How do you exercise an option to extend a term?

How do you exercise an option to extend the term of an agreement?

It’s actually not too hard. Hi everyone Simon here from The Contract Company. Contracts that’s what we do, all day, every day and sometimes overnight, lucky us.

Anyway, so you’ve got a contract. In the contract there is a set term, say one, two, or three years. The contract also has an option period where you can extend the contract for that further term. Whatever it is one year, two years, six months doesn’t matter.

How to Extend the Term of an Agreement

How do you exercise the option? Right, number one, have a look at the wording of the clause.

A lot of people get this wrong because the clause will often say something like, Party A is able to exercise the option if Party A sends a letter or an email or some sort of written notice to Party B saying that you Party A is exercising this option. So that’s pretty simple Party A.

All I need to do is follow what the clause says or write an email to Party B. [The email] saying under clause blah blah of the contract we have the ability to extend the term for a further period of one year. By this email, we’re giving you notice that we’re exercising that option. The new or the expiry date of the contract will now be, you know, at some point in the future.

What some people do though is they actually write a letter that requires the other party to consent. Now what that does is that the one party is asking the other party to consent. Then what do you do if they don’t consent? Interesting.

Then you’re in a bit of a pickle because the contract said that you Party A can exercise the option you know actually meaning without their consent just by sending them a letter.

Contract Variation

And so if you send them a letter and ask them to sign. What you’re doing is really varying the contract to say look even though the contract says that we can exercise the option by just sending you a notice we actually want to send you notice but do you want the contract to be extended? Do you want to allow us to exercise the option? Not a good position to be in. So you want to make sure that you just follow what the contract says.

Now sometimes the option clause will say the other party needs the consent. But not most of the contracts I’ve seen and I suppose I’ve seen a lot of Commonwealth contracts.

And when you’re acting for the Commonwealth. The Commonwealth just says if we exercise the option then we’ll just send you a notification.

Can an Email Suffice?

But to be honest they don’t always get it right. So just look at the wording of the contract and do what the clause says and don’t overthink it. If it basically says if you need to issue a notice to Party B in writing then guess what an email will suffice.

Now, sometimes there’ll be a notice provision in the contract that says you know formal notices between the parties must be said and by facts. If they’re written you know I was going to say by a certain law firm. But I’m not going to say that if they were written in, you know, 1987.

But these days you know come on let’s get real – an email should suffice. In fact when you’re doing something like exercising the option because that’s an important thing you always want to put it in writing.

The question is do you need to attach a formal letter to an email? Or a formal letter hand-delivered well from what I’ve seen you know 99% of the time?

No, it can just be an email. Right, that’s how you exercise an option. There’s so many variations to this so I’ve obviously been general but I hope that helps.

If you have any questions feel free to get in touch simon@contractcompany.com.au or 1-800-355-455 thanks very much

 

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