Australia: Exercise of options under leases

This applies to Retail Leases and commercial property leases. Things to be aware of on the exercise of an option:

  1. Check the Lease, both as a landlord and tenant, to ensure you are aware of any specific rights or obligations that come with the exercise of the option.
  2. Make sure the option is exercised properly;
  3. Make sure the option is exercised within the correct timeframe;

Most businesses occupy premises which they lease from another party. Generally there is a good working relationship between the Landlord and the Tenant and correspondence is informal.

Quite often the value of the business is associated with its location. The value of the premises to the Landlord may in part be related to having a high quality tenant but may also be related just to the high quality of the location of the premises.

A business owner as Tenant will want a secure right to occupy the premises with a long term Lease and a number of options to renew the Lease. As a result, the Lease and its options are very valuable to the Tenant. The Lease will have terms and conditions for the occupation of the premises. It will also contain terms and conditions that apply under any future option term, and how the option may be exercised.

We are quite often contacted by both Tenants and Landlords in regard to their Leases and what is to happen with an option. Often this is after the period of time in which the option for the further term could have been exercised by the Tenant. We are then asked to look at correspondence to see if the option was properly exercised. This may include emails and letters that have been sent by email to the Landlord, or the Landlord's agent, and we need to determine whether they are an exercise of the option. There may also have been correspondence sent to the Tenant by the Landlord or by the Landlord's Agent which blurs the lines further. As Solicitors we are not able to bind our clients and cannot exercise options on the behalf of Tenants but we can advise on the rights and opportunities that arise and assist in the processes.

I was recently asked by a Landlord about an exercise of an option. It was coming to the end of the time for the Tenant to exercise the option and the Landlord thought that the Tenant wanted the space but had not heard from the Tenant apart from a few emails. The Landlord wanted the Tenant to stay as the Tenant had been a good tenant. I was able to advise the Landlord on what was needed and I advised him to speak to the Tenant. To exercise the option the tenant had to sign and deliver a letter stating that it was exercising its option.

A Tenant that I recently assisted had a dilemma about exercising an option. The Landlord was interested in redeveloping a retail site, and would have much preferred it if the Tenant did not exercise its option (or did not exercise its option correctly). The Lease did not have an address for the Landlord nor an address for service on the Landlord so to ensure that the Notice of Exercise of Option was received, we took the liberty of having a number of original Notices signed by the Tenant and sent to the Landlord at their registered office, at their place of business, to their Agent and their Solicitor. The Notice had also been carefully drafted by us to be an unequivocal exercise of the Option. The Lease had the methods that a notice could be served (post, and in person), but by email was not included. The Landlord was not impressed as the exercise of the option would delay the redevelopment. As a result, the Landlord was required to do a deal with the Tenant if the Landlord wanted to proceed with its redevelopment and not wait until the end of the Tenant's option term. This meant the Tenant was in a very strong negotiating position. As it turned out, what the Tenant really wanted a lease in the newly redeveloped site, not a lease of the current site in an aging centre that needed redevelopment. The Landlord and the Tenant did a deal and the Tenant got a very favourable lease in another more favourable location in the redeveloped site.

Retail Leases have specific requirements as a result of Retail Leases legislation, which assist Tenants when they are exercising their options. The Option term in many Leases commences at a market rent, which is yet to be determined. The Retail Lease legislation generally provides an opportunity for Tenants to have the market rent determined before they are required to exercise their option . Often a longer period is needed to exercise the right to have the market rent determined in advance and I assist clients in that process as well as preparing the Notices required and serving them once signed. It is important to be aware of the terms of your lease and the rights and opportunities available especially at the time that an option may be exercised.

As a business lawyer and property lawyer, I do a lot of work with Leases and Lease transactions. While it may seem straightforward when you are exercising an option, it is important to strictly comply with the Lease, including the wording of the notice of exercise, and where and how it is served, to ensure there is a clear exercise of the option. Getting legal advice can be vital.

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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