Commercial Leasing – What’s an option clause?

What is an option clause in a lease?

If you are a landlord or tenant it is important to understand the implications of option clauses. An option in a commercial lease allows a tenant to renew a lease for a further term. This article will explore how option clauses work and how they should be worded to protect both tenant and landlord.

What is an option clause?

Put simply, it is a clause in a commercial lease that stipulates the obligations of both parties regarding the exercise and grant of the further option.

An option clause allows a tenant to renew the lease at the end of the initial term. This option can only be exercised if the tenants meet strict conditions including no breaches of the lease and exercising the option within a stipulated time frame.

Do I need an option clause in my lease?

Yes. It is imperative to have an option clause in a commercial lease if an option is being provided. A carefully worded option clause will provide certainty to both landlord and tenant surrounding the exercise and grant of the option.

A well drafted option clause will include the following points:

• How the tenant will exercise the option – usually in writing within a stipulated time frame and delivered to the landlord.
• In the event of breach (by the tenant) the grant of the option is at the sole discretion of the landlord – this is to protect the landlord from leasing to an unfavourable tenant.
• Time limitations – this is usually 3-6 months before the end of the lease term.
• How rent will be reviewed? Will rent be reviewed by CPI or Market review? This is especially important for a landlord as failure to specify will result in the landlord not being able to increase rent.
• If the premises falls within the Retail Leases Act attention should be made to the strict requirements of the Retail Legislation.

Well drafted option clauses are imperative for both landlord and tenant. At McLaughlin & Associates Lawyers, our experienced commercial lawyers will assist in the review of your commercial lease prior to signing and can assist in drafting of option clauses that suit your circumstances. Contact one of our commercial lawyers today on 07 3808 7777 or business@mclaughlinlawyers.com.au