Can a ten­ant with­draw an exer­cise of an option under a lease?

In Brief

A lease may con­tain an option for the ten­ant to enter into a new lease when the first term expires. This is known as an option lease. Gen­er­al­ly if a ten­ant exer­cis­es the option in accor­dance with the terms of the option lease, the ten­ant will be bound by the new lease and is not enti­tled to change its mind.

What ques­tions to ask

If a ten­ant has exer­cised an option to enter into a fur­ther term and then decides that it no longer wants to pro­ceed with the new lease, there are two ques­tions you need to ask. The ques­tions are the same whether you are a land­lord or a tenant.

1. Has the ten­ant cor­rect­ly exer­cised the option?

The lease will specify:

  • when the ten­ant must exer­cise the option; 
  • what the ten­ant needs to do to exer­cise the option. Typ­i­cal­ly a ten­ant must serve a notice on the land­lord stat­ing that the ten­ant exer­cis­es the option; and 
  • where to send the notice and who to address the notice to. 

If the ten­ant has not com­plied with the pro­ce­dure con­tained in the lease for any of the above items, then the notice may be invalid. If the notice is invalid, the ten­ant may be enti­tled to advise the land­lord that it will no longer con­tin­ue with the option lease. The right of the ten­ant to do so is not clear cut as the ten­an­t’s rights can be affect­ed by things such as the ten­an­t’s con­duct after hav­ing served the notice.

2. Does the lease pro­vide that the par­ties are not bound until the option lease is signed?

Typ­i­cal­ly, if a ten­ant cor­rect­ly exer­cis­es the option to renew the lease, the exer­cise of the option will bind both par­ties to the lease, even if a new lease is nev­er exe­cut­ed, pro­vid­ed that the land­lord is not oth­er­wise enti­tled to refuse the grant of the option lease. 

In this case, a ten­ant would not be enti­tled to with­draw from the lease after hav­ing cor­rect­ly exer­cised the option. 

How­ev­er, if the lease spec­i­fies that the par­ties are not bound until the option lease is signed, then it may be pos­si­ble for the ten­ant to with­draw from the lease after hav­ing cor­rect­ly exer­cised the option. Pro­vi­sions of this nature are not com­mon in leases.

Read an ear­li­er arti­cle by Cather­ine on Advan­tages in final­is­ing the mar­ket rent before a ten­ant exer­cis­es an option for a new lease term.

Please con­tact Mary Digiglio if you have a ques­tion about how to serve a notice to exer­cise your option or whether an option has been cor­rect­ly exercised: