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Owners must be kept on a lease – article

Thursday, 16 August 2007
By Print 21 Online Article
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For most in the printing industry, profitability is dependant on the uninterrupted use of their premises. Having to relocate because you failed to exercise your option to renew your lease could be one very expensive headache, one that may even cost you clients.

An option to renew is a clause contained in most leases that grants a lessee (or tenant) the right to enter into a new lease with the lessor (or landlord). A recent case highlights the importance of exercising your option to renew the lease on time.

A company operated a factory in leased premises for a number of years. The lease was a five year term with two options of five years each. The lease contained a clause stating that if the company wished to take up the first five-year option it had to give written notice to the landlord at least three months before the lease expired.

The company’s directors could not decide whether to take up the option or not. The landlord did not press the directors of the company for a decision. The lease expired and the company stayed in occupation of the premises with the landlord’s permission.

Don’t rely on mistakes

The directors of the company got nervous about the fact that they did not have a secure lease so they decided that in order to keep the options available to them they would write to the landlord stating: “We would like to take on the option contained in the lease. Please forward to us the relevant documents.”

Even though the time to exercise the option had expired, the landlord’s solicitors prepared a new lease and sent it to the company. The company directors then decided that the factory was no longer needed and the company vacated the premises without signing the new lease.

The landlord sued the company for rent from the date they vacated until a new tenant was found. The company argued that its own notice exercising the option was invalid because it was served out of time. The Court held that the clause specifying the deadline for exercise of the option was for the benefit of the landlord and could only be waived by the landlord. The company could not rely on its own mistake and was therefore ordered to pay all the rent claimed plus interest under the new lease.

Read and remember

There are formal requirements you need to comply with when you exercise your option, so read your lease carefully. Your lease will set out the period in which to exercise the option. Commercial leases usually (but not always) specify that a notice to exercise an option should be served no earlier than six months prior to lease ending and no later than three months prior to the lease ending. You should note the date the lease will expire, then count backwards to determine when the last date is to exercise the option and aim to serve your notice well before the last day.

If you want to renew but have missed the cut-off date, you should still serve your notice although the landlord may not accept it. Most commercial leases contain very detailed clauses relating to exercising options and there may be special grounds for exercising an option late. It may be wise for you to seek legal advice at this point if you are unsure about your future occupancy or will be negotiating a lease extension or a new lease.

The lease you can do

  • Make your decision to take up an option using proper forward planning.
  • Precisely follow the procedure for taking up the option.
  • Do not have ambiguous communications with the landlord about whether you are renewing or not.
  • If it is your intention to take up an option on certain conditions, then be crystal clear. Mistakes or misunderstandings can get you a lease you do not want or perhaps worse, no lease at all.
  • If you wish to avoid the expense of an unintended relocation then properly diarise the period for exercising your options.

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