Most motel businesses are leasehold. The right for the motelier to operate from the motel is granted by the owner of the motel (landlord) to the motel business owner (as tenant) under a lease.
Most motel leases are granted for an initial term, with an option for the motelier (as tenant) to exercise an option to take the lease for one or more additional terms. An initial term of 5 to 10 years with three options for additional 5 year terms is typical (i.e. a total of 20 to 25 years including options).
It is critical for moteliers to understand when and how their lease options can be exercised. The last thing a motelier wants is to loose their business because they (or their on-site manager) simply forgot to exercise the lease option or the notice exercising the option was not given in accordance with the strict requirements of the lease.
We have had clients come to us on more than one occasion with this problem. Landlords will not always simply agree to waive the requirements of the lease. Someone else may be offering the landlord more rent or may just suit the landlord to end the tenancy.
Don’t get caught out.
Tips for exercising your option correctly
To avoid the real risk a failure to exercise a lease option correctly leads to the loss of a motel business, our tips are listed below. Please give us a call if you are concerned or want to discuss any aspect of your lease:
• Read the lease—almost all commercial leases will have strict requirements about when and how a lease option can be exercised by the tenant. If the lease is not clear, discuss it with your lawyer.
• Diarise the dates—Most leases will say an option can be exercised no earlier than 12 months before the end of the term and not later than three months before the end of the term. If you don’t send the notice between these dates, the landlord may be entitled to refuse to grant you a new lease. Diarise the dates and have someone else do the same so you don’t miss them. Part of our service to our clients to take the responsibility of diarising these dates. Ask your lawyer to do so if they don’t already.
• Don’t leave it until the last minute—Even if you intend to sell the business, you are better off exercising the option as soon as you are entitled to do so. Buyers and their banks will likely require you to do so in any event.
• Give the notice by a method allowed under the lease—Don’t do it over the phone. Follow the terms of the lease. If the lease says all notices must be sent by post to the PO Box address of the landlord specified in the lease, send the notice exercising the option by that method as well as by email to the landlord’s property manager (or whoever you typically communicate with when dealing with the landlord). Don’t just send an email unless the lease allows notices to be given by email and specifies the email address to which the email must be sent.
• Who signs the notice—If the lease says all notices must be formally signed by the tenant entity, make sure this occurs. If you are not sure what is required give your lawyer a quick call.
• The notice should be unequivocal and unconditional—Don’t send a notice saying you intend to exercise the option. Say you hereby give notice you exercise the option for the additional lease term staring on X and ending on Y and ask the landlord to acknowledge receipt and provide the new lease for you to sign.
• Follow up for acknowledgment of receipt—If the landlord does not acknowledge receipt of the notice, follow up and ask for written acknowledgement the lease option has been exercised. If the landlord blanks you (and this does occur) call your lawyer.