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 extend the lease term from 1 July 2025 to 30 June 2028.
If you wish to exercise your option to renew correctly, you must ensure that you have notified your landlord:
- clearly in writing and in accordance with the lease agreement; and
- within the timeframe specified in your lease.
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 detriment, we recommend that you engage a lawyer to review the new lease agreement for you.
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 either as a specific date or time period.
It is important not to miss the time period within which you can exercise the renewal option, because the landlord is under no obligation to extend the lease if you attempt to exercise the option outside of the relevant period unless it is a retail shop. The Commercial Tenancies (Retails Shops) Agreements Act requires the landlord to notify the tenant at least 6 months (but no more than 12 months) before the expiry of the term.
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. In rare cases, the court has allowed a tenant to exercise its option outside of the relevant time period - 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, and looking for a new lease may be a better alternative if you have missed the relevant time period, and the landlord refuses to allow you to exercise the option outside of that period.
Provide correct notice in accordance with the lease agreement
In addition to the requirement to exercise your option at the correct time, you must ensure that your notice to exercise the option:
- is in the correct form;
- is addressed to the landlord at the landlord’s address for service set out in the lease agreement;
- is given and correctly executed by the tenant as named in the lease agreement; and
- otherwise complies with the terms of the lease.
Although providing the correct notice and complying with formalities to exercise an option may seem straightforward, it can be very technical, and many court cases have been fought over whether an option notice has been exercised correctly.
It is also important not to inadvertently exercise an option when you do not intend to do so, or you will be legally bound by the terms of the lease for the option period.
Conclusion
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 all formalities when exercising their option to renew. Failure to do so can result in a tenant forfeiting its right to exercise the option.
Tenants also need to ensure that the new lease agreement for the option period does not change their rights and obligations under the original lease agreement.
To ensure you understand your rights and responsibilities regarding exercising an option to renew, we recommend you speak to one of our experienced lawyers.
This article is general information only and does not take into account your specific circumstances. If you or someone you know wants more information or needs help or advice, please contact us.