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Posted: Thursday, April 22, 2010
By: Laurie Sanderson, a partner of Gowlings Lafleur Henderson LLP |
At the risk of oversimplifying, a commercial lease really boils down to a few necessary business points – the parties, the space, the rent and the term. Of course there are a million variations on these themes (for which I am eternally grateful), but these are the essential elements.
The Term – how deceptively simple. When does it start and when will it end.
Today, I would like to focus on when it will end, and more particularly, options to renew and options to extend. In many ways, options to renew and options to extend are the same, but there is one key difference. The exercise of an option to renew creates a new contract; a new demise. An option to extend is, as its name suggests, an extension or continuation of the original term of the lease. “SO WHAT” you say (and loudly). Because an option to renew creates a new contract, personal rights may not be carried forward into the new term unless you specifically provide for this. “What are personal rights?” you ask. These are rights that do not run with the land, I so helpfully reply. Okay, not so helpfully. Personal rights include things like rights of first refusal, radius restrictions, exclusivity covenants. Because of the possible unintentional lapse of these rights, most leasing counsel prefer to use options to extend.
That being said, an option to extend can have the opposite unintended result in that rights continue that were perhaps intended to be limited to the initial term. For example, the landlord may not intend that the tenant’s right of first refusal continue during the extension term. Which brings me to my first practice tip.
Notice – Is 6 months enough?
Options to extend are generally (but not always) exercised by the tenant giving notice to the landlord. It is imperative that the landlord consider how much notice is appropriate. Unless it has a cooperative tenant, the landlord will not know whether it needs to secure a new tenant for the premises until the tenant’s notice period has expired and the tenant fails to exercise its option. The usual 6 month notice period will not be sufficient in most circumstances, and particularly so if the premises are large, the location or configuration is less than ideal . . . .
There will be less doubt as to whether the tenant has exercised its option within the required time if you use an actual date by which the option must be exercised, rather than referring to a period of months. It will also make everyone’s life easier if the notice provisions of the lease stipulate that notice will be deemed to have been received at a particular point in time, as for example, on the first business day following the date on which it is couriered.
Be Clear and Unequivocal
Now that we’ve considered how the option should be structured, how much notice is appropriate and how it should be delivered, we get to the real issue - how it must be exercised.
The exercise of the option will not be effective if it is either conditional or equivocal.
If, as in many options, the rent for the option period is to be agreed by the parties, I strongly suggest that the tenant address this in a separate letter to the landlord, or at least in a separate paragraph from the exercise so that there can be no misunderstanding that the exercise is not intended to be conditional.
Agreements to Agree are Not Enforceable
Just as the exercise of the option must be clear and unequivocal, the terms of the option must be certain or ascertainable. Most options to extend provide that they are to be on the same terms and conditions as the initial term of the lease except that there is no further option to extend and that the rent is to be as agreed between the parties. Unfortunately, this is in the eyes of the Court, simply an agreement to agree and void for uncertainty.
In order to make an option legally enforceable, the lease needs to address how the rent is to be determined and what will happen if the parties cannot agree. As this is really a topic in and of itself, suffice it to say that most parties address this by providing that the rent is to be the fair market rent as agreed by the parties and failing agreement, as determined by arbitration.
Timing Really is Everything
Which brings me to my 6th and final practice tip. EXERCISE ON TIME. In legal terms, the notice requirement is a condition precedent to the exercise. The Court’s ability to excuse the tenant’s failure to satisfy the notice requirements under the option are extremely limited. In order to qualify for relief, the tenant must prove that it has made diligent efforts to comply and that the failure to do so is through no fault of its own.
Tenants also need to be aware that they cannot rely on the landlord’s behaviour to excuse their failure to fulfil the condition precedent to the option e.g. the notice requirement. The fact that the parties are actively discussing an extension of the term does not extend or fulfil the notice requirement. The tenant will forfeit its option unless if formally exercises its option in accordance with the terms of the lease.
Like a lot of things in life, options are deceptively simple, but I am hoping that these practice tips are helpful.
Laurie Sanderson
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The comments contained in this article provide general information only. They should not be regarded or relied upon as legal advice or opinions. Gowling Lafleur Henderson LLP would be pleased to provide more information or specific advice on matters of interest to the reader.
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