Commercial Leases – Options for Further Terms

There are two different types of commercial leases – retail and non-retail or commercial leases. Both may contain options for further terms to extend the lease.

An option is firstly negotiated at the commencement of a lease. The number of options contained in a lease, or the lack thereof, can impact the value of the landlord’s commercial property or a tenant’s business. It can also impact the stability and viability of the tenant’s business.

Exercising an option will most likely trigger a rent review as outlined in the lease. It can raise other issues as well. The landlord is obliged to renew the lease if an option is included in the lease and properly exercised by the tenant. Many commercial lease disputes arise because of the failure of the tenant to properly exercise its option, or the ensuing market rent review associated with the renewal of the lease.

Tenants and landlords may not have a full understanding of their rights and obligations in relation to exercising their option or market rent reviews. Commercial lease lawyers commonly find that if a landlord wants to terminate the lease, they may look for any opportunity not to renew the lease.

Option’s must be exercised correctly by the tenant in order for that exercise of option to be valid. Therefore, it’s very important to understand the exercise of option process.

A brief outline of some common legal issues to watch for are:

• Meeting the right time frame within which to exercise the option – even if a tenant misses the time frame they may still have right to renew the lease.
• Service of Notice – Like most legal notices they must be served correctly.
• Lease Breaches – If the tenant is in breach of the lease the landlord may have the right to refuse the tenant’s notice to exercise their option under the lease.
• Failure to follow the process for Retail Leases – Retail leases are more regulated and have specific processes that should be followed.

Terms of the new lease – the renewed lease must usually be on the same terms as the expired lease, less one option.

Issues such as those listed above can quickly complicate the renewal of lease pursuant to an option. If you are in doubt, then you should seek further advice about your circumstances.

If you are anticipating an option renewal or there are issues or disputes over the lease, we can provide expert legal advice.

Obtaining advice is key to helping you resolve issues and improve your success at negotiations. Our commercial lease lawyers will clarify your legal position and outline the rights and responsibilities of each party under the lease. You will be in a better position in your negotiations if you have certainty around your legal position.

As a tenant, if you decide not to exercise your option to renew, your lease will most likely lapse, subject to some exceptions, including for example, in a retail lease situation in circumstances when a landlord has not provided the formal notification of the right to renew also – even if a tenant misses the cut off the date in theory to exercise an option, it may not be too late. Legal advice is strongly advisable in such circumstances.