INSIGHTS: Is this the end of your lease?

March 12, 2014

From years of experience, we know that concerns over business leases can be the greatest and most frequent worry faced by our clients. It’s surprising how often clients come to us with serious worries over whether their lease will be renewed by the landlord. Many of these worries could be avoided if the end of tenancy is considered even before the lease is signed.

We fully appreciate that particularly at the beginning of a new business venture, you may not know how well your business will fare, and you may not wish to be tied in to renewing the lease just in case things don’t go well. This is where the lease option will help.

What is a lease option?

A lease option is just a clause in a lease agreement which gives the tenant the right to renew the tenancy before it comes to an end.

Leases are legally binding contracts with a lot of small print like any other, so it’s important that prospective tenants fully understand the obligations and costs they will be taking on before they take a lease. All too often, business problems such as disputes over being refused a renewal of a lease arise because the details of these issues weren’t understood properly by the tenant when they first took the lease.

Negotiate the terms of an option before you sign the lease

Having an option to renew does just what it says it does – it gives you an option. It does not mean that you will be obliged to take a new lease when the old one ends.

If you do not have an option written in your lease then you will not have a right to renew the lease and it will be a matter for negotiation between you and your landlord. Some tenants who would like to renew but who did not negotiate an option into the original lease terms find themselves facing different lease terms if they want to renew – such as a different rental payment and service charges.

A carefully drafted lease option can therefore give you, from the beginning of your tenancy, the certainty that you can have another lease if you would like one and some certainty over the terms of any renewed lease in the future.

Be sure that you do want a new lease before exercising any option

Lease options will generally state that they must be exercised by the tenant giving written notice to the landlord by a certain date and in a certain way e.g. in writing. If you are not sure whether you really do want to commit to a renewed lease by the option date then you should think carefully before giving the notice and exercising the option. Once the option is exercised, you will have created a new agreement for a lease which can be difficult if not impossible to get out of.

The importance of good legal advice if you do want a new lease

A lease is a detailed legal document, and an option clause will contain requirements about how the option is to be exercised. If you fail to comply with any of the requirements you could find that your landlord is entitled to refuse you a new lease even though you had an option. Requirements might include points about the manner of exercise of the option, and the date by which the option must be exercised. Specialist legal advice can help you though these requirements to ensure that you get the lease, and the business continuity that you want.

Points to note:

  • think about whether you would like the flexibility of an option to renew before you sign the lease and negotiate the option terms in good times;
  • plan well ahead for the end of your lease – take careful note of any dates by which lease option must be exercised;
  • be aware that if you exercise an option to renew your lease then you will be legally committed to the new lease on the terms agreed; and
  • seek specialist legal advice before you exercise an option to renew – your lawyer can help ensure that you get the lease you want and avoid potential disputes.

Meridian Lawyers provides cost-effective legal services to business, from sole traders to ASX listed companies. Whether you need advice regarding your business dealings, contracts, leases, employees or contractors, or find yourself in the middle of a dispute or litigation, Meridian Lawyers will be able to help. For more information, please contact Georgina Odell.

This article has been published in NSW Dentist, the magazine of the Australian Dental Association NSW Branch, March 2014.