By: Kenneth W. Chung
If your lease contains an option to extend the lease term and you intend to extend your lease, then you must properly and timely send your written option exercise notice. If your notice is even one day late, then the landlord may reject your request to extend the lease term. In such event, the landlord has the right to evict you from the premises, increase your rent to an amount higher than fair market value, or require other payments or terms as a condition to extending your lease. In order to avoid such potential consequences, the option exercise notice must be properly and timely sent.
Unless you have a form lease, no two leases are identical. Therefore, you should review your lease and option provisions carefully so that you may understand and satisfy all requirements. However, please note that most leases require the option exercise notice to be sent within a certain time period before the lease expiration date. The following is a sample provision:
Tenant may exercise the Option by first giving to Landlord a minimum of 6 months written notice, but not more than 12 months written notice of Tenant’s intent to exercise the Option.
If the lease expires on December 31, 2017, then under this option provision, the notice of exercising the option must be sent to the landlord between January 1, 2017 and June 30, 2017. Some leases provide for a shorter notice period of 3 months. The purpose of such a deadline is so that the landlord will have enough time to market the premises for lease if the tenant does not intend to exercise the option. In order to avoid missing the deadline, you should create a reminder such as on your Outlook calendar or some other method to remind you of the deadline.
The notice of exercising the option must also be sent properly. Almost all leases have a “Notice” provision which is generally towards the end of the lease document. It identifies how notices are to be sent. While you must review your specific notice provision and requirements, generally notices are required to be sent by certified mail (return receipt requested), overnight mail or by other methods. The notice provision may also identify the specific address for the landlord to where notices must be sent. If you are not sure of the address to where legal notices must be sent, you should obtain and confirm the correct address with the landlord or property manager in writing. All of the notice requirements should be complied in order to avoid the potential claim that your option notice was not properly sent.
In addition to the issues of missing the notice deadline or not properly sending the notice, your lease may contain other provisions that may terminate your option right. For example, many leases state that the tenant will lose the right to exercise the option if tenant has been given 3 or more default notices during the lease term regardless of whether the default was cured. This means that over a five year lease term, if your rent check was lost in the mail 3 times resulting in a default notice, then your option right would be lost. If you have such a provision in your lease, and you believe you received an unjustified default notice, then you should provide the landlord with a notice of opposition explaining why the default notice is unjustified. Maintaining a record of such objection could be useful if you have to later oppose the landlord’s attempt to terminate your option.
In almost all leases, once the option is exercised, the tenant cannot withdraw the exercise of the option after the tenant later finds out that the fair market value rent is higher than expected. Therefore, proper investigation and research should be completed prior to exercising the option. Once the option is exercised, and if the lease provides for procedures in establishing the fair market rent, then the tenant should review the applicable procedures and deadlines. Many leases provide that the landlord will propose what the fair market rent should be and that the landlord’s determination will become final if the tenant does not issue a written objection within the specified deadline.
The timely and proper exercise of your option right is critical in maintaining the value of your business. If you require assistance in understanding the requirements of the option provisions in your lease and in processing your option notice or have other issues with your lease, then please contact us.
Kenneth W. Chung is the managing partner at Kring & Chung, LLP. Mr. Chung is experienced in both business litigation and business transactions. His business law experience includes corporate, real estate, contract, intellectual property and employment issues. He is also a licensed real estate broker. Mr. Chung may be contacted at (949) 261-7700 or [email protected].