an option by six months, so if you need to specify the extended day, you should ensure that the tenant is notified on a day that is precisely six months before the expiry date.

One solution may be to serve a notice that says that the extended last date for exercising an option is 6 months after the tenant is given the notice (rather than specifying the actual date). It is unclear at this stage whether such a notice would satisfy the test in Xiao, so practitioners should be cautious in serving such a notice.

The implications of a defective s 28(2)(a) notice can be significant, particularly if the landlord has plans to redevelop or re-let the premises – if the notice is found to be invalid, then the tenant’s option can still be exercised and the tenant can remain in possession.