Many of my franchisor and franchisee clients conduct their
businesses through a particular premises. In fact, a big portion of
the value of their businesses relate to goodwill, which is in turn
affected by securing that premises. This can occur through an
initial term or a series of terms (granted through options to
renew), to obtain that security of tenure.
What does it mean to exercise an option?
Simply put, if a lease contains an option to exercise this means
that the tenant can ask to extend the lease. If the lease has no
option to exercise when it finishes, then at the conclusion of the
lease, the relationship usually becomes a month-to-month lease if
the tenant doesn't move out. This means that either the tenant
or the landlord can end or change the lease with one month's
So what happens when a landlord denies your exercise of
The leases that I read will usually say that a tenant's
right to exercise an option to renew is conditional upon them not
being in breach of their lease – at either the date of
exercise of option or in some cases throughout the term of the
lease. Landlords sometimes rely on such provisions to deny
otherwise valid exercises of option in order to deny a tenant their
Tenants, don't panic – the law may preserve your
In such cases, you may be able to rely on the Conveyancing Act
(in NSW), to prevent the landlord from denying your right to
exercise an option in the event of a supposed breach of lease.
Here is how the Conveyancing Act operates to protect you where
you are in breach of lease:
Section 133E requires a notice to be served by the landlord
within 14 days after you give your notice of exercise of option (if
a breach occurred before the notice period), or within 14 days of
the breach occurring (if it occurred after giving notice)
The notice needs to be in prescribed form and must specify the
alleged breach. It should also state that subject to any order of
the court under section 133F, that the breach is being used to
preclude you from entitlement to the option
No breach of any relevant obligation by you under your lease
can prevent your claim to the option unless the prescribed notice
has been served and your rights have been extinguished (because you
didn't seek relief in accordance with section 133E or the court
hasn't granted you relief under section 133F)
It is important that within one month of being served with the
prescribed notice that you seek relief from the effect of your
breach from the court, if you want to maintain your option in the
wake of a prescribed notice
Note that the court's powers to grant relief are very wide
under section 133F and they may take any circumstances they
consider to be relevant so your application for relief could go
Make your exercise of option bulletproof
Don't give your landlord an extra excuse to deny your right
to exercise an option. Even if you aren't in breach of your
lease, your landlord can deny you your right of exercise of option
if you haven't:
Exercised the option in time
Demonstrated a sufficient intention to exercise the option in
Addressed the notice of exercise to the correct party
Served the notice to exercise on the correct party.
Your starting point when contemplating an exercise of option
should always be a review of the option provisions in your lease
– what does your lease say about when and how to exercise?
What do the service of notice provisions in your lease say about
what is considered to be sufficient service of a notice – is
it your landlord's responsibility or can it be their lawyer or
agent? There are a number of cases which discuss this point where
parties have failed to serve a notice correctly.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Warranties can be risk-shifting mechanisms when the party giving the warranty is not the party at fault for the defect.
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