3 FAQs Answered About an Option Lease

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Table of Contents

• 1. What is an Option Lease?
• 2. How Does Market Rent Affect the Last Day to Exercise My Option?
• 3. How Do You Validly Exercise Your Option Lease?
• Key Takeaways

Leasing disputes over option terms can be stressful – especially if you are unsure of the status of your tenure in your current premises and cannot find suitable premises elsewhere in the meantime. Whether you are at the start of your negotiations for a new lease or if you already have a lease, we answer three FAQs to help you understand your rights.

1. What is an Option Lease?

An option lease is a lease which includes the right to a further term. Disputes can arise where parties are unclear as to the procedure involved. For instance, do you know that there is usually a strict timeframe in which you must exercise your option term? What happens if you are out of time? Does the landlord have any positive obligation to give you notice that your right to exercise your option lease will expire after a particular date?

2. How Does Market Rent Affect the Last Day to Exercise My Option?

As a tenant, one of the important dates to consider is when the landlord gives you notice of the new market rent. This date is of particular importance if the landlord is basing the rent at the commencement of the option term on current market rent review standards. Does your landlord have to give you notice before the last day to exercise your option lease?

On the one hand, you don’t want to be compelled to exercise your option for a further term if you have not reached agreement on the new market rent.

On the other hand, this process may be outside of your control if the lease does not say when the landlord must provide you with a new rent review notice and this may occur after the deadline for you to exercise your option. In New South Wales and Queensland Retail Lease legislation, the tenant has a right to know the landlord’s determination of the current rent amount 3-6 months before the last day on which the tenant may exercise their option.

If the tenant requests a market rent determination, the retail legislation extends the last day that the tenant is required to exercise its option under the lease. This date is varied to be the earlier of 21 days after:

• The tenant gives notice of the determined market rent; or
• The day of the lease ends.

This protection is afforded only to retail leases. It may then be in your best interest to ensure that the timing set out to exercise your option aligns with when your landlord will determine the market rent review.

3. How Do You Validly Exercise Your Option Lease?

Validly exercising your option lease requires more than simply emailing your agent or landlord. In certain cases, it may merely amount to an intention to exercise the option. In the case of Kavia Holdings Pty Ltd v Suntrack Holdings Pty Limited [2011] NSWSC 716, the matter before the Court was whether the tenant had validly exercised its option by sending an email to the lessor.

The Court held that the requirements of a valid exercise of an option by email depend on the wording of the lease. It stated that a valid email exercise of an option must:

• Satisfy the contractual requirements of the notice as set out in the lease (e.g. if the lease requires written notice but not physical delivery, an email is sufficient);
• Contain clear and unequivocal wording (i.e. the tenant does not phrase the exercise of the option in a way that makes it conditional upon another event or further negotiations); and
• Meet the lease requirement for signing (i.e. the court held that the inclusion of the sender’s name on the email was sufficient to satisfy the “signing” requirement under the lease).

Key Takeaways

The lost opportunity of an option lease for a further term may be significant if you are relying on the premises for your business’ continuity. It is important to understand the process of how to validly exercise your option lease so that you are not out of time and communicate clearly your intentions for the avoidance of ambiguity.

If you have any questions or would like any assistance in reviewing your lease documents, get in touch with our commercial leasing team on 1300 544 755.