Lease options allow a tenant to exercise a guaranteed right for a further term if they meet certain conditions. Failure to exercise an option within the time frame (the option window) the lease specifies can result in the tenant losing the right to take advantage of the further term. Below, we unpack an example of a tenant who failed to exercise an option in time and the various obligations and rights of landlords and tenants.
Consider This Scenario
A landlord leases a commercial premises to a tenant under a lease. The lease is for five years with two 5-year options. The tenant must exercise the first option no earlier than six months but no later than three months before the end of the first term (the option window).
But what if a tenant forgets to exercise his lease within the option window, and the landlord finds a better tenant? Can the landlord argue that the tenant has lost his or her right to exercise the option and they should get out of the premises?
A tenant still has a valid option despite exercising the option outside of the option window.
Is the Tenant Entitled to a Further Period?
The Court held in Glenalton Investments Pty Limited v Weemah Park Pty Limited  QSC 445 (Glenalton case) that the tenant was entitled to the lease for the further period. The main reason was due to the landlord’s actions and behaviours, in particular:
- The landlord accepted the tenant’s letter stating he would exercise the option; and
- The landlord returned a letter to the tenant accepting the valuer’s assessment of the market rate.
The communication between the parties and the agreement to a new lease despite the option window expiring was critical. If the landlord in Glenalton had made it clear that the option had expired, then the outcome may have been different.
Signing the Lease
Importantly, once the parties agree on the option, the landlord’s lawyer should prepare the documents as soon as possible and present them to the tenant. Until such time, a valid “agreement for lease” exists, but no valid lease. If the parties fail to enter into the agreements, a claim for damages may arise.
If a landlord wants to exercise the option, they should clearly communicate with the tenant and offer a new lease on the same terms as the option (save for any rent increase).
Alternatively, if the landlord wants to evict the tenant, they should offer a new lease on different commercial terms and be clear this is not an exercise of an option. They should provide a notice of termination once the option window has passed.
At the start of every lease, a tenant should diarise the exact dates for the exercise of the option. This exercise will help them avoid being caught in a situation where the landlord may refuse to exercise the option or where the landlord will hold the tenant to ransom with less favourable terms than those contained in the original lease.
If you have any questions, get in touch with our commercial leasing team on 1300 544 755.
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