The following is general advice and does not constitute legal advice. Remember that leases are complicated financial instruments and expert legal advice should always be sought.
An option is the right granted under a lease whereby the Lessor grants to the Lessee the right (but not the obligation) to enter into further lease terms of the premises after the expiry of the initial lease, within a specified time frame limited in the initial lease. In Australia, the responsibility for exercising an option correctly always falls on the Lessee, as the Lessee receives the benefit of a new lease and burdens the Lessor.
The key element for exercising options is that the option must be exercised within the option exercise window. Generally if a Lessee misses their option exercise window, then the option will lapse, unless the Lessor agrees to formally extend the option exercise window.
The example above best illustrates this. A lease has a commencement on 01/07 2005 and expires on 30/06/2010 with a five year option. The lease calls for the option to be exercised between three and six months from expiry. The areas shown between the arrows is the option exercise window.
There are other important factors to consider when exercising options correctly.
- The tenant is not to be in breach of the lease in serving the appropriate notice to exercise the option.
- In the Lessee’s option clause there will generally be directions on what the Lessee must do or have done in relation to breaches of lease. A breach of lease, sometimes also referred to as a default, can include a number of factors, the most typical of which is not paying the rent on time or being in arrears.
- There are two important aspects to serving a notice. Firstly, the notice must be unconditional and in writing. Secondly, the notice must be served correctly in accordance with the directions in the lease under the notices clause.
Once an option has been exercised (with the exception of below) the Lessee and Lessor are locked into that option, neither the tenant nor the Landlord cannot withdraw.
However in NSW and QLD, there is a special provision in the Retail Leases Act. The Lessee may ask for the option to be determined early, not earlier than six months nor later than three months of the last date in which you can notify your option. If this clause is activated then the Lessee has 21 days from the determination notice to decide if they wish to exercise their option.
If you are having any issues with options in your lease contracts, do not forget that the property team at Intelligent Property Solutions and Leasing Information Systems are here to help.
Please note, the above should not be considered as actual legal advice and when in doubt, we recommend that you contact your appropriate legal professional.
