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:
