Exercise of option to renew a commercial lease
Why it's important to get it right!
Failure to correctly exercise an option to renew in a lease can have costly and detrimental effects for both landlords and tenants.
An option to renew in a lease is a tenant's right to require the landlord to grant a new lease, on the same terms (except for any changes to such terms as set out in the option - which is usually a review of the rent), at the end of the current term.
However, the tenant must exercise the option to renew strictly in accordance with the lease terms if the option is to be valid.
Why is it important to get it right?
From a tenant's perspective, if an option to renew is not exercised correctly, the landlord may –
- refuse to grant a lease for the further term – requiring the tenant to relocate and costing the tenant unwanted down time in its business and money;
- change the lease terms – which may cost the tenant dearly in having to re-negotiate a new lease, rather than just continuing under the old lease terms as required by the option to renew;
- increase the rent to a more substantial rent than what the tenant would have had to pay had the option been exercised correctly, and which the tenant may be forced to accept if they wish to remain in the premises.
Further, a failure of the tenant to exercise the option correctly, may disadvantage the landlord because the terms of the lease for the further term may no longer be clear, resulting in a dispute.
Once the option period lapses (or if the option is not exercised strictly in accordance with the terms of the lease) the subsequent negotiations between the parties may form the new lease terms and become binding on them, the result of which may not be what the parties were intending.
A recent case that emphasises why it is important to exercise the option correctly is Tripple A Pty Ltd v Win Television Pty Ltd  QCA where a notice exercising the option was not given by the tenant within the time required by the lease and a dispute over the amount of rent ensued.
In that case the court was required to consider:
1) Whether an option to renew could be validly exercised out of time, and what rent was payable by the tenant?
The court held that an option to renew cannot be validly exercised out of time or inconsistently with the terms of the lease, and that the correspondence between the parties (relating to what they thought was a valid exercise of option) was in fact an agreement for a new lease, which was binding on the parties.
The ramifications of this for the landlord was that the rent that applied to the lease was the current market rent. Such rent was considerably lower than what the landlord would have been entitled to had the option been exercised correctly and the lease terms strictly complied with.
2) Can a landlord waive compliance with the requirements to exercise the option?
The landlord cannot waive the requirements for the exercise of an option, once the time in which the option can be exercised has passed.
This case highlights the importance of strictly complying with the lease terms, exercising the option within time, and that parties need to be careful that their conduct after such option period has lapsed, is not deemed to be a new agreement which the parties may be bound by.
What can landlords and tenants do to ensure valid exercise of option?
- both parties should be aware of what the option clause in the lease requires, and diarise the date the option must be exercised by;
- the landlord may wish to remind the tenant before the option is due to be exercised of the date the option is due to be exercised; and
- the tenant should serve the notice to exercise the option strictly within the time and in the manner required by the lease.
Following these simple steps may help avoid unnecessary and costly disputes.
Please note that some different rules apply if the Retail Shop Leases Act (Qld) 1994 applies to the lease – in which case much more onerous obligations are imposed on the landlord, which we have referred to in our previous articles (a copy of which can be obtained by emailing us on the below email address).
If you or someone you know wants more information or needs help or advice, please contact either Ken or Nicole on (07) 5443 4866 or email firstname.lastname@example.org.
Ken Waddington Nicole Downs
(07) 5443 4866 (07) 5443 4866