Important commercial lease clause: option terms



Pros and cons for landlords & tenants of an option to renew a lease.
Australia Real Estate and Construction
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An option to renew, also known as an 'option', is a clause within a commercial lease which allows the tenant a further fixed term or terms after the expiry of the existing lease.

The major benefit of including one, or multiple, option terms in a commercial lease, for both landlords and tenants, is the certainty and security that it provides.

This is because so long as the option is validly exercised in accordance with the terms of the lease, a further lease will be granted for the time period stated in the lease.

The option lease will be on the same terms as the existing lease, except for the following which will be amended in accordance with the clauses of the existing lease:

  • amount of rent payable – this will be determined in accordance with the conditions set out in the existing lease, often calculated by reference to market rent;
  • commencing and terminating dates – the new option lease will commence one day after the existing lease; and
  • removal of any clause which the existing lease provides is for the first term only – the most common example of this is a rent-free period, which generally applies to the start of the existing lease only.

Therefore, an option lease is not an opportunity for either party to renegotiate and amend the terms of the lease. This could be considered either a positive or negative for the parties, depending on the individual circumstances.

Exercising the option

Each lease will have specified requirements for how the option must be exercised.

The tenant will be required to serve notice on the landlord advising that they will be exercising their option to renew within a specified time period, generally between 3 and 6 months before the end of the existing lease. There is a further requirement that when the tenant exercises the option, there must be no outstanding rent or outgoings that are overdue for payment.

Tenants should ensure that they review the option clauses in their lease at the commencement of the lease, and diarise the dates, to ensure that they don't miss out on receiving the benefit of the option term.

Across all of our offices throughout the Illawarra, Kells are experienced in acting for both landlords and tenants on leases.

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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