Lease Option Guidance and Lease Option Notification Form (attached)[1]

What are the requirementsunder the Energy Efficiency in Government Operations (EEGO) policy for Commonwealth agenciesrelating to lease options?

The EEGO policy (section C5) requires that:

  • Prior to exercising a lease optionCommonwealth agencies, covered by EEGO, need to conduct an independent NABERSEnergy assessment of their current premises; and
  • Where premises do not meet the relevant NABERS Energy rating of 4.5 starsfor the tenancyand base building (where applicable), agencies need to conduct market testing to determine whether there are cost effective alternative accommodation which do meet the EEGO requirements.

These requirements apply to any leased office area with Net Lettable Area of 2000m2 or more for a term two years or more.

Are agencies required under EEGO to seek a Green Lease Schedule (GLS) exception when exercising a lease option?

Subject to meeting the conditions of section C5 of the EEGOpolicy, which includes identifying the NABERS Energy rating of current premises and, where applicable, market testing, Commonwealth agencies are not required to seek an exception to inclusion of a Green Lease Schedule when exercising a lease option.

What is a lease option?

In general terms an option to renew a lease gives a tenant the right, but not the obligation, to call for a new lease of the premises. Any lease options available to a tenant will form part of the original lease and the terms of the option clause will govern the rights and obligations attached to that option right.

The terms of each lease, including the option clause, and the actions taken in relation to that clause, will determine that actual rights arising. For example, option clauses can contain conditions precedent to the exercise of the option, the time frame for exercise and other requirements for exercising it (such as who can give the notice of exercise of option and how it is to be given).

The option clause will also set out the terms applicable to the lease for the option term (for example, the lease for the option term is on the same terms and conditions as the original lease except for matters such as dates, rent and other commercial term updates).If there is any doubt about whether an option right exists legal advice may need to be obtained by the agency.

What rights does a lease option create?

In general terms,the proper exercise of an option grants a tenant an equitable interest for the new term.Assuming the option exercise is properly exercised, until the new lease is executed the parties are regarded as having an enforceable agreement for lease.

Which NABERS ratings are required?

Certified NABERS ratings, as opposed to desktop, or ‘informal’ NABERS ratings, should be obtained for the office tenancy and, where the agency is a majority tenant (i.e. where leasing 50 per cent or more of the building), for the base building. The base building rating is usually the responsibility of the building owner. The building owner may already have a current certificate for the base building.

What ratings do building owners have to disclose?

Under the Building Energy Efficiency Disclosure Act 2010 there are mandatory obligations applicable to many commercial buildings. Most sellers or lessors of office space of 2,000m2or more are required to obtain and disclose an up-to-date energy efficiency rating.

This energy efficiency rating includes the current NABERS base building rating.

What constitutes market testing?

For the purposes of EEGO, this depends on the level of value of the lease option and on the availability of alternatives in the market. As a minimum, agencies would be expected to contact their local commercial real estate agent to determine if cost-effective alternatives, that meet their requirements, and which are in line EEGO requirements, are available. For large office leases agencies may need to go out to an open tender to find cost-effective alternatives to satisfy FMA Act procurement obligations including obtaining the best value for money for the Commonwealth whilst adhering to Government policy.

What alternatives are open to agencies?

Some alternatives to exercising a lease option which an agency may consider,are to move to a different building or in some casesto sign a lease for the development of a new building.

An agency may also consider initiating 'without prejudice negotiations' with the landlord under the existing lease to negotiate variations to the lease for the option term (for example, by including a GLS). This should be done with care (and agencies may need to seek legal advice) as in some circumstances introducing variations through exercise of the option right could result in the option right being lost.

Once an option has been validly exercised the parties are locked in to the lease for the option term and neither party can withdraw or renegotiate without the agreement of the other party.

What are some examples of scenarios and possible outcomes where there is a lease option?

The table below contains some examples of alternatives which can be considered where the original lease contains an option to renew and does not contain required energy performance outcomes / GLS. This is not an exhaustive list and as each lease situation is different, agencies should consider obtaining legal advice in deciding the best approach for their particular circumstances.

Alternative / Some considerations
Option is exercised validly without agreeing inclusion of improved energy outcome or a GLS into the lease for the option term / There is no legal right to introduce a requirement for improved energy outcomes or a GLS. Once the option is validly exercised the parties are legally bound to enter into a lease on the terms contemplated by the option provisions in the original lease.
Before option is exercised validly, parties to original lease can negotiate amendments to the lease which will applyIF the option is exercised / Care is needed to undertake these negotiations 'without prejudice' to the option rights in the original lease to avoid the tenant losing the option right.
If a agreement is reached through the negotiations the agreed amendments should be carefully documented and the option can be exercised in line with original lease and the agreement to vary the lease for the option term. The parties will be bound by those terms.
If negotiations do not result in the required outcome the agency may choose to relocate to other premises.
This approach should be initiated in advance well in advance of the time to exercise the option to ensure sufficient time is available enable all alternatives to be properly explored.
After option is exercised validly the tenant may ask the landlord to negotiate an amendment to the lease / Care is needed to approach these negotiations on a 'without prejudice' basis to ensure the tenant is not exposed to legal liability for non adherence to the enforceable rights created by the exercise of the option.
At this stage the parties are already bound to proceed with the lease for the option term on the terms contemplated in the original lease and this may impact on the negotiation process.
If a agreement is reached through the negotiationsthe agreed amendments should be carefully documented to ensure the parties are bound by the agreed variations and that they are incorporated into the lease for the option term.
If negotiations do not result in the required outcome the tenant remains bound by the terms of the option lease and cannot require amendments to be made. The tenantcannotsurrender the lease for the option term without the express agreement of the landlord (who may not agree to the surrender or who may impose conditions in giving an agreement to surrender).
This approach presents some risks as the outcome is dependenton the willingness of the parties to agree variations in acontext where they are already legally bound to proceed with the lease without the desired amendments.
Before option is exercised validly the parties to original lease may negotiate an entirely fresh lease without prejudice to the option right in the original lease / Care is needed to undertake these negotiations 'without prejudice' to the option rights in the original lease to avoid the tenant losing the option right.
Consideration is also needed regarding the merits of throwing open the entire lease arrangement to negotiations.
This approach means that if agreement on a fresh lease is not reached and if the option is not exercised, the tenant forgoes the certainty of those rights. Alternatively, provided a decision is made in sufficient time, the tenant may still exercise the option and the parties will then be bound by the lease for the further term on the conditions contemplated by the original lease.
Provided this approach is adopted well in advance of the time to exercise the option to ensure sufficient time to enable all alternatives to be properly explored, it allows the parties to revisit the whole lease relationship but still affords the tenant the comfort that it retains the opportunity to exercise the option.
This approach should be initiated well in advance of the time to exercise the option to ensure sufficient time is available enable all alternatives to be properly explored.
Before option is exercised validly parties to original lease can negotiate an entirely new lease without preserving the option right / This approach means:
a.the option is not exercised and the tenant forgoes the certainty of those rights; and
b.theentire lease is thrown open to renegotiation.
This approach means that if agreement on a fresh lease is not reached and the option is not exercised. The tenant forgoes the option right and has no opportunity for future tenure in the absence of a fresh lease being agreed.
Consideration is also needed regarding the merits of throwing open the entire lease arrangement to negotiations.
Provided this approach is adopted well in advance of the time to exercise the option to ensure sufficient time to enable all alternatives to be properly explored, it allows the parties to revisit the whole lease relationship and the tenant may be prepared to accept the risks associated with losing the option right

Attachment A

Lease Option Notification
This optional form can be used to notify DCCEE of an agency’s intention to exercise a lease option.
Activities prior to exercising a lease option
1 / NABERS tenancy rating / Stars
2 / NABERS base building rating (see also item 3) / Stars / (Where the agency is a majority tenant or has a net lease)
3 / Has the building owner disclosed the relevant NABERS rating/ BEEC certificate[2] under Commercial Building Disclosure (CBD) requirements?
For more details see / Yes (please indicate NABERS rating below)
_____ Stars NABERS Energy for whole/ base building
No - Exception/ exemption under CBD Not applicable
4 / Energy Efficiency incentives offered / negotiated by agency / (Please specify)
5 / Market testing undertaken prior to exercising lease option / Approach to open market
Approach to selected market
Advice from Commercial Property agent
Advice from Tenant advocate
Other – please list
6 / Further information / Please attach any further information
Agency Name:
Project Manager: (name and contact details)
Building Address:
Agency’s Lease Area: / m2 / % of TotalBuilding Area: / %
LeaseOption Term and date of commencement of option (also indicateany further options):
Please note that ultimately decisions to exercise a lease option or pursue alternatives need to be made by individual agencies.
When completed pleasesupply to DCCEE. Email:

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[1]The comments regarding options in this document are of a general nature only and do not constitute legal advice. Agencies should make their own inquiries in relation to the nature of the legal arrangements applying in each situation.

[2]The building owner may be required to disclose base or whole building NABERS rating under CBD legislation.