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 notice.
So what happens when a landlord denies your exercise of option?
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 rights.
Tenants, don't panic – the law may preserve your rights!
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 either way.
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 your notice
- 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.
