A reminder – take care when dealing with lease options

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A reminder – take care when dealing with lease options

For many reasons, the need to secure continuation of tenure of a particular business premises is a vital part of strategic planning. For leasehold tenure, this is often approached by the use of long term leases, with options to renew, exercisable by the tenant.

To ensure that there is no question about the validity of an option, you must strictly adhere to the terms of the lease. Particular attention should be paid to:

  • The language used in the notice of the option – it should be clear and unequivocal. If amendments to the option lease terms are requested or contemplated, then it would fail to be a proper exercise of option. When determining whether a notice is suitably unambiguous, reference will be made to whether a reasonable person in the position of the recipient would take the notice to be an exercise of the option.
  • The method of service of the notice – again, reference should be made to the terms of the Lease. Usually service will involve delivery of the notice at the address nominated by the Lessor. Recent case law suggests that in certain circumstances email service is sufficient.
  • The time frame for service – this is perhaps the most problematic requirement for Lessees. If a Lessee exercises an option outside the time dictated by the Lease, it will not be a valid exercise and may result in the option being lost. The earliest and latest dates for exercise of the option should be clearly diarised in order to ensure the time frame is not missed.
  • Other conditions precedent to exercising the option – many leases contain conditions which must be met before the Lessee can exercise its option or before the Lessor is bound to give a further term. The most common of these is the requirement that the Lessee is not, at the time of exercise and at the end of the Lease term, in breach of the Lease or has rectified any such breach.

Perhaps of more importance to the Lessor, the option provisions should ensure any clause which is particular only to the initial term, is removed from the further term/s, such as a rent free period or Lessor’s obligation to contribute to the Lessee’s fitout.

By ensuring that the notice is given in strict compliance with the Lease terms, the parties will have certainty and can avoid an often costly and time consuming court or tribunal determination.

If you require any assistance with drafting a Lease or notice of exercise of option or in relation to your Lease generally, please contact our office on 4925 2077.

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