Most leases contain what is known as an ‘option to renew’. An ‘option to renew’ is a contractual right that is given to the Tenant to obtain an additional term for the lease if the Tenant so chooses. For instance, if the Tenant has a lease for the period of three (3) years with an additional three (3) years option, the total term of the lease can be perceived as six (6) years. However, the option to renew becomes binding only when the Tenant duly exercises the option.
Exercise of Option
In order for the Tenant to secure the further period of the option, the Tenant must give notice to the Landlord in writing as to the intention of the Tenant to exercise the option. Most leases require the notice of exercise of option to be provided to the Landlord within six to three months from the expiry of the lease.
The notice of exercise of option must also be provided to the Landlord in the appropriate manner. The Tenant must provide the notice to the Landlord in accordance with the Landlord’s instructions as set out in the Lease. For instance, if the Tenant posts the notice to the Landlord’s residential address and the lease document required the notice to be delivered to a different address, that notice of exercise of option will be considered invalid.
Period of Exercise of Option
The Court has interpreted the exercise of option period in a strict manner. If the option is exercised outside the permitted timeframe, which is often (but not always) six (6) to three (3) months before the expiry of the lease, the Tenant’s right will vanish. The Court’s strict enforcement mean that if the notice was delivered to the Landlord only one (1) day outside the timeframe, the exercise of option is considered invalid.
Protection of the Tenant’s rights to the exercise of option
Even though the lease may expressly specify the Tenant’s right to a further term, the Tenant may lose that right in the following instance. A right in a land/home/shop/building etc is a proprietary right only when that right is registered with the New South Wales Land Registry Services Office. Otherwise, that right is not protected. If the lease is not registered, the Landlord is not prohibited to ignore the lease and negotiate a new lease with a new Tenant. Although the old Tenant will have the right to sue the Landlord for a breach of contract (i.e. the Lease), the Tenant may lose business, reputation, or sleep as a result.
Method of delivery of the Notice
It is standard practice that a notice to exercise an option to renew the lease is posted to the Landlord by registered post, requiring a signature upon receiving it by the Landlord. This is because if there is no proof that the Landlord has received the notice, the Landlord can always deny receiving it. In the event that there are issues with proving notice, the commencement of Court proceedings may be required to establish notice was provided.
What do you need from this?
If you are a Landlord or a Tenant:
- Ensure that any lease entered into is documented in writing.
- Ensure that the lease is registered with the New South Wales Land Registry Services Office.
- Ensure to diarise any exercise of option notice dates.
- Ensure that the notice is delivered in the appropriate manner with proof of its receipt.