Understand more about ‘options’ in commercial leasing and consider if it might be right for your business
What is an option?
An option gives a tenant the right, but not the obligation, to extend their lease beyond the expiry of the initial term. The term of the option period is predetermined during the original negotiations and may include multiple options.
As an example, if you negotiate a lease of 3 years plus two options, each for periods of 3 years, you have the opportunity to occupy the property for up to nine years, while your obligation is only for the initial three year term.
The property owner is not obliged to allow you to negotiate option terms after you have entered a lease, so it’s important to negotiate options while you’re negotiating all other terms at the outset.
How do I exercise my option?
Even when your lease includes an option, you must correctly exercise that option or risk forfeiting it. Good practice requires that you check your lease often, and don’t leave things until the last minute.
Most commercial leases require the lessee (tenant) to serve the owner (or owner’s representative) with written notice to ‘exercise the option’ between six and three months before the initial term expires.
A lessee in breach of the lease may be forced to forfeit their option. There are many potential breaches so, if you are in doubt, come and see us. The most common breaches we see relate to overdue rent or outgoings, so make sure your obligations are performed under the lease and you shouldn’t have any problem.
Making your option ‘conditional’
A mistake is to assume you can exercise your option conditionally. We regularly see tenants serve notice of intention to exercise their option ‘subject to X’. Their condition is usually based on what the new rent will be. This does not constitute exercising the option and may lead to forfeit.
What about future rent?
If you are concerned about what the rent will be once your initial lease has ended, check your lease for details of the rent review process. For options, a ‘Market Review’ is the most common format, though other formats exist, including CPI, fixed amount or percentage.
Where rent is subject to a Market Review, the lease will also set out conditions for how this should be done, including how you to handle a dispute on what the ‘market rent’ for the property should be.
As with all lease agreements, good communication with your owner or agent is invaluable in this process so keeping open, clear and professional communication lines will benefit everyone.