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 pre-conditions contained in the lease.
Landlords are not obliged to offer a renewal option; however, options usually form part of the initial lease negotiations. Including a lease option can benefit both parties if they are interested in a long-term commercial relationship.
If your lease includes a renewal option, you should carefully read the terms and conditions before the option expires. This will help you understand the steps you must take to exercise the option and avoid losing your right to renew.
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 terms of the lease agreement; and
- Within the timeframe specified in your lease (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 you exercise your option properly, or that the terms of the new lease agreement have not changed to your disadvantage, we recommend you seek legal advice.
The Importance of Diarising the Option Renewal Period
Commercial leases almost always have a time limit on when a tenant can exercise an option to renew, usually expressed as a specific date or period. Tenants are typically permitted to exercise the option from three to nine months before the end of the lease term.
If a tenant fails to exercise the renewal option before the deadline, they will lose their right to renew the lease. The landlord is then free to lease the property to another tenant and has no obligation to renew the lease. Therefore, the stakes for you or your business can be high.
Courts Generally Construe Option Renewal Periods Strictly
Recent cases show that courts interpret the timeframe to exercise the option strictly. The Supreme Court has jurisdiction to override the option in the manner required by the lease agreement; however, this is rare. Court proceedings can also 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 forfeit their right to exercise it.
For a tenant to validly exercise their option to renew, the notice must be:
- 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 lease terms.
Although providing the correct notice and complying with formalities may seem straightforward, it can become complex. This is why we recommend you seek legal advice from an experienced lawyer.
Next Steps
Exercising an option to renew a commercial lease may seem simple and straightforward. However, this is not always the case. Tenants need to clearly understand and comply with formalities when exercising their option. Failure to do so can result in forfeiting the right to renew.
Tenants should also ensure that the new lease reflects the terms of their current lease.
This article contains general information only. It is important to obtain professional advice relevant to your circumstances. To 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 02 9221 1088 or email .