Options to Renew in Leases – Mark that Calendar!

Commercial leases and retail shop leases commonly contain options to renew.  However, many tenants and landlords are not 100% sure about how options to renew work.  In our experience, when it comes to options to renew, there are two common questions people have:

  1. If I have an option to renew in my lease, does the lease automatically roll over when the initial term is up?

No.

An option to renew in a lease is essentially a right to call for a new lease, generally on the same terms as the old lease (excepting exercise options).  As such, an option to renew has to be exercised in order for it to be effective.  It is rare that a lease term automatically rolls over to the further or option term, once the term has expired.

It is important that the exercise of an option to renew a lease is recorded in a deed of extension of lease.  A failure to do so can lead to disputes as to whether an option to renew was, in fact, exercised.

  1. Is it usually up to the tenant to exercise the option to renew in a lease?

Yes.

The way in which a tenant can exercise the option to renew is set out in the lease.  If you are a tenant and wish to remain in the premises, pay particular attention to the time period within which you must give notice to the landlord of your intention to exercise the option, the type of notice you must give and how to give notice under the lease.  If an option to renew is not exercised properly, the landlord may be entitled to reject the notice and your lease may come to an end when the then current term expires.

If a tenant failed to exercise an option to renew and remains in the premises when the current term expires, the tenant may be deemed to be ‘holding over’.  One possible consequence of this is that the tenant may have to pay a higher rent.  Another possible consequence is that the landlord may ask the tenant to leave (and the tenant will generally be obliged to leave) within a short period of time.

Landlords under retail shop leases should note that whilst it is the tenant that has to exercise an option to renew, the landlord is obliged under the Commercial Tenancy (Retail Shops) Agreement Act 1985 (WA) to notify the tenant in writing of the date after which the option is no longer exercisable.  The landlord must do this at least 6 months, and no more than 12 months, before that date.  If a landlord fails to do this, the date by which the option is no longer exercisable is 6 months after the landlord has notified the tenant.  Effectively, this extends the term of the lease thereby tying up the landlord’s property for a longer period than the landlord may have anticipated or desired.

Are you a tenant or landlord?  Are you unsure as to what is required to exercise your option to renew?  Do you need a deed of extension of lease prepared?  Or, do you believe that you or your tenant has exercised an option out of time?  If you’d like advice as to your position, we can help!  

Call us on (08) 9228 2881.

 

Disclaimer – The articles provided by Equitas Lawyers are for general information only. While every care has been taken in preparing these articles, they are intended to be a guide only, and no warranty is given as to the accuracy, currency or completeness of the information contained in them. The articles are not intended to be, nor should it be, relied upon as a substitute for legal or other professional advice. Formal legal advice should be sought in particular matters.

 

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