When you first enter into a lease for premises to set up your business, it is not always possible to gauge your business’ success or the suitability of the location. It is then a safer option for some to have a ‘break’ in their lease by having two lease terms as opposed to one long lease. For example, a six-year lease could be done by having a three year (the initial term) plus a three-year option lease.
In doing so, you are giving yourself the flexibility of either continuing with the current lease (by exercising the option) or vacating at the expiry of the initial lease term if the location turns out to be less than ideal. The difference between an option lease and a new lease is that the option lease contains the same terms and conditions as the initial lease, so there is no need to renegotiate the terms. Most importantly, the rent review method for the option is predetermined during negotiations of the first lease which makes budgeting for the rent increase a lot easier. The process of how you exercise your option in your lease depends on what your lease says and often this is dependent on if retail legislation governs your lease or if it’s a non-retail lease.
For commercial leases and other non-retail leases (not regulated by retail legislation), how to validly exercise your option depends on the wording and criteria set out in the lease document. Usually, a timeframe is given (no earlier than six months and no later than three months before the expiry date) where the tenant must serve on its landlord written notice to formally exercise its option. The landlord would then acknowledge receipt in writing and prepare the relevant new lease document which should be the same terms and conditions as the existing lease so that no further negotiation is required. If the rent at the commencement of the option term is to be reviewed to market rent, this process is also initiated.
Retail leases are different in that each state has different retail legislation prescribing the procedure for exercising an option. As legislation is state-based, these differences can create confusion around the applicable rules!
Positive Obligation on the Landlord to Remind the Tenant of Option Lease Deadline
In Victoria and Western Australia, the landlord has a positive obligation to notify the tenant in writing of the last day the tenant must exercise its option lease. This notice must be given no more than 12 months and no less than six months before the expiry of the lease term. If the landlord fails to give this notice, the law will extend the tenant’s current lease term by a further six months and during this extension term, the tenant has a right to terminate the lease at any time by giving the landlord written notice. This means that if you are a tenant, your notice period to exercise your option will be extended by law if the landlord fails to remind you of your option notice deadline.
In Queensland, the retail legislation does not extend the current lease term if the landlord fails to give the tenant a reminder notice. This is despite the landlord’s positive obligation to do so, and a failure of which is considered an offence under the Act.
In other states such as New South Wales, South Australia and the Australian Capital Territory, there is no positive obligation on the landlord to provide notice to the tenant of their deadline to exercise their option lease. It’s then prudent in these jurisdictions to diarise the option dates so that you will not miss it and be out of time.
How to validly exercise your option lease is a formal process that requires serving written notice and observing the timeframe your lease states so as to ensure that you do not miss your deadline. If you have any questions, or would like assistance in reviewing your lease document let our leasing lawyers know on 1300 544 755.