Option periods in commercial and retail leases benefit both the landlord and tenant. However, they can be complex clauses which require careful consideration, particularly for the tenant, to ensure that their rights to the option period are not lost.
What is an option to renew?
An option to renew clause in a lease entitles the tenant to have the term of the lease renewed for a set period of time. The lease may provide for one, or multiple option periods, which are agreed between the landlord and tenant when negotiating the initial lease. For example, a lease may have an initial term of 5 years, with two option periods of a further 5 years each. Therefore, the total period of the lease is 15 years.
Who is bound by the option?
If exercised correctly, the landlord is bound by the option period in a lease. This means the tenant is guaranteed the right to lease the premises for those periods, providing valuable protection for their entitlement to occupy the premises. However, the tenant is not obliged to exercise its option and can terminate the lease at the end of the initial term or at the end of any of the option periods.
How is an option exercised?
An option to renew must be exercised strictly in accordance with the requirements of the lease. If the option is not exercised correctly, the landlord is not bound by the clause and is not obliged to renew the lease. The lease will specify the period during which an option is to be exercised. The standard period is usually between six and three months prior to the termination date of the initial lease. The lease will also specify how the landlord must be notified, for example, in writing to the address noted in the lease.
Will the terms of the lease change?
If the option to renew is exercised correctly, the new lease must be on the same terms as the initial lease. The only terms which will change are those required to do so due to the nature of it being a renewal lease. For example, the rent will usually be increased in accordance with the rent review clause, and any references to option periods will be updated.
Do I sign a new lease?
When an option is exercised, the landlord’s solicitor usually prepares the new lease documents. This can either be a new lease, or a variation of lease (both of which can be registered at Land Registry Services , if they are prepared in registrable form). A variation of lease is used as a way of varying only the required clauses without preparing an entire lease. The variation will specify the changes by referencing the existing lease.
Conclusion
Tenants are only guaranteed their option to renew if it is exercised strictly in accordance with the lease. Leases can be complex documents, and great care should be taken to draft, and then interpret the terms and requirements correctly.
Our property team at Jenkins Legal Services can assist with this process, to ensure your rights are not lost. If you would like to discuss your lease, please contact us at office@jenkinslegal.com.au or call 02 4929 2000.