Sunday, 14 February 2016

Lease Option Terms

Office building - photo by Pafcool2, courtesy of Wikimedia Commons.

A common feature of commercial and industrial leases is that the leases have OPTION TERMS, meaning that a right given to the tenant (also called the lessee) to extend the term of the lease when the term is getting close to expiry.

As the word "option" suggests, the tenant may extend the term, if the conditions for doing so are met, but is not obliged to do so.

The conditions that apply to the exercise of an option to renew usually include that the tenant must not be in breach of the lease - i.e. it has paid its rent on time, not damaged the property, and has done all of the other things that it is supposed to do. Another condition is that the tenant must during the correct timeframe.

The timing of the option exercise is important because most landlords (also called lessors) don't want to reach the end of the term and discover that the tenant is leaving and then experience a period where the building remains unused, is uncared for, and is not earning rent, while the expenses of keeping the building running continue.

For that reason, most commercial/industrial leases require the tenant to indicate that it wishes to stay in the building before the end of the term is reached.  If the tenant doesn't want to stay, the landlord has an opportunity to begin advertising the premises for lease right away and show it to potential new tenants, with a view to installing the new tenant immediately after the old one leaves.

Accordingly, many leases provide a strict window of time during which the tenant has to exercise the option to renew.  A common solution is to make the window start 6 months before the lease ends, and finish 3 months before the lease ends.

Another common feature of leases is that the rent will probably be reviewed at the commencement of any option term.  Rent review mechanisms were discussed in one of our earlier blog posts.

This blog post deals with the law applicable in Australia at the time of publication. If you are interested in finding out more about commercial leases in Australia, please visit our website. This blog post deals with topics of general educational or informational interest, and is not intended as legal advice for any particular person.

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