The Value of an Option in a Commercial Lease and How to Protect it

Posted on Jun 4, 2020 by Dean Frith

As a tenant when negotiating the terms of a commercial lease one of the most valuable things to obtain is what is called an “option”. An option is a term in a commercial or retail lease that permits a tenant to renew their lease at the end of the initial lease period for a further period.  Options are beneficial to tenants as it is an option in their favour, that is, it is within their discretion as to whether they choose to exercise it or not.

Options are very common in commercial leases, but unfortunately it is also common for tenants to be unaware of their requirements in order to validly exercise their option.  The benefit of an option will most likely be lost where it is not validly exercised.  This can mean that an unexpecting tenant, who thought they had many years left on their lease via one or more options, is left to vacate the premises and find new premises on very short notice.

There are many, many cases that have been decided on the issue of exercising options, which has created a large body of common law on the topic but the valid exercise of option can be simplified in the following three things that are usually involved in the formal exercise of an option by a tenant:

  1. The preparation and signature of an effective form of notice of exercise of option;
  2. Service of that notice within the required time for exercise of the option and on the correct party who should be served with the notice; and
  3. Ensuring that at the time of serving the notice the tenant is not in breach of any terms of the lease (e.g. they are not behind on the payment of rent).

I could spend considerable time going through the cases and all of the examples of how tenants have failed in their attempts to validly exercise their option (for example, in one recent case of Jong v Advanced Dental Services Pty Ltd (2019) the lessee sent an email saying: “Yes I would like to renew the lease for another term”, which was found by the Court not to be a valid exercise of option), but the bottom line is that tenants should obtain the assistance of a leasing lawyer when exercising their option to ensure that it is done correctly and that the valuable commodity of your option is not lost!