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. However, it often benefits both parties if they are interested in a long-term commercial relationship.
It is important to 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. For example, if your original commercial lease runs from 1 July 2022 to 30 June 2025 (3 years), then a 3-year option would cover 1 July 2025 to 30 June 2028.
To exercise your option to renew correctly, ensure you notify your landlord:
- clearly in writing and in accordance with the lease agreement; and
- within the timeframe specified in your lease (the ‘option exercise window’).
After completing these steps, your landlord should acknowledge receipt in writing and start preparing the new lease agreement. They can do this through a new lease with the same terms or a deed of renewal of lease.
To ensure the new lease terms have not changed to your disadvantage, we recommend seeking legal advice.
The Importance of Diarising the Option Renewal Period
Leases almost always specify a time limit for exercising the renewal option. The lease usually allows tenants to exercise the option from three to nine months before the end of the lease term.
It is important not to miss this opportunity, as the landlord is under no obligation to renew if the tenant fails to exercise the option.
Courts Generally Construe Option Renewal Periods Strictly
Recent cases show that courts interpret the timeframe to exercise the option strictly. While the Supreme Court has the jurisdiction to override the option to renew a lease as required by the lease agreement, this is rare. Court proceedings can also be costly.
Provide Correct Notice – Refer to Lease Agreement and Comply with Formalities
Understanding the deadline for exercising the option is critical. Failure to exercise the option according to the lease terms means the tenant forfeits their right to renew.
To validly exercise the option, the tenant must ensure the notice is:
- in the correct format;
- addressed to the landlord;
- given and executed by the tenant named in the lease agreement;
- served on the landlord within the required timeframe and in accordance with the lease terms.
Although providing correct notice may seem straightforward, it can become complex. We recommend seeking legal advice from an experienced lawyer.
Conclusion
Exercising an option to renew a commercial lease may seem simple. However, it is not always straightforward. Tenants must clearly understand and comply with formalities when exercising their option. Failure to do so can result in forfeiting the right to renew.
Tenants also need to ensure that the new lease they sign reflects the terms of their current lease.
This article provides general information only. To understand your rights and responsibilities regarding exercising an option to renew, we recommend speaking to one of our experienced lawyers.
This information is of a general nature only. You should obtain professional advice relevant to your circumstances. If you or someone you know wants more information or needs help, please call 02 6621 2481 or email [email protected].