Exercise Your Option

Exercise your Option.

An option is a right to a further term. Usually, a tenant has an option in their lease to a further term giving them the right to have the lease on substantially the same terms (allowing for rent increases), but the process is automatic.

Tenants file the lease in the bottom drawer and forget about it. Solicitors seldom remind their clients that its time to exercise their options. What does it mean to ‘exercise’ an option?

Think of exercising an option as triggering the option to take effect. Provided the tenant does certain things, the option is ‘exercised’, and the landlord must grant a new lease. There are normally strict obligations the tenant must follow to validly exercise the option. If they do not do each of these things, the option expires, and the lease reverts to a month-to-month lease.  This can have catastrophic effect on the value of your business.

The best way to make sure you have properly exercised your option is to use a Notice of Exercise of Option. The Notice is a formal document that lists the landlord, tenant, property and makes it abundantly clear that the tenant is exercising the option. The Notice forms valuable proof that the option was exercised if the landlord disputes it later.

Most leases require the following for a valid exercise of option:

• The option must be exercised in a certain time – usually a three-week window. It cannot be exercised before or after this window.
• The notice must be in writing (refer to the comments above re using a notice)
• The tenant cannot be in breach of the lease (i.e., behind in rent, or in dispute with the landlord.

The points above are not exhaustive. Leases that contain options normally contain a raft of provisions about how the option is to be exercised and how notice may be given. Do not assume that sending an email is sufficient notice. There are still a lot of old-fashioned leases out there that do not allow options to be exercised by email.

 Get out your lease and diarise your option exercise dates. If in double speak to your lawyer or get in touch with one of ours.