Contract clause
Option to renew clause: the right to a further term
An option to renew clause gives a tenant the right to extend a lease for a further term on stated conditions, provided the tenant gives notice within a set window before the lease expires. The landlord must grant the new term if the option is validly exercised, which makes the window and the conditions the heart of the clause.
An option is worth a great deal to a tenant who has spent money on a fit out, and nothing if the notice arrives a day late. The clause has to make the window, the method of exercise and the rent for the new term impossible to misread.
Indunil Asanka · Co-founder
4 min read · Published
Sample clause
a retail lease in Victoria between Wattlebank Holdings, a fictional owner of a corner shop building in Warrnambool, and Tidepool Pharmacy, with an initial term of three years
22. Option to Renew 22.1 Tidepool Pharmacy may renew this Lease for one Further Term of 3 years starting on the day after the Expiry Date. 22.2 The option is exercised by written notice given to Wattlebank Holdings no earlier than 6 months and no later than 3 months before the Expiry Date. 22.3 The option may not be exercised if, when the notice is given, the Tenant has not remedied a default about which the Landlord has given written notice, or the Tenant has persistently defaulted during the Term and the Landlord has given written notice of those defaults. 22.4 The Further Term is on the terms of this Lease, except that there is no further option and the starting Rent is reviewed to Current Market Rent under clause 6. 22.5 The Landlord will give the Tenant the written notice required by section 28 of the Retail Leases Act 2003 (Vic) at least 3 months before the last date for exercising the option.
Sample wording, not legal advice.
Variants
Two consecutive options
A tenant making a large investment in fit out that wants security of occupation for a long period.
The Tenant may renew this Lease for a First Further Term of 5 years and, if the first option is exercised, for a Second Further Term of 5 years. Each option is exercised by written notice given no earlier than 9 months and no later than 6 months before the end of the term then running. Each Further Term is on the terms of this Lease, with the option clause amended to remove the option already exercised.
Office lease with a strict compliance condition
A lease outside retail leases legislation, where the landlord wants a clean record as a condition of renewal.
The Tenant may renew this Lease for one Further Term of 4 years by written notice given between 12 and 9 months before the Expiry Date, but only if at the date of the notice and at the Expiry Date there is no unremedied breach of this Lease and the Tenant has not been given more than 2 notices of breach during the Term. Time is of the essence for giving the notice.
England and Wales business tenancy
A United Kingdom lease, where renewal rights may come from statute rather than from an option.
The parties acknowledge that the tenancy created by this Lease is one to which sections 24 to 28 of the Landlord and Tenant Act 1954 apply unless they have been excluded by an agreement complying with section 38A. Where those sections apply, the Tenant's right to a new tenancy arises under Part II of that Act, and this clause does not limit that right.
What to negotiate
The width of the window
A narrow window near expiry suits a landlord that wants to keep its options open. Tenants ask for a wider window that opens early enough to plan and closes early enough to find other premises if the rent is too high. Six to three months is common for shops, and longer for large premises.
Rent for the further term
A market review on renewal lets the landlord catch up with the market, while a fixed increase gives the tenant certainty. Tenants who accept a market review want the rent known before they must commit, which in a Victorian retail lease is supported by the landlord's option notice and the early rent review process.
The risk of leaving it out
Without an option the tenant has no right to stay after expiry, however much it has spent on the premises, and must negotiate a new lease from a weaker position. In a Victorian retail lease the landlord must still tell a tenant without an option, between 6 and 12 months before expiry, whether it will offer a renewal.
Victorian retail leases
The Retail Leases Act 2003 (Vic) requires an option clause to state the exercise date, how the option is exercised, the renewal terms and how the new rent is set. The only grounds for refusing a validly exercised option are an unremedied default the landlord has notified in writing, or persistent default the landlord has notified. At least 3 months before the last exercise date the landlord must give the tenant written notice of that date, the rent for the first 12 months of the renewal, the availability of an early rent review and of a cooling off period, and any changes to the disclosure statement. If it does not, the exercise date moves to 3 months after the notice is given.
After the option is exercised
A tenant who has not asked for an early rent review has a 14 day cooling off period after exercising the option, during which it can withdraw by written notice. The renewed term starts when the previous term expires, even if the lease was extended while notices were outstanding. The minimum 5 year term rule counts the initial term and any option together, so a 3 year lease with a 3 year option satisfies it.
Where it sits in a generated document
A generated lease numbers the option as its own clause near the term clause, with the window, conditions and renewal rent as separate sub clauses that point to the rent review clause by number. The generated draft does not cite the Act, so the notice timing in any draft is checked against the legislation before signing.
Documents that carry this clause
Questions people ask
What happens if a tenant misses the option window?
Generally the option lapses and the landlord is free to refuse a renewal or offer different terms. In a Victorian retail lease, a landlord that did not give the required option notice at least 3 months before the last exercise date cannot rely on that date, because the deadline moves to 3 months after the notice is actually given.
Can a landlord refuse an option because of a past breach?
In a Victorian retail lease only on two grounds: an unremedied default the landlord has notified in writing, or persistent default throughout the term that the landlord has notified. In a lease outside retail leases legislation the conditions are whatever the clause says, which is why office tenants read compliance conditions closely.
How should a tenant exercise an option?
Exactly as the clause requires, in writing, to the address or person the notices clause names, within the window, and with proof of delivery. If the lease requires the notice to be signed by a director or served by a particular method, that requirement is followed too. An informal email to a property manager invites a dispute about whether the option was validly exercised.
Is the rent the same in the renewed term?
Only if the clause says so. Many leases review the rent to market at the start of the further term, while others apply the usual annual increase. In a Victorian retail lease the landlord's option notice must state the rent for the first 12 months, and the tenant can request an early market rent review within 28 days.
Does an option to renew count towards a minimum lease term?
Yes. Under the Retail Leases Act 2003 (Vic) a retail premises lease must run for at least 5 years including any further terms available under an option, unless an exception applies such as a waiver certificate. A 2 year lease with a 3 year option therefore meets the rule, while a 2 year lease with no option does not.
How is an option different from a first right of refusal?
An option obliges the landlord to grant the further term if the tenant exercises it correctly. A first right of refusal only gives the tenant a chance to match an offer the landlord receives from someone else, and the landlord is free not to seek or accept offers at all. The two give very different security.
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