Exercising an option to renew a retail lease in Victoria.

The Victorian Retail Leases Act 2003 (RLA) is the legal framework which regulates the leasing of retail premises in Victoria. “Retail premises” means premises used wholly or predominantly for the sale or hire of goods by “retail”, or the “retail” sale of services.  There are, however, certain premises which are exempt from being considered retail premises.

“Retail” means the sale of goods, or the provision of services to the public or end user, as opposed to a wholesaler.

The RLA seeks to provide tenants with a level of security of tenure, which is particularly important in the retail industry, where businesses may take time to establish and build a customer base.

Sections 28, 28A and 28B of the RLA deal with the process of tenant’s exercising an option to renew a retail lease, in circumstances where a tenant has an option in its lease.

Understanding the procedure and timeframes for exercising an option under a retail lease is essential for both landlords and tenants.

Exercising an Option to Renew a Lease under Section 28

Section 28 of the RLA applies if a retail premises lease contains an option to renew the lease for a further term.

The process for exercising an option to renew a lease under Section 28 of the RLA is relatively straightforward but key elements are often missed.

Firstly, the landlord must give written notice to the tenant that an option to renew the lease may be exercised by the tenant. This notice must be given to the tenant at least 3 months before the last date on which the tenant can exercise the option.  The notice must set out the following information:

• the date by which the option to renew the lease may be exercised by the tenant; and
• the rent payable for the first 12 months under any renewed term of the lease; and
• the availability of an early rent review under section 28A; and
• the availability of a cooling off period under section 28B; and
• any changes to the most recent disclosure statement provided to the tenant, other than any changes in relation to rent.

The consequences of landlords and commercial leasing agents failing to provide written notice to the tenant as detailed above is as follows:

1. the last date by which the tenant can exercise the option is option automatically extended in the lease to the date which is 3 months after the date on which the landlord actually provided the tenant with written notice; and
2. if that date is after the date on which the term of the lease ends, the lease continues until that date on the same terms and conditions; and
3. the tenant, whether or not the landlord has by then notified the tenant as required, may give written notice to the landlord terminating the lease:
   1. on or after the date on which the term of the lease ends; and
   2. before the date determined under paragraph B above.

A Tenant may either:

• exercise its option by providing the landlord with written notice to that effect; or
• postpone its exercise of option by requesting an early rent review and providing with written notice electing an early rent review.

If a tenant exercises its option without requesting an early rent review, a new legally binding lease is deemed to come into effect between the landlord and the tenant notwithstanding that a new lease or a deed of renewal of lease has not yet been signed by the landlord and tenant.  Subject to a rent adjustment, the renewed lease is usually on the same terms and conditions as the expired lease, unless the landlord and tenant agree otherwise.

Early Rent Reviews – Section 28A of the RLA

Within 28 days of the landlord providing the tenant with a written notice under section 28 of RLA advising it of the last date on which it can exercise its option and that it may request an early rent review, the tenant may request an early rent review by providing the landlord with written notice to that effect.

An early rent review involves the determination of the market rent payable for the premises on the commencement date of the new lease term.  This can either be negotiated and agreed between the landlord and tenant, or it can be determined by an independent specialist valuer who is usually appointed by the Victorian Small Business Commission or the Real Estate Institute of Victoria depending on what the lease specifies.

If a tenant elects an early rent review, the last date on which the tenant can exercise its option is extended to the date which is 14 days after the date on which the tenant is notified of the new market rent by the independent specialist valuer.  In this way, the tenant can assess whether the new rent is affordable, particularly in markets like today where inflation and rents are increasing at more than usual rates.

Cooling Off – Section 28B

If a tenant exercises its option to renew its lease but has not requested an early rent review, the tenant may, during the cooling off period, give the landlord a written notice stating that the tenant no longer wishes to exercise its option to renew the lease.

The “cooling off period” is 14 days after the day on which the tenant exercises its option to renew the lease.

Get an understanding of your rights as a retail tenant

Navigating the law in this area can be hard for tenants as it is nuanced. If you are seeking to exercise an option and your landlord is trying to circumvent the law or given you notice to vacate it is important to seek advice on your legal position and options.

The law is quite specific when it comes to retail leases and tenants are well protected.

Other issues associated with exercising an option is the increase of rent and market rent reviews. Under the RLA there are well defined steps and timeframes that apply. We can also help explain the process of, and resolve disputes about, rent increases.

Legal Advice for tenants and landlords

It is important for both landlords and tenants to understand their rights and obligations under the RLA to ensure their respective best outcomes.

If you need assistance in exercising your options to renew a lease or any associated lease dispute, we have extensive experience and are able to assist. Our leasing lawyers are well versed in the commercial issues and the RLA and have helped negotiate positive outcomes for our clients, whether they are landlords or tenants.

We have expertise in helping clients from shopping centre owners to small retailers. Our advice is of the highest quality and commercially sound.

Call on of our leasing team today to discuss how we can assist with your leasing matter.

About The Author - Chris Karatselios

Chris is an Accredited Commercial Law Specialist and a Partner at PCL Lawyers. Chris has approximately 30 years’ experience in commercial and property law. Chris has extensive expertise in complex...