Steps in exercising your option
An option is a clause in the lease allowing a tenant to renew their tenancy for an additional term. Each lease is different so tenants should be aware of their rights and obligations so they do not miss out on their right to extend the lease.
Things tenants should consider include:
- When does the tenant exercise the option?
Most leases are between 3 to 6 months before the expiry of the term of the lease. However, a lease may require more notice so tenants must be aware of the cut-off date well in advance before the expiry of the lease.
- How does the tenant exercise the option?
Many tenants believe that a simple email to an agent is adequate. If the lease stipulates the tenant can provide notice to the agent via email then this is fine but generally, this is not the case. Many leases request that the tenant mail a letter to the landlord at a particular address specified in the lease. To err on the side of caution, we recommend also performing a company search and mailing it to the registered and business address of the landlord as well as to the agent.
- How can a tenant be certain that the option has been exercised correctly?
Apart from a lawyer confirming the correct method, we also recommend that tenants have the landlord approve in writing that they agree the option has been validly exercised.
Additionally, it is best to have the extension document signed by both parties before the period to exercise the option expires.
- Is there anything that can stop the option being exercised?
There may be preconditions under the lease that the tenant must comply with before the renewal can occur. This may include, that no breach is present at the time of exercising the option or throughout the lease, refurbishing the premises and/or a review of the rent.
- Is there anything else tenants must be aware of?
Once the option has been exercised the tenant is required to take on the lease for the further term.
Any changes to the original lease are either agreed upon in advance (noted in the lease) or at the time of extending the lease.
Tenants should be careful when sending their notice exercising the option if they have any conditional items requested. Eg tenants may say “I exercise the option on the condition that we are granted an additional a 5 year term when this option expires”. If the landlord does not agree to this request, then the tenant must again ask to extend the term without any conditions before their right to extend the lease expires.Once the option is correctly exercised then the tenant cannot back out of the extension unless agreed by the landlord. What this means is that the tenant is bound by the lease at the rent stated in the lease. Generally, if the parties do not agree on the rent, then it is taken to a valuer to determine. It is a good idea for the parties to agree on the new rent before the tenant exercises the option.
- Does a new document have to be prepared to show the extension?
While this is not required it is preferred by tenants as all the terms are clear between the parties. If possible, the extension document can be registered which allows for greater protection for the tenant.
In summary, exercising the option can be simple but if not done correctly can result in the lease term ending quicker than anticipated by the tenant. It is advisable that tenants obtain legal advice on how to exercise the lease correctly and ensure it is documented.