Exercising an option to renew a lease

If you have ever signed a commercial lease, you may be familiar with the common option to renew term. This allows for the tenant to exercise their right to renew the lease and continue to exercise their rights under that lease after the expiration date. It is important to understand your rights and obligations under the lease, the option and how the option must be exercised to renew the lease.

How to exercise the option

The lease will typically specify the process required to exercise an option. This involves the tenant providing the landlord with written notice that it intends to exercise the option to renew the lease within a specified period prior to its expiration – typically under the “Option for Renewal” provisions (or sometimes referred to as “Further Term” clause). Tenants should take key notice of:

  • the timeframe specified to give notice to the landlord of its intent to exercise the option of renewal; and
  • how to comply with the notice requirements in the lease.

For example, if the lease specifies that the notice must be delivered to the landlord’s registered office, it will be invalid if sent to the landlord by email.

When the notice will be binding

Whether notice of exercise of the option is valid will be dependent on whether the tenant is in default or in breach of their obligations under the lease at the time of the giving of the notice.

Where the tenant has not breached its obligations under the lease, the notice will be binding on the landlord if:

  1. the tenant has followed the option procedure in the lease correctly; or
  2. the landlord has, by its conduct, impliedly accepted, granted or acknowledged the tenant’s right to a further option period.

Disputes between Landlords and Tenants

A landlord may deny the tenant the right to exercise an option if the tenant is in default of its obligations under the lease. If this is the case, section 128 of the Property Law Act 1974 (Qld) provides that within 14 days from receipt of the tenant’s notice, the landlord must issue their own notice specifying what the default is and their intention to deny the exercise of the option as a result. Without issuing their own notice, the landlord will be unable to deny the exercise of the option even where the tenant remains in default. Where the landlord does issue the notice, the tenant has one month to apply to the court for relief to allow the exercise of the option.

Failure to strictly comply with the requirements of notice is another cause of dispute. As stated above, the notice must strictly comply with the requirements of the lease. Failure to do so may result in a dispute over the validity of the exercise of the option.

Exercising an option after expiration of the lease

If the tenant has missed the deadline to exercise its option to renew the lease, then its right to exercise the option is forfeited. It cannot be waived by the landlord once the notice period has expired. Nonetheless, it is common for landlords to continue to act as if the option had been exercised correctly and renew the lease. However, the renewal is a new lease, and all terms are negotiable between the parties, including the rent payable.

Change of mind after exercising option

There is no change of mind after the tenant exercises its right to an option of renewal. Where a tenant has provided notice to the landlord of its intent to exercise the option correctly, the notice will bind both the tenant and the landlord to a further term.

How we can help

If the option to renew is approaching or you are in a dispute regarding the option to renew, whether you are the landlord or the tenant, we recommend that you obtain legal advice. At Cohen Legal, we can assist you to understand the terms and conditions of the lease and with a timely resolution if a dispute arises.

Our business is protecting yours.