Do you understand the notion of options on Leases? | Rob Balanda

A classic beginner mistake I see regularly is with options in Leases. For Lease

Many Investors work under the mistaken belief that an option clause in a Lease allowing the tenant to extend the term of the Lease, must also be agreed to by the landlord before it can be exercised.  Not so.

Almost always the right to extend a Lease under an option clause is the tenant’s call (and can often also be exercised even if the tenant is in default under the Lease) and the landlord has no input into it at all.

And here is where it gets really cruel…

If the Lease is extended the rental stays the same, without any increase (even CPI) unless the option clause specifically provides that the rent is to be reviewed or at least increased by CPI at the time any option is exercised.

So here is another one of those clauses that you should keep in your Investor’s Toolbox for future reference. 

Remember, the real estate agent won’t suggest such a clause to you.

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For them it raises more issues to resolve before they get the deal signed. Remember they operate under the often unspoken principle that “Less is Yes”.

That is, the less clauses they have in the offer they take to their Seller or their Landlord, the more chance they have of getting them to say yes to the deal.

“Provided that during the term of the Lease and at the date of exercise of the option contained in this clause the Tenants have not breached the Lease, the Tenants will have the option to extend the term of this lease for a further period of (insert the term of the new Lease) from the date of expiration of this Lease provided that they give notice to the Landlord in writing before the expiration of the Lease that they desire to exercise that option.

The Lease for that period will be on the same terms as this Lease, except for this clause and the rental, which rental will be the current market rental payable for the Lease of similar properties in the locality at the commencement date of the new Lease.

If the parties cannot agree on the current market rental at that time, the matter may be referred, at the request of either party, to the President for the time being of the Real Estate Institute of Queensland who will nominate a letting agent who conducts letting within the locality of the property, or some other person acceptable to the President who in the President’s opinion is capable of determining the current market rental for the property.

The person nominated will determine the amount of the current market rental and in doing so that person will act as an expert and not as an arbitrator and their decision will be final and binding upon the parties.”



Want more of this type of information?


Rob Balanda

About

Rob is a partner in the Gold Coast based law firm MBA Lawyers. He is a highly regarded educator of property investors and estate agents and the author of the "Made Simple" series of books and CD's.
Visit www.ClausesMadeSimple.com


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