A lease option is something that can baffle new landlords and tenants alike, and we still find aspects of options are misunderstood by seasoned landlords and tenants. But if you want to ensure a successful tenancy – regardless of which side you’re on – you need to understand how options work and what your rights and responsibilities are.
What is a lease option?
A lease option is an inbuilt contractual right for a tenant to ask the landlord for a further lease term, for a certain number of years, and if notice ‘exercising’ the option is given by the tenant to the landlord, the landlord is unable to deny that further term except in very limited circumstances.
For example, the lease might be for an initial term of 3 years but it then contains two, 3 year options – if those are exercised by the tenant in accordance with the terms of the lease, the tenant has the right to be in the premises for 9 years in total.
Who are options good for?
Options are very advantageous for tenants – they have the comfort of knowing they can extend the lease if they want, but do not have to make that decision until sometime before the lease term expires.
For landlords, options give them a lack of certainty as they do not know whether the tenant is going to stay on in the premises until they receive the notice from the tenant. However, many landlords feel the existence of an option means a tenant is more likely to exercise it and stay there, rather than decide to look for new premises elsewhere.
Method of giving notice? The option clause in leases usually requires them to be exercised in a certain way (for example, by a letter posted to a certain address) and within a certain timeframe (for example, it must be given before the date that is three months before the expiry of the lease).
If these requirements are not met, and the landlord does not want the lease to be extended, they can point to the tenant’s lack of compliance with those technical requirements and deny them the option, which means the tenant must leave the premises on the expiry date.
Tenant is in breach & denying an option – If a landlord receives a notice exercising an option from the tenant and wants to deny the tenant that option due to a previous or ongoing breach of the lease, section 128 of the Property Law Act 1974 (Qld) overrides any other provision of the lease and requires the landlord to give a notice to the tenant within 14 days of receiving the option exercise notice, setting out that breach of the lease, which gives the tenant an opportunity to remedy the breach – and if that does not occur, they do not have the right to continue to occupy the premises for the option period.
Retail Shop Leases Act 1994 (Qld) – Where this legislation applies (which is an entirely different topic for discussion), it requires the landlord to give a disclosure statement to the tenant within 7 days of a tenant exercising the option. If this statement is not given, the tenant can terminate the lease at any time, for any reason, within 6 months of the option period commencing.
Ultimately, all landlords and tenants should ensure that they receive clear advice on any steps they need to take under their lease if it contains an option and diarise the critical dates to ensure they are not missed.