Summary - In our blog article "Is the Lease Option Exercise Binding?" we wrote on the effect of a validly exercised option to renew. We touched upon the need to ensure valid exercise of the option. In this blog article, we stress the importance of the option being validly exercised in more detail and note the statutory protection that a tenant may be able to rely on in obtaining relief against forfeiture of its option.
Option clauses constitute an irrevocable offer to renew subject to the tenant satisfying certain pre-conditions including service of a written notice of exercise of the option on the landlord within a specified notice period.
Frequently, option clauses state that the tenant loses its right to exercise the option if it has been consistently in breach of the terms of the lease.
Such clauses should be avoided or at the very least, limited to any breach of an essential term or to a breach that would entitle the landlord to terminate the lease.
Again, it is preferable that any such breaches be restricted to those subsisting as at the date of exercise of the option and perhaps the last day of the initial term.
Care needs to be taken in the drafting, not only when there are multiple option terms, but also where personal guarantors of the tenant (in respect of the initial term) are no longer available or associated with the tenant but are required to continue the guarantee during the option period.
Besides ensuring certainty as to the terms and conditions of the option lease, there must be a clear mechanism in the lease to determine the initial rent for the option period if it cannot be agreed upon between the parties. Wording such as "rent mutually agreed between the parties" would be void for uncertainty. Any uncertainties may, in certain circumstances, constitute the option contract as merely an agreement to agree which is unenforceable.
Some relief to tenants is afforded by Section 133 of the Conveyancing Act which can prevent a landlord from forfeiting an option to renew unless the tenant is notified of its breach of the lease and after which the tenant can seek an order from the Court preventing forfeiture of the option term. Before determining any such proceeding, the Court may take into consideration the nature of the particular breach, the extent to which the landlord was prejudiced by the breach and the conduct of the parties.
It has long been the position that a failure by a tenant to comply strictly with an option clause in purporting to exercise an option to renew results in loss of the option term. Accordingly, tenants must carefully check the clause to ensure any purported exercise is in accordance with the clause and landlords receiving the option to exercise notice should also review the option clause requirements to check whether the tenant has complied.
