Pitfalls of exercising options
Commercial and retail tenants often get into the habit of thinking of options for further terms as a given. However, care needs to be taken in the exercising of an option, as issues can arise which mean that a purported exercise of an option is invalid, and the opportunity to exercise the option is lost.
If the lease is subject to the Retail Leases Act 2003 (Victoria), then there are only two conditions that can be imposed on the exercise of an option. In our experience, these conditions are universally imposed in practice, and it is rare to encounter any other conditions imposed, even in commercial leases not subject to the Act.
They are:
- That the tenant has remedied any default under the lease about which the landlord has given the tenant written notice; and
- That the tenant has not persistently defaulted under the lease throughout its term and the landlord has given the tenant written notice of the defaults.
A third, implicit, condition is that the option needs to be exercised within the time fixed for the option to be exercised.
There are several pitfalls which can arise for tenants in this area. Two such pitfalls are:
- Sometimes the notice of exercise of the option is sent but not delivered. The notice may be posted but never received. Or it may be sent by email and misdelivered. This basic pitfall arises more often than might be expected, and by the time it is discovered, the tenant may be out of time to exercise the option. It is prudent for a tenant to follow up to ensure the notice of exercise of option has in fact been received, and seek written confirmation.
- If the tenant is in breach of the lease at the time of sending the notice of exercise of option, and has received written notice of the breach, then the exercise of the option is not valid. This can include situations where the tenant is in dispute with the landlord about, for example, the charging of certain outgoings, or the application of a rent increase. These are commonly indicated as overdue amounts on monthly statements sent to the tenant – and therefore the requirement that the tenant receive written notice of the breach has normally been satisfied. Whilst the tenant may be confident that it is legally in the right, the holding back of payment in this situation at the time of exercise of the option may come at the cost of expensive legal proceedings to confirm the true legal position, and if the tenant’s interpretation of the matter turns out to be wrong, even in a minor respect, the consequences for the tenant are enormous – a forfeited option will mean that either a new lease needs to be negotiated with a landlord who is entitled to refuse consent on any terms, or that the tenant needs to move and make good the premises by termination of the lease.
Given the real importance of further options to tenants, great care needs to be taken to ensure that an exercise of an option is valid.
