Option Leases: a Five-Point Checklist for Landlords
When an existing lease expires, a tenant may have the “option” to renew the lease. Essentially a tenant has the right to have a new lease granted to them on the same terms as the existing lease. However, the rent will be reviewed in accordance with the rent review terms of the existing lease.
So, what should a landlord be aware of when the initial term of a lease is coming to an end?
Here is a handy checklist for landlords:
- Option Notice Period: It is important to ensure that you have entered into your calendar the correct dates the tenant is required to exercise their option to renew the lease. Usually, there will be a window (for example, a window of 3 to 6 months before the terminating date of the initial term) when the tenant can provide notice exercising their option to renew the lease. If the tenant misses this window, then the option period lapses and you may have cause to refuse the grant of a new lease.
- Validity of the Notice to Exercise the Option Term: The existing lease will usually mandate and set out the formal requirements for notice of the exercise of an option term by the tenant, such as the required method for service of the notice. As surprising as it may sound, a notice can be deemed invalid based on such a technicality, so it is important to seek legal advice in this regard, if you are unsure.
- Ask Yourself - are there any Subsisting Breaches Under the Lease? A breach of an essential term of the lease can include, amongst other things, the tenant’s failure to pay rent, maintain the condition or permitted use of the property. If the breach is still subsisting at the time the tenant serves their notice to exercise the option, they may no longer have a right to a new lease term. In such an instance, you will be required to notify the tenant in writing of the breach within 14 days after the giving of a notice or within 14 days after the breach occurred if the breach occurred after the giving of that notice, in accordance with the relevant legislation. This is something worth considering in the lead up to an option term and certainly something worth seeking legal advice on.
- Acknowledgement of Notice and New Rent: It is important that you provide written acknowledgement to the tenant if you agree to grant the further term. You will then need to determine the new rent payable at the commencement of the option term, in accordance with the rent review terms. If, however, you decide that you do not wish to grant the further term to the tenant, then we would strongly suggest you seek legal advice, to ensure that the grounds for refusal are in line with the terms of the lease and any relevant legislation. This could potentially save you from any legal action by the tenant.
- Preparation of the Option Lease: It is essential that you engage your solicitor to prepare the lease for the new term, to ensure that the option lease terms are properly documented. Unless otherwise agreed to between the parties, the terms will be essentially the same as the existing lease.
In summary, the process for option leases can be a delicate and quite complex task for landlords. Ensure you are aware of all your legal rights and obligations by seeking legal advice prior to delving into the option lease process.