OPTIONS IN LEASES

QBM Lawyers > Property Law > Options in Commercial and Retail Leases – What Tenants Need to Know

Options in Leases

The question of whether you have a right to renew or extend your lease depends on whether there is an option term included in your lease. When you have an option to renew and you want to take up a further lease of your premises, the landlord is obliged to grant you a further lease for the option term subject to certain provisions of your lease being complied with.

Failure to exercise your option correctly and in strict accordance with your lease can result in you losing the right to renew your lease. From here, the worst case scenario for you as a tenant is the landlord electing to not enter into a new lease with you upon expiry leaving you without a premises.

Given the potentially fatal nature of failing to exercise options correctly, we have outlined below some of the most common questions we face when acting for a tenants dealing with option terms.

 

How do I exercise my option?

How and when you exercise your option will depend on the specific requirements in your lease. These are found in the “Option for Renewal” clause (also sometimes referred to a “Further Term” clause) and outline:

1.     whether the notice exercising the option must be in writing and signed by you;

2.     the timeframe in which you must provide the notice to the landlord. For example, the notice period may be at least 6 months but not more than 9 months prior to the expiry date of the current term of the lease; and

3.     who the notice is to be delivered to which could be the landlord, the landlord’s property agent or possibly even the centre manager if your premises is located in a shopping centre.

It is also important that your notice strictly complies with the leases requirements as to form and how it is to be delivered as this will play a part when considering whether your notice is valid or not. For example, if your lease notes that a notice can only be served on the landlord if sent by post to the landlord’s registered office, you cannot exercise the option by way of an email to the landlord.

 

Does my landlord have to remind me of my option to renew?

If your lease is a Queensland ‘Retail Shop Lease’ and subject to the Retail Shop Leases Act 1994 (Qld), your landlord must give you written notice at least 2 months, but no more than 6 months, before the last date on which you may exercise your option to renew your lease.

However, there is no consequence or protection afforded to you under the Retail Shop Leases Act 1994 (Qld) if the landlord fails to remind you of your exercise date within the 4 month timeframe noted above.

Whether a landlord is required to remind you where your lease is a commercial lease (i.e. not a ‘Retail Shop Lease’) will depend on the terms of the lease itself.

If you want to check whether your lease is a Retail Shop Lease, a useful guide is the list in the Retail Shop Lease Regulation 2016 which is available online.

 

I’ve exercised my option so what happens next?

Once you have exercised your option, the landlord will arrange for formal lease documentation to be prepared. This usually takes the form of an amendment to lease which will vary the terms of your current including the expiry date, the rent payable from the commencement date of the option term and whether there are any remaining options. Importantly, all other terms of your lease will be affirmed unless otherwise varied under the amendment to lease.

Where your lease is a ‘Retail Shop Lease’, the landlord must provide you with a current disclosure statement within 7 days of receiving your notice exercising the option unless you have provided a signed waiver notice stating that you waive the landlord’s obligation to do so (section 21E(2)-(3), Retail Shop Leases Act 1994 (Qld)). The landlord’s failure to provide a current disclosure statement will result in you having a right to terminate the lease within the first 6 months of the option term.

 

I’ve exercised my option but the Landlord won’t renew my lease. Why?

When options terms are included in your lease, they are not automatically granted by a landlord when the time comes for the lease to be renewed. Depending on the terms of the lease, your right to renew a lease is almost always subject to the following:

1.     you providing the landlord with a valid notice exercising the option; and

2.     you not being in default or breach of the lease.

For example, if you are behind in paying your rent or have not maintained the condition of the premises in accordance with the lease at the time you exercise your option, then the landlord need not grant a further lease to you.

 

I missed exercising my option in my lease. Can I still exercise my option late?

If you miss providing the landlord with notice exercising your option within the notice period, your right to a further term is forfeited. Once that notice period has expired, the landlord cannot simply waive the requirement for you to exercise the option within the notice period. This means that even if you exercise your option, if it is outside of the option exercise period then the landlord is under no obligation to grant you a further lease on the expiry of your current lease.

Notwithstanding this, we find in most cases that landlords are content to continue to act as if the option had been properly exercised and proceed with a renewal on that basis. What is important here is that a renewal in these circumstances will be considered a new lease and all terms will be up for renegotiation between the parties.

 

I’ve exercised my option but I’ve changed my mind and want to vacate when my lease expires. Can I take it back?

If you have provided the landlord with notice exercising the option in accordance with the terms of the lease, then the notice will bind both you and the landlord to the further term.

However, there may be circumstances where you can withdraw your exercise of the option which generally only arises in the cases where a notice was invalid. Common examples of a notice being invalid include:

1.     the notice being given outside of the notice period specified in the lease;

2.     the notice was not delivered to the landlord in strict compliance with service requirements pursuant to the lease;

3.     the notice was given orally when the lease required it to be given in writing and signed by the tenant, or vice versa;

4.     the wording of the notice does not clearly indicate that the option is exercised. The use of words “intention to exercise” may not be satisfactory to demonstrate a clear and unequivocal exercise of option;

5.     the notice is given by an individual on behalf of the tenant without the requisite authority or power to do so;

6.     the notice requests substantial amendments to the lease and a renegotiation of terms to the extent that it could not be considered a renewal of lease on the same terms; or

7.     if your lease is a ‘Retail Shop Lease’, you provide the landlord with a written notice within 14 days of receiving the landlord’s current disclosure statement withdrawing your exercise of the option (section 21E(4), Retail Shop Leases Act 1994 (Qld)). 

 

For all leasing enquiries, please contact our Gold Coast leasing lawyers Kayla Davison (kaylad@qbmlaw.com.au) and Peter Muller (peterm@qbmlaw.com.au) for assistance.

Specialist Property Advice

At QBM Lawyers we focus on delivering effective results to clients and have the management, support, and facilities to do so.  We understand our clients’ aims, acknowledge their challenges and opportunities and are able to listen and respond to their commercial needs.