An option clause is a term in a commercial lease that allows a tenant to renew their lease at the end of the original lease period, if they meet certain conditions.
Landlords are not obliged to offer a renewal option but must comply with the renewal option if provided for in current Lease and certain requirements have been met by the tenant. It is often in the interests of both parties for their own commercial reasons and also for the long-term commercial relationship between the landlord and tenant
It is important that you understand the steps you need to take if you want to exercise the option to renew your lease.
How option renewal periods work
Most commercial leases require the tenant to notify the landlord if they wish to exercise an option to renew their lease. For example, if your original commercial lease has a fixed term from 1 July 2022 to 30 June 2025 (3 years), then a 3-year option would cover 1 July 2025 to 30 June 2028.
If you wish to exercise your option to renew correctly, ensure you have notified your landlord:
- clearly in writing and in accordance with the lease agreement; and
- within the timeframe specified in your lease (which is referred to as the ‘option exercise window’).
Once you have completed the above steps, your landlord should acknowledge receipt of your decision in writing and start preparing the new lease agreement. They can do this through a new lease with the same terms or by a deed of renewal of lease.
To ensure that the terms of the new lease agreement have not changed to your disadvantage, we recommend you seek legal advice.
Additionally, you should be aware that it in general the lease would specify that the tenant is not entitled to exercise the option to renew if they are in breach of any terms in the current lease. You should obtain legal advice in situations such as this and preferably well before the timeframe provided in the option exercise window.
The importance of diarising the option renewal period
There will almost always be a time limit on when a tenant can exercise an option to renew which is usually expressed in the commercial lease as a specific date or time period. The usual trend is to allow the tenant to exercise the option to renew from three to nine months before the end of the lease term.
It is important for the tenant not to miss the opportunity to exercise the renewal option as the landlord is under no obligation to renew the lease if the tenant fails to exercise the option.
Courts generally construe option renewal periods strictly
Recent cases show that courts will interpret the timeframe to exercise the option to renew the lease strictly and in particular when the landlord has taken steps or incurred costs to find a new tenant. The Supreme Court has jurisdiction to override the option to renew a lease in the manner required by the lease agreement, however, this is rare. In any event, court proceedings can be very costly.
Provide correct notice – refer to lease agreement and comply with formalities to exercise option
As mentioned above, it is critical to understand the deadline for exercising the option to renew.
Failure to exercise the option in the manner required by the lease agreement, means the tenant will have forfeited their right to exercise the option.
For a tenant to validly exercise their option to renew, they must ensure that the notice is:
- in the correct format;
- addressed to the landlord;
- given and correctly executed by the tenant as named in the lease agreement;
- served on the landlord within the required timeframe and in accordance with the terms of the lease.
Although providing the correct notice and complying with formalities to exercise an option may seem straightforward, it can become complex. This is why we recommend you seek legal advice from an experienced lawyer.
Conclusion
Exercising an option to renew a commercial lease may seem simple and straightforward. However, this is not always the case. Tenants need to ensure they clearly understand and comply with formalities when exercising their option to renew. Failure to do so can result in a tenant forfeiting their right to exercise the option. Most of the time this would mean their business would be severly impacted as they cannot operate the business at the premises.
Tenants also need to ensure that the new lease they sign reflects their current lease.
This information is for general purposes only and it is important to obtain professional advice relevant to your circumstances. To ensure you understand your rights and responsibilities regarding exercising an option to renew, we recommend you speak to one of our experienced lawyers.
If you or someone you know wants more information or needs help or advice, please contact us on 61 2 9212 1099 or email info@dls-lawyers.com.
