Section 28 - notices of last date to exercise option

Since 1 October 2020, landlords under retail leases have been required to give their tenants three months’ notice of the tenant’s last date to exercise their option.

To be compliant, the notice must set out the information stipulated in Section 28 of the Retail Leases Act. Notably the Act requires the notice to set out:

• the date by which the option to renew the lease may be exercised by the tenant; and

• the rent payable for the first 12 months under any renewed term of the lease; and

• the availability of an early rent review under section 28A; and

• the availability of a cooling off period under section 28B; and

• any changes to the most recent disclosure statement provided to the tenant, other than any changes in relation to rent.

The notice requirements are much more proscriptive than they were prior to October 2020 and notices with obvious defects are still very common (that may be the subject of a future article) but, until now, there has been very limited consideration of the provision by the Tribunal or the Courts.

The recent matter of Pagica Pty Ltd atf the Oscinah Trust v Inlet Property Pty Ltd [2024] VCAT 830 considered a purported Section 28 notice that was served on the tenant of a motel business in Inverloch.

The landlord alleged that the tenant failed to exercise its option within the time contemplated by the notice (whether or not the tenant had exercised was disputed and, for the reasons set out below, was not required to be determined by the Tribunal). The lease was on reasonably ordinary terms as to renewal.

The landlord sought to bring the lease to an end on the basis that the tenant had failed to exercise its option within time. The tenant brought the proceedings arguing that the notice provided by the landlord did not comply with Section 28 of the Act and so was defective (the result of which would see the time for the tenant to renew extended until 3 months after a valid notice was served)

Fundamentally it is important to understand some underlying principles set out by the Court previously and our 1 April 2020 article is informative in this regard: https://www.easternbridge.com.au/post/when-notice-is-more-than-sending-a-notice While the decisions in our old article relate to Section 28 as it applied prior to October 2020 the fundamental principles (that the section should be interpreted strictly and that a defective notice will be treated as having not been served at all) would still seem to apply.

The tenant’s argument in relation to effectiveness of the notice relied on three key assertions:

1. the notice of last date failed to set out “the rent payable for the first 12 months under any renewed term of the lease”;

2. the notice of last date failed to set out “the availability of an early rent review under section 28A”; and

3. the notice of last date failed to set out “the availability of a cooling off period under section 28B”.

A copy of the full notice is included in the decision and is reproduced here:

Taking each element argued by the tenant in turn:

1. Failure to set out rent

The notice stated “the commencement rent for the further term will be: $110,000 per annum + GST”.

The lease contemplated rent for the further term being reviewed to market (that is rent as agreed between the parties or, failing agreement, as determined by a specialist retail valuer).

The tenant argued that by stating the rent “will be” the landlord’s nominated figure, the landlord “has implied or ‘strongly suggested’ that the market rent has already been determined”.

2 & 3 Failure to set out early rent review availability & cooling off right

The notice stated that early rent review and cooling off rights were available, but went into no detail about how those rights operated.

The tenant argued that the notice failed to “set out” the availability because it failed to provide any information about the respective rights, including any information as to the relevant time limits for exercising those rights (the Act contemplates a tenant requesting an early rent review only within the 28 days following service of notice of last date to exercise and cooling off only within the 14 days following exercise of option).

The landlord argued that the notice contained sufficient information to comply with the Act. Specifically, the landlord argued that:

• the reference to commencing rent was the “nominated or proposed” rent of the landlord;

• the Act sets out no requirement to refer to a rent determination process in the notice;

• the purpose of the notice is to be “a simple user-friendly notice designed to be understood by lay tenants”.

  
  

The decision

The decision primarily focusses on the description of rent in the further term as set out in the notice.

The decision is brief and unequivocal, finding:

It is therefore inconsistent with the terms of s 28 for a notice to state a fixed amount as the commencing rent and that the tenant is entitled to request an early market rent review

…

Section 28 of the RLA requires the notice to state the commencing rent for the further term. The Lease states that the commencing rent for the further term is to be determined by a market rent review unless otherwise agreed by the parties. The Renewal Notice states the commencing rent for the further term is $110,000 per annum plus GST. That statement on its face is clearly incorrect and misleading

…

In those circumstances, I find that the Renewal Notice did not comply with the notice requirements of s 28 of the RLA and is therefore invalid

In coming to this decision, the Tribunal applied a purposive consideration of the text of the Act, noting that the question required “consideration of the of the text of the legislation whilst having regard to the context and purpose of the statute”.

The Tribunal found that where the Act is intended to enhance “the certainty and fairness of retail leasing arrangements between landlords and tenants” and Section 28 specifically intended to “[enable] a tenant to have an early market rent review before it exercises the option to understand what the rent payable will be and whether that is an expense the tenant’s business can afford” it would be “inconsistent with the terms of s 28 for a notice to state a fixed amount as the commencing rent and that the tenant is entitled to request an early market rent review”.

The decision moves on to considering the second element of the tenant’s claim – that failing to properly “set out” how the tenant could trigger its early rent review right was a separate failing of the notice.

The decision does not engage with the argument in any great detail (and does not consider the argument in relation to cooling off availability at all) but does state:

A renewal notice should set out sufficient information to allow the tenant to make an informed decision about whether to exercise the option for a further term or not. Where the lease provides that there is to be a market rent review, the availability of an early rent review must be recorded in the renewal notice

…

the stating of a fixed rent amount as the commencing rent and then a reference to the tenant being entitled to an early rent review is inconsistent with s 28 of the RLA (emphasis added)

This element of the decision is more equivocal, however it would seem that a notice stating simply “an early rent review is available to the tenant (Section 28A)” fails to meet the requirements of the Act to “set out” the availability of an early rent review.

Practical takeaways

The practical consequences of the decision are very significant.

As noted above, it is not uncommon to see Section 28 notices that are unquestionably invalid (not allowing sufficient time, not purporting to meet any of the requirements of Section 28 etc…). It is common to see notices that carry the hallmarks of a valid notice but which state the rent for the further term as a matter of fact rather than indicate that “the rent is to be reviewed to market” or words of similar effect.

A defective Section 28 notice can have very substantial consequences for a landlord and all landlords (and their agents and solicitors) should very carefully consider their notices to ensure they are compliant.

Other elements of decision

Within the proceeding the tenant argued that it had renewed the lease either:

• by correspondence from its solicitor during the period set out in the (invalid) notice; or

• by correspondence from its solicitor on 5 April 2024, after the dispute had arisen (and after the expiry of the date in the (invalid) notice).

  
  

The first question was not required to be answered by the Tribunal and so was not.

The second question, however, was answered by the Tribunal finding that while the 5 April correspondence was a “clear and unequivocal expression of the tenant’s intention” to renew (being the ordinary threshold for an effective renewal) -

the option is exercisable by the tenant up to 3 months after a valid notice is given by the landlord to the tenant

…

while the tenant has expressed its intention to exercise the option, the 5 April letter was of no legal effect

This is an interesting finding – it indicates that any otherwise binding renewal by a tenant will be of no effect (and the tenant not bound to the further term) if it does not come after service of a valid notice by the landlord. This decision would seem to invalidate swathes of renewals that have come in these circumstances (although note that once the parties enter into a deed of renewal the question will become moot).

Paul Nunan

Accredited Specialist - Commercial Leasing

Thank you very much to Jamie Bedelis, the instructing solicitor for the applicant in the matter, for keeping us in the loop on this important decision.