Think Nicholsons

May 08

Option clauses – treat them as just another boiler plate clause at your peril

It is commonplace for leases and commercial agreements, to grant a party (the Grantee) the right and ability, but not the obligation, to extend the term.  This is known as an option. 

To be in a position to exercise an option, the Grantee must satisfy whatever conditions are provided for in the option. Contractually, those conditions are treated as ‘conditions precedent’ ie conditions which must be satisfied before the option can be exercised.   A failure to satisfy the conditions precedent may be fatal to the Grantee’s right to exercise the option.  The consequences of such a failure could be catastrophic, particularly if the Grantee’s business is intrinsically linked to the extension of the term of the agreement.

So, what should be included as conditions precedent in an option?  This will involve a careful balancing of the parties’ rights.  Further, consideration may need to be given to how those rights may be valued depending on how difficult it is to satisfy the condition precedent.  The more difficult a condition precedent is to satisfy, the less value ought to be placed on the extended term conferred by the option.

Some examples of conditions precedent are to require:

      -    the Grantee to not be in breach of the agreement as at the date of exercise of the option; or
      -    that style of compliance, but only in respect of certain material terms (ie paying rent).

More recent adaptations have imposed more stringent conditions by requiring the Grantee to have punctually performed all of its obligations under the agreement at all times.  This type of condition precedent will be very difficult to satisfy because any breach of the agreement (whether material or not) will be disentitling conduct.   

Particular care and attention needs to be given when drafting or agreeing to an option to identify what conditions precedent must be satisfied before the Grantee has the right to the exercise of the option. 

 

Troy Hawthorn

Partner
Troy heads our Commercial Litigation and Dispute Resolution Division and is responsible for the litigation and resolution of disputes in all Courts. Having more than twenty years experience, he has had exposure to the full spectrum of commercial disputes, from high-profile litigation, to representing clients in specialised Tribunals.