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What is an Option?

Standard in many commercial leases, an ‘Option’ is a clause in the lease agreement which grants the tenant the ability to renew the tenancy for an additional term or terms.

Ordinarily the lease will include certain restrictions on when and how the tenant may exercise the Option. Should the tenant fail to exercise the Option correctly, there will be no automatic right of renewal, and any new lease will be subject to negotiation with the landlord.

What are the benefits of an Option?

Generally speaking, the inclusion of an Option in a lease is primarily for the benefit of the tenant. Specifically, it grants a tenant the ability to secure premises for an extended period, but also the flexibility to decline the Option and end the tenancy if required.

Options can be particularly beneficial for new businesses, where the tenant is unsure whether or not they can commit to a long-term lease.

When and how is an Option exercised?

Whether the Option can be exercised and how it can be exercised will depend on the terms of that tenant’s particular lease.

Some common terms of a lease Option include the following:-

  • That the tenant must give written notice to the landlord of their intention to exercise the Option;
  • That the notice must be given during a particular period (usually between 6 months and 3 months prior to the end of the initial lease term); and
  • At the time of exercising the option, the tenant must have paid all rent and other monies up to date, and must not be in breach of the lease in any way (this is designed to protect landlords from being forced to continue a lease in these circumstances).

It is the tenant’s responsibility to ensure that they have clearly and correctly exercised their Option. Any tenants who are unsure of the procedure or requirements under their lease should seek appropriate legal advice.

How can Shopping Centre Leases differ?

In addition to any Options granted under the terms of the lease, for certain types of lease, the Leases (Commercial and Retail) Act 2001 may also grant a tenant the option to renew or extend their lease.

Where premises are considered to be in the ‘retail area of a shopping centre’, the Act allows tenants a preferential right to renew their lease above any other potential tenant, subject to certain conditions. All landlords and tenants should be aware of these provisions and their potential impacts.

If you would otherwise like to discuss any of the above further, please contact Anthony Simpson on (02) 6140 6236, or email [email protected].

For a general introduction to commercial leasing, see our article here