Lease Option Solicitors

A contractual option to take a lease for a further term is a ‘call’ option. It confers a unilateral right on the tenant to call for a renewal lease (often subject to conditions precedent such as all rents being paid up to date and the tenant not being in material breach of covenant). There is no obligation on the tenant to exercise his right, but if he does, the landlord is bound to perform his part of the bargain.

A call option is a contract for the sale of land within the Law of Property (Miscellaneous Provisions) Act 1989, s 2 (LP(MP)A 1989). It must:

• be in writing

• contain or incorporate all of the terms expressly agreed between the parties, and

• be signed by or on behalf of each party

The tenant’s notice of exercise is simply a mechanism to trigger the obligation to grant the lease. Accordingly, valid exercise of the option does not depend on both parties signing the notice.

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A contractual option to renew, as opposed to a longer lease term with a tenant right to break, may reduce the initial amount of stamp duty land tax (SDLT) payable by the tenant. Break clauses are ignored for the purpose of SDLT and in the event that the break is exercised, the tenant is not entitled to a refund of any SDLT. Provided the tenant is not paying a fee for the grant of the option, no additional SDLT is payable in respect of a lease which contains an option to renew. The initial charge to SDLT is based on the contractual term of the lease and a further charge to SDLT will only arise if the renewal lease is granted.

However, SDLT is payable if an option fee is payable that exceeds the relevant threshold.

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Ensure the option clearly states the renewal lease will not include the option to renew. Where the option states that the renewal lease will be on the same terms as the existing lease,each renewal lease will include a further option to renew and create a perpetually renewable lease by operation of law. A perpetually renewable lease is converted into:

• In the case of a head lease, the grant of a lease for 2000 years, and

• In the case of an underlease, the grant of a lease for a term of one day less than the term out of which it is derived

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Ensure the term of the renewal lease is less than 60 years. Any contract for the renewal of a lease for a term exceeding 60 years from the termination date of the original lease is void. However, the extent of any exceptions to this statutory provision, and its scope, is unclear. There are no reported cases on it.

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Ensure the period in which the option is exercisable is clearly stated. Time is of the essence for the exercise of an option. At the end of the option period the option will lapse.

If the lease fails to specify an option period, the right to exercise the option continues until the relationship of landlord and tenant ends (see Moss v Barton (1866) LR 1 Eq 474).

An option to renew a lease granted prior to 6 April 2010 is not subject to the rule against perpetuities.

An option to renew granted prior to 6 April 2010 by a freeholder to a subtenant, exercisable once

the intermediate lease expires, is not subject to the rule against perpetuities provided it:

• Is exercisable only by the tenant or his successors in title, and

• Ceases to be exercisable at or before the expiry of one year after expiry of the lease

Where these conditions are not fulfilled the option will be void if not exercised within 21 years.

Perpetuities and Accumulations Act 2009 came into force on 6 April 2010. It effectively disapplies the rule against perpetuities from all options granted on or after 6 April 2010.

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Unless the option clearly provides otherwise the benefit of the option to renew will pass to the tenant’s successors in title. This is also the case in respect of old tenancies. An option to renew is considered to run with the land.

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Ensure that the option clearly states either:

• The new rent, or

• If the rent is to be ascertained when the option is exercised, a mechanism to calculate the rent with a dispute resolution procedure which can be invoked in the event of a dispute

Failure to do so may render the agreement void for uncertainty.

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In order for the renewal lease to exclude security of tenure, the statutory exclusion procedure must be completed before the tenant becomes contractually bound to enter into the renewal lease. The tenant will be contractually bound to enter into the new lease on exercising the option. The exclusion procedure must therefore take place before the option is exercised. Ensure that either the:

• Statutory procedure is carried out before the grant of the initial lease at the same time as the exclusion procedure for the initial lease, or

• Exercise of the option is conditional on the tenant informing the landlord of its intention to exercise the option and completion of the statutory exclusion procedure before exercising the option. From a tenant's perspective, the risk is that the landlord could simply fail to serve the Landlord and Tenant Act 1954 (LTA 1954) warning notice, leaving the tenant unable to exercise the option (although the tenant would have a breach of covenant claim against the landlord). If acting for the tenant, consider giving the tenant the ability to exercise the option if the landlord fails to serve the warning notice within the period stipulated in the clause

If the option to renew is not personal to the original tenant, the contracting out procedure must be completed in respect of each new assignee. Ensure either the:

• Tenant’s right to assign is conditional on the assignee completing the statutory procedure before the date of the assignment, or

• Exercise of the option is conditional on the tenant informing the landlord of its intention to exercise the option and completion of the statutory exclusion procedure before exercising the option

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Where a lease protected by the LTA 1954, Pt II contains an option to renew, exercisable by the tenant, the tenant may elect to exercise its option or to rely on renewal under the statutory provisions.

Unless and until exercised, the option does not constitute an enforceable agreement to renew until validly exercised. LTA 1954, Pt II ceases to apply to a tenancy at the point when an enforceable agreement to renew is in force. Consequently, the tenancy remains within the protection of LTA 1954, Pt II up to the point at which the option is exercised, and the landlord becomes bound to grant a new tenancy. On valid exercise of the option it becomes possible to ascertain the date for completion, and so the date on which the current tenancy comes to an end.

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A tenant's option to renew is often conditional on:

• Payment of outstanding rent, and

• Compliance with covenants. The extent to which those conditions must be satisfied depends on whether they are absolute or qualified (eg by words such as reasonable, material or substantial)

As with conditions precedent to exercise a break right, the conditions are strictly applied by the courts. If the conditions are not fulfilled, the option may not operate.

A tenant’s solicitor must ensure it advises the tenant of the risk of non-compliance with any conditions precedent. Failure to do so may amount to negligence.

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If the property is subject to a mortgage that prohibits leasing without the mortgagee’s consent, then written evidence of consent must be obtained prior to completion of the lease. Where the lease contains an option to renew, the landlord should ensure that the mortgagee also expressly consents to the grant of the option to avoid being in breach of the charge. The tenant should also ensure that such consent is given. If no consent is obtained, the mortgagee may be able to invalidate the grant of the renewal lease and treat the tenant as a trespasser unless the mortgagee has accepted the tenant. He will have a claim in damages against the landlord, but only if there is an express covenant for quiet enjoyment covering interruption by title paramount. An implied covenant for quiet enjoyment only extends to the landlord and those claiming under him.

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Options to renew granted in respect of:

• Registered land—must be protected by entry of a unilateral or an agreed notice on the register of the landlord’s title. If the lease itself is registrable and contains the prescribed clauses, provided box LR9 of the prescribed lease clauses is correctly completed, a separate application for a unilateral notice is not required. A notice should be entered even where the option holder is in actual occupation. The Land Registration Act 2002 significantly reduced the protection afforded by actual occupation so that it relates only to land that is physically occupied by the option holder

• Unregistered land—must be protected by entry of a C(iv) land charge (ie as an estate contract) against the name of the landlord. Failure to register will render the option void against a purchaser for money or money’s worth of the landlord’s estate (and its successors in title)

Landlords should ensure the option specifies it becomes void if the tenant fails to register within a specified period. If the tenant's option is unenforceable against a purchaser of the reversion through the tenant's failure to register the option, the original tenant may be able to sue the original landlord for damages for breach of contract

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