1.12 Option Clauses And Specialist Clauses In Tenancy Agreements

Front 1

What are OPTION CLAUSES?

Back 1

These are variations to the standard form of lease negotiated by the LL and tenant.

Front 2

What are the most common forms of VARIATIONs of leases - known as option clauses?

Back 2

• Options to renew
• Options to terminate (usually called break clauses)
• Options to buy

Front 3

What does the option to renew clause allow?

Back 3

Allows the tenant to automatically renew the lease at the end of the term.
• gives a guarentee to the tenant AND
• it is binding on the LL

It also means that the terms will be on the same terms,for the same period and at the same rent.

Front 4

How do lawyers describe the option to renew clause?

Back 4

They would say that it 'touches and concerns the land' and as such would be transferred with any sale or assignment (transfer) of the LL or tenants interest.
This clause should be registered in order to bind a buyer of a LL interests.

Front 5

What would happen if the renewed lease also had the option to renew?

Back 5

The lease could be renewed again and again and would become a perpetual lease (now converted to the term of 2000 years).

Front 6

If an option to renew clause is qualified what does that mean?

Back 6

This means that the clause can be varied. The two most common qualifications are that the new lease:
• has no option to renew (to prevent it becoming perpetual)
• reserves the ability to vary the rent - this should be at market value and have a mechanism in the lease as to what happens if there is a dispute.

Front 7

The option to renew clause is binding on the LL if the tenant chooses to renew it - the LL would normally want the clause to be linked to caveats (conditions) - why?

Back 7

The LL would not want to be bound to renew a lease to a bad tenant.

Front 8

What are the usual caveats (conditions) associated with an option to renew clause?

Back 8

• that notice has to be given (usually at a specified time and in a specified manner, e.g. in writing at least 6 months before the end of the tenancy
• that the tenant is not in breach of any of the covenants in the lease

Front 9

What doea the option to terminate (break clause) mean?

Back 9

The option gives the party exercising the right to end the lease on the terms outlined in the lease document which must be strictly followed.

In residential tenancies the break clause is most likely to apply to a tenant.

Front 10

What sort of residential tenancies do break clauses apply to? how/when can they be ended?

Back 10

Options to terminate apply to both fixed term and some periodic tenancies.

The tenancy can usually be ended either:
• at a specific point in the tenancy
• on the occurance of a specific event.

Front 11

What could the specific points in the tenancy be when relating to break clauses in leases?

Back 11

These may be pre-determined dates, or every year or two years during longer leases.

A specific event could be that the LL wishes to regain possession so that redevelopment can take place.

Front 12

An option to break will usually be subject to conditions - what are these likely to be?

Back 12

• for the LL the option would normally have to be excerised in notice and in writing giving a specified period
• for tenants there will normally be a similar notice clause and also linking the exercise of the option to having performed all the covenants in the lease.

Front 13

Is the option to terminate deemed to 'touch and concern the land'? What does this mean?

Back 13

Yes it is and it means that the option to break will pass with an assignement of the lease or sale of the LL interest, UNLESS the clause is written in such a way as to make it personal to one party (usually the origional tenant)

Front 14

If there is a breach in any of the covenants of the lease how will this affect the option to renew clause?

Back 14

Just as notice must be strictly met, so must the requirement to keep the covenants in the lease. If the tenant is in breach, even if they are minor, it may be enough to defeat the 'option to renew' clause.

Front 15

West Country Cleaners v Saly [1966]

Back 15

This is a case relating to breach of the covenants of the lease and the option to renew clause.
• the tenant covenanted to paint every third year but did not do so, although premises in good condition and the LL had never complained, it was enough to defeat the option to renew.

Front 16

What is the option to buy clause and how does it apply to residential leases?

Back 16

This is much more common with commercial property but could also be written into a residential lease.
The option to buy the property could be exercised:
• at the end of the lease
• at specific points in the lease
• on the occurance of a specific event

Front 17

How will the property price be determined in the option to buy clause?

Back 17

• usually there will be a predetermined price set in advance of the clause inserted in the lease
OR
• it will specify a mechanism by which the price can be determined often with some kind of arbitration clause if agreement to price can not be reached.

Front 18

Is an 'option to buy' clause deemed to be a clause that 'touches and concerns the land'?

Back 18

No - but it is considered to be personal to both parties. The option will not generally pass when the lease is assigned or the LL's interest is sold and should be registered as a land charge.

Front 19

What is a business release clause?

Back 19

This could be found in some contractual leases with companies linked to specific events - such as where an employee occupying the property is transferred, dismissed or dies. The clause would allow the company, on notice, to terminate the tenacy in any of one or several events.

Front 20

If other types of specialist clauses are negotiated what must you consider?

Back 20

• any clause needs to be agreed after negotiation
AND
• must meet the requirements of the Unfair Terms in Consumer Contracts Regulations 1999.

Front 21

What provisions would specialist clauses cover? List some.

Back 21

• provision of a gardener
• cleaner
• decoration of the property

These specialist clauses will normally detail access arrangements, who is responsible for providing the service and who is responsible for payment.