Dont forget to exercise your option

Published: 07 January 2008.

By Small Myers Hughes Lawyers

Scenario (Qld or NSW)

You have recently purchased management rights in a building and paid a high multiplier, partly because your agreements have 20 and a bit years yet to run. You look at your agreements and they were for an original term of five years with four five years options for renewal (total 25 years). The first option clause states that the option must be exercised by giving notice in writing to the body corporate not more than nine months or less than three months prior to the expiry of the original term. You do your calculation and realize that the minimum three month notice period expired yesterday. You quickly contact your strata manager and notify them in writing that you intend to exercise the option.

Some weeks later, you receive a letter from the strata manager advising that the committee of the body corporate do not recognize the exercise of the option as it was not exercised strictly within the time period contained in the option clause and consequently, your agreements will expire in three months’ time.

Other than panic, what can you do?

Answer

In short, nothing-- from a legal point of view.

This scenario (and likewise tenants under retail tenancies) has been litigated on numerous occasions through the courts and invariably, the courts have decided that option exercise dates are “drop dead dates”. In other words, if you miss the exercise period even by a single day, you lose your right to renew the agreement.

It goes without saying that if you miss the exercise date under the first option, the agreement comes to an end at the conclusion of the than current term and all subsequent options are likewise lost.

The only thing available to you is to throw yourself at the mercy of the body corporate and hope that it is prepared to waive the non-compliance and recognize the option. This may or may not work depending on your relationship with the body corporate and/or the committee.

As you can see, the consequences of a simple oversight can be horrendous. If you lose your agreements, you lose your goodwill. If you lose your goodwill you have nothing to sell, other than possibly a discounted rent roll.

When you think logically about options, you really wonder why caretaking and letting agreements are not simply drafted for the maximum term (ie 25 years or ten years depending at what point of time the agreements are entered into - or in Queensland what module you are under). I have never yet met a manager who has elected not to exercise an option. The only (half reasonable) reasons I can come up with for inclusion of options is:

(a) an agreement with a term of five years with four five year options for renewal sometimes seems more acceptable to a body corporate rather than an agreement with a flat term of 25 years. This is psychological argument only.

(b) the exercise of an option is generally a good time to go back to the body corporate and ask for the agreement to be “topped up” by the recently expired term. For example, if a caretaking agreement in New South Wales was for a period of three years followed by a four year option for renewal followed by a three year option for renewal, when you exercise your first option (at the end of the initial three year period), it’s a convenient time to likewise ask the owners corporation to top up the agreement by adding on a further three years to bring your term back to 10 years.

If options are in agreements, the best form of option is what we call a “self renewing” option. In other words, instead of having a traditional option clause that provides that the manager must be proactive and give written notice to the body corporate prior to the expiry of the then current term (and generally within a “window” period), the alternative self renewing options state that the option will automatically be exercised unless the manager gives the body corporate notice that it does not intend to exercise the option.

The moral of the story

Be very, very careful with your options. If you have not already done so, check your agreements and find out when the last date is for exercise is and then diarize this date.

Also, when exercising options, be careful that you comply strictly with the wording contained in the caretaking and/or letting agreement in relation to the form of notice and the delivery of notice. If you have the slightest doubt, check with your solicitors or get them to do it.