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 is often in the interests of both parties if they are interested in a long-term commercial relationship.
If your commercial lease contains an option to renew, it is important to understand the steps you need to take to exercise the option correctly. The lease will usually set out when and how the option must be exercised, and failing to comply with those requirements can create significant problems for a tenant.
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. The option clause should specify the renewal period, the timeframe for exercising the option and any conditions that must be satisfied.
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.
In NSW, the Conveyancing Act 1919 (NSW) recognises options in leases, including a tenant’s right to require a landlord to grant or offer to grant a renewal or extension of a lease in certain circumstances.
If you wish to exercise your option to renew correctly, you should:
- check the lease to identify the exact date or period in which the option must be exercised;
- review the requirements for giving notice to the landlord;
- ensure any conditions attached to the option have been considered;
- give notice in the manner and within the timeframe required by the lease; and
- keep evidence of the notice and when it was given.
To ensure that the terms of the new lease agreement have not changed to your disadvantage, we recommend you seek legal advice before exercising the option or entering into a renewed lease.
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. This 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. However, the timeframe will depend on the individual lease, so you should not rely on a standard period.
It is important for the tenant not to miss the opportunity to exercise the renewal option. The landlord may not be obliged to renew the lease if the tenant fails to exercise the option in accordance with the lease.
For this reason, tenants should diarise the option period well in advance and allow enough time to obtain legal advice, review the lease and prepare any required notice.
Courts generally construe option renewal periods strictly
Recent cases demonstrate the importance of complying with the timeframe and requirements contained in a lease when exercising an option to renew.
Option clauses can create valuable contractual rights for tenants, but those rights are generally exercised according to the terms agreed in the lease. A dispute about whether an option has been validly exercised can result in costly court proceedings.
The Supreme Court may have jurisdiction to grant relief in some circumstances, including in relation to certain breaches affecting a tenant’s entitlement to an option. However, this should not be relied upon as an alternative to complying with the lease. Court proceedings can be costly, time-consuming and uncertain.
Provide correct notice and comply with the lease formalities
As mentioned above, it is critical to understand the deadline for exercising the option to renew.
The lease may also specify how the notice must be given. For example, it may contain requirements about the person or address to whom notice must be given, the method of service and the information that must be included.
Before exercising an option to renew a commercial lease, check the following:
- Renewal deadline: Confirm the exact date or period during which the option can be exercised.
- Notice requirements: Check what the lease says about the form, content and delivery of the notice.
- Conditions: Review any conditions attached to the tenant’s right to exercise the option.
- Lease obligations: Consider whether there are any outstanding issues under the existing lease that may affect the option.
- Renewed lease terms: Check the rent, lease term, review provisions and other terms that will apply during the renewal period.
- Evidence of service: Keep a copy of the notice and evidence that it was given in accordance with the lease.
It is important not to assume that simply telling the landlord that you want to stay in the premises will amount to a valid exercise of the option. The requirements of the particular lease need to be followed.
What if the tenant has breached the lease?
A tenant may be concerned that a breach of the existing lease automatically prevents them from exercising an option to renew. The position can depend on the terms of the lease and the nature and timing of the breach.
In NSW, section 133E of the Conveyancing Act 1919 (NSW) contains provisions concerning certain breaches of obligations under a lease and when a breach can affect a tenant’s entitlement to an option.
This means that a tenant should not assume that a breach automatically determines their rights, but should also not assume that a breach can safely be ignored. If there is a dispute about an option to renew, legal advice should be obtained promptly.
Review the renewed commercial lease
Exercising an option to renew does not mean that every term of the commercial lease should simply be accepted without review.
Before the renewal takes effect, it is sensible to check the terms that will apply during the new lease period, including matters such as:
- the new lease term;
- rent and rent review provisions;
- outgoings;
- repair and maintenance obligations;
- make-good obligations;
- permitted use of the premises;
- assignment or subleasing provisions; and
- any other changes proposed by the landlord.
To ensure that the terms of the new lease agreement have not changed to your disadvantage, we recommend you seek legal advice before signing a new lease or agreeing to amended terms.
Why legal advice can help
Exercising an option to renew a commercial lease can involve more than simply notifying the landlord that you want to remain in the premises. The lease may contain strict requirements about timing, notice and other conditions.
A lawyer can review the lease, identify the applicable option period, consider the requirements for exercising the option and advise you about the terms that will apply to the renewed lease.
How Revolance Legal Can Help
Revolance Legal provides commercial lease legal advice to businesses in Sydney. Our commercial lease lawyers in Sydney can assist with reviewing existing leases, advising on lease terms and helping landlords and tenants understand their rights and obligations.
If you are approaching the end of your commercial lease or need advice about exercising an option to renew, contact Revolance Legal on 02 9266 0688 or email [email protected].
Frequently Asked Questions About Commercial Lease Renewal Options
What is an option to renew a commercial lease?
An option to renew is a contractual right contained in a commercial lease that allows a tenant to require the landlord to grant or offer a further lease, subject to the terms and conditions of the option.
When should I exercise an option to renew my commercial lease?
The timing depends on the terms of the particular lease. The option clause will usually specify a date or period during which the tenant must exercise the option. Tenants should diarise this period well before the deadline.
What happens if I miss the deadline to renew my commercial lease?
Missing the deadline can put the tenant’s right to renew at risk. The consequences depend on the wording of the lease and the circumstances. If a deadline has been missed, obtain legal advice promptly rather than assuming the option has automatically been lost or remains available.
Can a landlord refuse to renew a commercial lease if I have an option?
If a tenant has a valid option to renew and properly exercises it in accordance with the lease, the landlord’s ability to refuse the renewal may be limited. However, the exact position depends on the wording of the option and any applicable legal requirements.
Can I exercise an option to renew if I have breached my commercial lease?
A breach does not necessarily mean that a tenant automatically loses the right to exercise an option. In NSW, specific statutory provisions can apply to certain breaches and options in leases. The lease and the circumstances of the breach should be reviewed before the tenant assumes that the option is available or unavailable.
Should I have my commercial lease reviewed before renewing?
Yes. A lease review can help identify the requirements for exercising the option and any changes to the terms that will apply during the renewed lease period. This can help a tenant understand their rights and obligations before committing to another lease term.
Disclaimer: This article provides general information only and does not constitute legal advice. It is important to obtain professional advice relevant to your circumstances. If you or someone you know wants more information or needs help or advice, please call our commercial lease lawyers Sydney on 02 9266 0688 or email [email protected].