Option to Renew Commercial Lease

by | Property & Leases

The Retail and Commercial Leases Act 1995 (“Act“) provides that a lease governed by the Act must have a minimum term of 5 years including options. The parties to the lease, and particularly the tenant, may not want to commit to a 5 year term so an option to renew the lease will provide the tenant with some flexibility without a lengthy commitment.  The Act provides the Court with the power to extend the term of the lease if it is less than 5 years.

The option to renew clause in the lease will specify a time-frame and conditions for exercise of that option by the tenant.

Below are some useful tips for tenants regarding the option to renew.

1. Don’t forget the date!

The period in which the option to renew can be exercised will be quite specific. For example, the clause in the lease will state that the option to renew the lease must be exercised no more than 9 months and no less than 6 months before the expiration of the initial term of the lease.  Normally ‘time is of the essence’ and the Courts have consistently interpreted this strictly!

It is easy to forget a range of dates that is 2 or 3 years in the future. The tenant should not rely on his or her memory. If the tenant has software that flags important dates then it should be utilised. The consequences of forgetting the date can be dire.

2. Evaluate the value of the lease

A well-organised tenant will make plans for the future long before the time for exercising the option arrives. He or she will be able to assess whether or not the current premises are suitable and, if not, find out whether there are other premises available for lease in the local area which may be cheaper and/or more attractive for the tenant’s business. If there are better alternatives available the tenant can then weigh up the pros and cons of moving before making a final decision. The disadvantages of moving are obvious and include:

  • the costs involved in moving the business;
  • the cost and inconvenience of changing stationery and signage;
  • the time and cost in advising existing customers and suppliers; and
  • the risk that business will decrease (loss of goodwill associated with the location).

The advantages of moving may include:

  • cheaper rent and outgoings;
  • better premises for staff and customers; and
  • potential for increased business.

Either way the tenant will have gained some knowledge of the local rental market and could use that knowledge as leverage for negotiations with the landlord.

3. Ensure there are no breaches

Generally speaking, the option to renew clause will state that the tenant cannot exercise the option if there is an existing breach or where there have been persistent breaches of the lease. The most common breach is late payment of rent. If the tenant has consistently paid the rent late the landlord is not obliged to renew the lease. This means that the tenant will have to find alternative premises, often at short notice.

It is prudent to maintain good relations with the landlord and comply with all the obligations under the lease. The landlord will appreciate a good tenant and the tenant will be able to conduct negotiations with the landlord from a strong position.

4. Make sure the communication is written and unequivocal

Unless the lease stipulates the formal requirements for the notice there is no standard format but the notice should:

  • Refer to the address of the premises;
  • Note the tenant’s full name;
  • Be signed by the tenant;
  • Be dated; and
  • Clearly state that the option to renew the lease is being exercised.

The notice should then be sent to the landlord’s address as specified in the lease.

The exercise of the option should be unequivocal. It should not be dependent on some other event or term. As an example, a notice that states that the tenant will exercise the option if the landlord fixes the leaking gutters on the roof will not be a valid exercise of the option.

It is also critical to note that an option to renew does not automatically roll over. There must be an active exercise of the option in accordance with the terms of the lease.

5. Contact the landlord even if you are out of time

If the tenant has not exercised the option by the due date it is still worth preparing and sending the notice to the landlord. The landlord is under no obligation to honour the notice but may treat the tenant favourably, especially if the tenant has been a good tenant. From the landlord’s point of view the failure to comply with the strict obligations of the lease can be overlooked if the tenant has proven to be a reliable and trustworthy tenant. On the downside the failure to comply with the notice provisions opens the door for the landlord to negotiate a new lease with the tenant on terms unfavourable to the tenant.

For further information please contact Danny Beger on 8362 6400 or email Danny BegerJoin our mailing list to receive updates and advice on current issues.

  • Danny Beger

    About the author: Danny Beger

    Danny advises on business transactions, trading structures, commercial documentation and estate planning issues. He has a wealth of business, commercial and property transactional experience.

    With interests in business and different types of property, Danny understands the issues that confront his clients, their businesses and investments.

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