Financial management

How to set up the option to renew your lease

- August 20, 2016 3 MIN READ

If you’re leasing a commercial property and your business is flourishing, staying put is usually a good idea. Inserting an Option to Renew clause in your lease contract makes this easier.

Today I’m going to answer all your questions about a lease option so you can be fully informed the next time you negotiate a commercial lease.

What is a lease option?

A lease option is a standard clause within a commercial or retail lease agreement that gives you a legal right to renew your lease for a set amount of time (depending on what is agreed upon and assuming you haven’t broken the terms of your current lease).

This means when your current lease is coming to an end, you can simply exercise your right to continue the lease, avoiding the need to change location, or negotiate a new lease agreement.

While options to renew are not a default requirement in commercial leasing, their inclusion is usually beneficial to both the landlord and tenant, so they are well worth including in your agreement.

Will an option be exactly the same as my old lease?

A continuation of a tenancy is known as a ‘further term’, ‘lease renewal’ or ‘option term’. However, you’ll actually be entering into a fresh lease agreement by exercising that option and more often than not, the new agreement will have an increased rental amount at the very least. (Usually an agreed, CPI or Market Value increase.)

What happens if I don’t have a lease option?

If you do not include an option clause in your lease, it means you won’t automatically have the right to renew your lease and the landlord will have no obligation to offer you a new one. Instead, you will have to go to the trouble of negotiating both a whole new lease agreement and rent amount.

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The landlord is under no obligation to accept your request for a new lease, so if they decide they weren’t happy with the last agreement, you could end up paying much more rent than you were previously, or you could end up losing the lease altogether and having to move to a new location!

For how long should my lease option be?

This is a question that only you can answer, depending upon your needs. If you are very confident about your businesses longevity in the area, a long-term renewal is probably your best bet. If you’re not so sure, a short-term option is safest. Your landlord will likely want to negotiate based on their own needs, so if they feel the area you’re leasing is high-demand, they may request that you sign a short-term option. Agreements should take consideration of all involved though, and you should strive for a happy medium.

How is an option exercised?

You’ll need to review your lease to ensure you are completely familiar with the terms of your option clause and the date on which your current lease expires. This is because it’s your responsibility as a tenant to exercise the option – don’t rely on the landlord to remind you!

In most cases, you’ll have a window of opportunity – which is usually around three to six months before the end of lease date – in which to notify the landlord of your intent to renew the lease.

The terms of your option clause will most likely require you to do this in writing, so make your request clear and unequivocal so that there’s no mistake about your intentions. This should be delivered by mail to the landlord’s business address and should include details such as the address of the leased property, your full name, business name, all relevant dates and your signature.

A new lease or deed of renewal should then be signed by all parties as soon as possible after the exercise of the option. This is very important because an option clause is only an agreement to renew the lease, so until ‘all the I’s are dotted and the T’s are crossed’ in accordance with the terms of the option to renew, you won’t have a safe ongoing tenure.

What changes can occur with rent?

As mentioned above, when an option is exercised, this usually results in a rent review – the formula of which will be set out in the lease terms. You’ll also always have the right to request a market rent review yourself, under Retail Leases legislation.

If a rent review amount hasn’t been determined before the option date comes into effect, then the option period may be extended by law (and this varies by state or territory) until you, the tenant, has been officially notified of the amount. Because of this, you are relieved of having to exercise your rights to an option if you’re not certain of being able to afford a higher rent incurred as the result of a review. If it turns out you can’t afford it, you can then just seek a new property to lease.

Remember …

A lease option is a great idea for many business owners and landlords alike, so remember to negotiate an option to renew in your lease contract if you’d like long-term security in the one location.

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