Exercising an option? Here is what you need to know Exercising an option to renew a commercial or retail lease is usually straightforward, but it can become complicated if you are not aware of the process. It is key you understand:
their general rights to renew the lease; what steps they need to take to exercise the option to renew; any criteria associated with the option; and any clear deadlines for providing notice to the landlord.
What is an option? When a landlord and tenant agree to sign a lease, they will agree to an initial period of time (‘term’) that the lease will go for. Often the landlord and tenant may contemplate a lease for a longer term but do not want to unconditionally commit to that further term right from the start. A common solution favoured by tenants and landlords is to agree on a process for renewing the lease, known as an option to renew. This refers to the optional decision whether to:
continue the lease for a further term (generally equivalent to the first term); or allow the lease to come to a natural conclusion at the end of the first term (also referred to as ‘expiry’).
This process of deciding on an option allows the tenant and landlord to agree on what conditions or commercial terms will remain the same or change between the initial and renewal terms. This article will look at the key steps for the landlord and tenant to take when exercising an option to renew the lease. What are your responsibilities in the process? In most circumstances, exercising the option to renew will have a few key steps for tenants. This includes that the tenant must:
notify the landlord (or its agent) whether they want to exercise the option during a specified window of time. This is usually around six or three months before expiry, depending on the lease. Further, this notice is usually given in writing; comply with any of the pre-agreed criteria for the renewal to go ahead. This may include refurbishing the premises (if a cost estimate is properly disclosed), ensuring all rent, outgoings and other payments are up-to-date, or agreeing to a change or review rent; and avoid being in breach or default of the lease, up until the expiry of the initial term.
Is there anything up for negotiation when you exercise the option? Generally, the renewed lease will contain the same or very similar legal obligations for both the landlord and tenant but with slightly updated commercial terms. Think of it as your current lease simply rolling over, however you will have a new base rent presented to you in the form of a market review.