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 usually in the interests of both parties if they are interested in a long-term commercial relationship.
It is important 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 extension or deed of extension and variation of lease.
To ensure 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
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 offer the same renewal terms that were in the original lease.
Courts generally construe option renewal periods strictly
Recent court cases show courts will interpret the timeframe to exercise the option to renew the lease strictly. 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, for example where the date of expiry of the option to renew was incorrectly noted by a landlord. Regardless, court proceedings can be very costly and time consuming for a tenant so that looking for a new lease may be a better alternative option.
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:
- make sure the notice is in the correct form;
- addressed to the landlord;
- is given and correctly executed by the tenant as named in the lease agreement;
- serve the notice 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.
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.
Tenants also need to ensure that the new lease they sign reflects their current lease.
To ensure you understand your rights and responsibilities regarding exercising an option to renew, we recommend you speak to one of our experienced lawyers.