What to do when an option to extend a lease is exercised

By August 13, 2020Property Law
Commercial Lease

So the Tenant wants to exercise an Option to renew the lease, what now?

What should a Tenant do?

The Tenant must understand how to validly exercise the Option and how rent will be calculated under the new lease before exercising the Option.

If the Option is not exercised in the way set out in the lease, the Landlord will not be required to extend the lease.

Once the Option is validly exercised, the Tenant will be bound by the new rental.

What should a Landlord do?

Carefully review the Option clause in the lease to make sure the Tenant has validly exercised the Option, including:

    1. Has the Tenant exercised the option within the specified time period?
    2. Has the notice been properly served?
    3. Is the Tenant in breach of the Lease?
    4. Is there any other condition the Tenant must satisfy to exercise the Option?

If the Option has not been validly exercised, the Landlord is not obliged to provide a further term.  However, if the Option is exercised correctly the Landlord may need to arrange for rent reviews to be undertaken and documentation of the renewal to be prepared.

If there is any doubt as to whether an Option has been validly exercised, we recommend that you contact a member of our Property team at Fox and Thomas for advice.

What else needs doing?

The new rent must be calculated in the way set out in the lease.  This may require a Consumer Price Index (CPI) calculation or a market rent valuation.

If the Tenant has paid a security deposit or provided a bank guarantee, the amount of the security may need to be increased in line with the new rent.

An amendment to lease or a new lease must be signed by the Tenant and Landlord.

If the lease is registered, the amendment must be registered on the property’s title.

If the Lease contains a director’s guarantee, the directors must sign a new guarantee to make sure they are still bound under the new lease.

The Tenant should take out, and the Landlord should obtain a copy of, any insurance policy the Tenant is required to hold under the lease.

Options to renew can be a tricky area for both Landlords and Tenants. If you are unsure of your rights, please contact a member of our Property team at Fox and Thomas  for further advice about taking steps in the option to renew process.