Flexibility in Compliance with Option Terms

Given the importance of the effect of the exercise of an option, it is not in any way surprising that the courts normally adopt a strict approach to adherence to the precise terms of the option agreement.

In a recent case, a tenant had the benefit of an option which allowed it to renew its lease. Among the conditions attaching to the exercise of the option were that the option was only exercisable as long as the original lease was still in the name of the tenant and that the tenant had to have paid any rent due and adhered to its covenanted obligations.

The tenant in this case was a company that was effectively a ‘shell’. It had almost no assets of its own and was a dormant company. The performance of its obligations under the lease was guaranteed by another company in the same group as the tenant. The guarantor company was about to leave the group of companies, so the tenant sought to switch the lease from its name to that of its parent company. In spite of the fact that the rent had actually been paid by its parent company and the premises had always been wholly occupied by the parent company, the landlord insisted that the lease remain in the name of the original tenant.

The landlord argued that the payment of the rent by the parent company was a breach of the tenant’s obligations under the lease, as was the occupation of the premises by the parent company. Accordingly, it claimed that the tenant could not exercise the option to renew the lease.

The court ruled that the tenant’s option could be validly exercised. The landlord had known from the outset that the parent company would occupy the premises as the licensee of the tenant. The lease contained a clause which prevented the tenant from allowing anyone else to occupy part of the premises, but not, as was the case here, the whole of the premises. Since the parent company had occupied the entirety of the premises, that condition had not been breached. To consider that payment of rent by the parent company (or indeed the tenant achieving compliance with its covenants indirectly) constituted a breach of the terms of the lease was considered to be excessively legalistic.

The court therefore ruled in favour of the tenant, confirming that although the need to comply with the indispensable conditions of an option is essential, some flexibility is allowed with regard to how the tenant can achieve compliance with such conditions.