Options and renewals for retail leases
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A retail premises lease includes terms for a specific period of occupancy and may include an option to renew. This is something the landlord and tenant can negotiate before entering into a lease.
The landlord’s obligation to renew a lease
The landlord must renew a lease if the lease contains an option to renew and the tenant has exercised this option (i.e. the tenant has advised the landlord in writing that the tenant would like to proceed with the option and renew the lease).
Option to renew: notices and timing
When the lease contains an option for the tenant to renew the lease for a further term, the Retail Leases Act 2003 (the Act) specifies that:
- the landlord must notify the tenant in writing, no later than three months before the date that the option is no longer valid, of:
- the date by which the option to renew the lease can be exercised
- the rent payable for the first 12 months of the renewed lease
- the availability of an early rent review
- the availability of a cooling off period
- any changes to the most recent disclosure statement provided to the tenant other than any changes in relation to rent
- the date by which the option can be exercised will be specified in the lease.
If the landlord doesn’t give the notice or notify the tenant of all of the above information, the date after which the option is no longer valid is extended by three months, starting from the date the landlord gives the notice to the tenant.
Where the extended date is after the expiry date in the lease, the lease continues until that date on the same terms and conditions as before the expiry date.
If the tenant doesn’t want the lease to be extended beyond the expiry date, the tenant can give the landlord written notice terminating the lease, providing the lease is not terminated earlier than the date the lease expires.
When the option to renew the lease is exercised, the new term will start on the date the previous lease expires, regardless of any extension.
Early rent review
Requesting an early rent review
If a retail premises lease provides for a rent review to be made on the basis of the current market rent of the premises, the tenant can ask the landlord for an early rent review. If the tenant doesn’t request an early rent review, they must notify the landlord in writing as to whether the tenant exercises their option to renew the lease on or before the last date that the option to renew can be exercised.
The tenant can request an early rent review by giving the landlord written notice of the request within 28 days after the landlord gives the option notice. If the landlord and tenant can’t agree on the rent or the appointment of a specialist retail valuer to determine the rent for them, either the landlord or the tenant can ask the VSBC to appoint a specialist retail valuer by submitting an application.
The impact of the rent determination date on the option and lease end dates
If a specialist retail valuer is appointed to determine the current market rent but the tenant isn’t notified of the rent determination at least 14 days before the last day they can exercise their option to renew the lease, the option to renew date is extended to 14 days after the date the tenant is notified of the rent determination.
If the option date is extended to a date (‘the extended date’) that is after the lease end date:
- where the tenant exercises their option, the lease is extended to the extended date
- where the tenant does not exercise their option, the lease is extended to a date that is three months after the extended date.
Extensions must be on the same terms and conditions of the lease, unless the landlord and tenant otherwise agree.
Scenario: impact of rent determination where a lease isn’t renewed
The tenant, an owner of a cake decorating business in Melbourne’s north, is under a lease that has an end date of 31 December 2021. The latest date that the tenant can exercise an option – that is accept their right to a further lease term under the lease – is 30 September 2021.
The landlord gives the tenant notice in writing of their right to take up a further lease term on 30 June 2021. On 27 July 2021, the tenant responds with a request for an early rent review.
These actions are in line with the Act, which states that a landlord must give their tenant notice of the latest date that they can exercise their option at least three months before this date. The tenant then has 28 days to decide whether to ask for an early rent review.
The landlord and tenant agree to appoint a specialist retail valuer to determine the rent for the next lease term. Because of delays, the valuer doesn’t give them the rent determination until 31 January 2022.
As a result, the last date that the tenant can exercise their option becomes 14 days after they were notified of the rent determination, meaning the option date becomes 14 February 2022. The tenant decides against exercising their option. The lease end date is then extended to become three months after 14 February 2022, with the lease ending on 14 May 2022.
Rent payable during an extended lease term
If the rent determination under an early rent review is less than the rent payable under the lease during an extended term, the rent payable during the extended term is to be equal to the rent determination.
Cooling off period
If a tenant has exercised their option to renew a retail premises lease and hasn’t requested an early rent review, the tenant has 14 days to give the landlord a written cooling off notice indicating that they no longer want to exercise their option to renew the lease.
If the tenant gives the landlord a cooling off notice, the term of the lease is extended by 14 days and the lease is taken as not having been renewed. The tenant can’t then change their mind and exercise their option to renew the lease.
No option to renew: notices and timing
When the lease doesn’t contain any option to renew the lease for a further term, the landlord must give written notice to the tenant, setting out the landlord’s intentions for renewal. The notice is to either:
- offer the tenant a renewal of the lease (on the terms in the notice)
- inform the tenant that the landlord does not plan to offer the tenant a renewal of the lease.
The landlord must provide the notice at least six months but no more than 12 months before the expiry date of the lease.
If the landlord doesn’t give the notice within this time, the lease is extended on the same terms and conditions by six months after the date the landlord gives the notice to the tenant.
- If a lease expires on 31 December 2019, the landlord must give the notice any time between 31 December 2018 and 30 June 2019.
- If the landlord fails to give the notice between these dates and eventually gives the notice to the tenant on 30 September 2019, the lease is extended by six months from this date.
- This means the lease will expire on 31 March 2020, on the same terms and conditions as applied immediately before the expiry date.
If the landlord doesn’t provide the notice within the notice period and the tenant doesn’t want the lease to be extended beyond the expiry date, the tenant can give the landlord written notice to terminate the lease. The date of lease termination must not be any earlier than the expiry date of the original lease.
For more information, you can speak with a member of our team by calling 1800 878 964 or emailing us.