Option to renew your lease? Use it before you lose it!

Tenants Beware

If you have an option to renew your lease for a further term, you must check the provisions of the lease carefully and ensure that you use it before you lose it! Exercising an option to renew should be treated as a formal process, and you should comply with the option provisions of the lease strictly to minimise your risk of missing out on securing the premises for the further term.

Generally speaking, in order to validly exercise your option you must:

1. Give the landlord formal written notice, which should be a clear and unequivocal exercise of the option.

  • Ensure that the notice is in the correct form, is addressed to the landlord (not an agent) and is given and correctly executed by the tenant as named in the lease.
  • Do not rely on verbal discussions only. 
  • Avoid giving a conditional notice (e.g. exercising the option subject to the landlord completing some works or agreeing to a particular rental amount), as such notice is not 'unequivocal' and the landlord could deny the further term if it does not agree to your conditions.

2. Serve the notice on the landlord within the required time.

  • The lease will specify a time by which or within which the option may be exercised (e.g. by giving notice not more than 12 months and not less than 6 months prior to the expiry date of the lease).  Such timeframes must be strictly complied with.  If you do not comply, even by one day, the landlord could deny the further term. 

3. Serve the notice on the landlord in accordance with the terms of the lease. 

  • The lease should specify the acceptable methods of service, which may or may not include post, fax or email.  Again, if you do not comply, the landlord can argue that you did not serve the required notice and could deny the further term.

The Supreme Court has jurisdiction to overcome a deficient exercise of option by granting the tenant relief against forfeiture.  However, such relief would not be granted where the tenant's failure to act occurred through the failure to exercise reasonable care or diligence.  It is unlikely to be granted to remedy a late exercise of option.  Plus running such court application would be costly.

A deficient exercise of option may still be accepted by the landlord.  However, you are best not to rely on the landlord's goodwill.  Also, do not assume that the landlord will accept a deficient exercise of option just because it may have accepted one in the past, as the preconditions to the grant of the option will be determined pursuant to each particular lease on a case by case basis. 

Landlords Beware

Some option clauses will specify that the option may only be exercised if the tenant is not in breach of the lease before and/or after giving its notice of exercise of option.

Landlords, if you seek to rely on such a clause of the lease to deny the further term, you must ensure that you comply with section 133E of the Conveyancing Act 1919 (NSW).  That section requires you to give the tenant a prescribed notice, which must:

  • specify the tenant’s breach(es) of the relevant clause(s) of the lease;
  • be served on the tenant in accordance with the terms of the lease;
  • be served within 14 days after the tenant gives its notice of exercise of option if the relevant breach occurred before the giving of that notice, or within 14 days after the breach if the relevant breach occurred after the giving of that notice; and
  • be in the correct form (including stating that, subject to any order of the court under section 133F, you propose to treat the breach as precluding the tenant from entitlement to the further term).

If you do not strictly comply with the above requirements, you may have to grant a new lease even if the tenant was in breach of the original lease.

After receiving the prescribed notice, the tenant has one month within which to commence court proceedings to obtain an order for relief against the effect of its breach of the original lease.

Author: Kristie Carlile

Contributing partner: Melissa Potter