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Commercial Leases - Options for Further Terms

There are two different types of commercial leases – retail and non-retail or commercial leases. Both may contain options for further terms to extend the lease.

An option is firstly negotiated at the commencement of a lease. The number of options contained in a lease, or the lack thereof, can impact the value of the landlord’s commercial property or a tenant’s business. It can also impact the stability and viability of the tenant’s business.

Exercising an option will most likely trigger a rent review as outlined in the lease. It can raise other issues as well. The landlord is obliged to renew the lease if an option is included in the lease and properly exercised by the tenant. Many commercial lease disputes arise because of the failure of the tenant to properly exercise its option, or the ensuing market rent review associated with the renewal of the lease.

Tenants and landlords may not have a full understanding of their rights and obligations in relation to exercising their option or market rent reviews. Commercial lease lawyers commonly find that if a landlord wants to terminate the lease, they may look for any opportunity not to renew the lease.

Option’s must be exercised correctly by the tenant in order for that exercise of option to be valid. Therefore, it’s very important to understand the exercise of option process.

A brief outline of some common legal issues to watch for are:

  • Meeting the right time frame within which to exercise the option – even if a tenant misses the time frame they may still have right to renew the lease.
  • Service of Notice – Like most legal notices they must be served correctly.
  • Lease Breaches – If the tenant is in breach of the lease the landlord may have the right to refuse the tenant’s notice to exercise their option under the lease.
  • Failure to follow the process for Retail Leases – Retail leases are more regulated and have specific processes that should be followed.

Terms of the new lease – the renewed lease must usually be on the same terms as the expired lease, less one option.

Issues such as those listed above can quickly complicate the renewal of lease pursuant to an option. If you are in doubt, then you should seek further advice about your circumstances.

If you are anticipating an option renewal or there are issues or disputes over the lease, we can provide expert legal advice.

Obtaining advice is key to helping you resolve issues and improve your success at negotiations. Our commercial lease lawyers will clarify your legal position and outline the rights and responsibilities of each party under the lease. You will be in a better position in your negotiations if you have certainty around your legal position.

As a tenant, if you decide not to exercise your option to renew, your lease will most likely lapse, subject to some exceptions, including for example, in a retail lease situation in circumstances when a landlord has not provided the formal notification of the right to renew also – even if a tenant misses the cut off the date in theory to exercise an option, it may not be too late. Legal advice is strongly advisable in such circumstances.

Exercising Options under Retail Leases

Retail leases have prescribed time frames and processes relating to exercise of options and the provision of notices in exercising them. The retail tenant often has greater protection (as a result of the Retail Leases Act 2003 (Vic)) than the non-retail commercial tenant.

If a retail lease contains an option, the following applies under the Retail Lease Act 2003:

  • 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.

The option renewal can trigger some issues such as determining what the new market rent should be and the requirement for a new lease disclosure statement. There can be further issues if the notice is not correctly served or the tenant is in breach of the lease.

Both the landlord and tenant must agree to the new market rent.

If a landlord and tenant cannot agree, either party has the right to elect for the appointment of a valuer to formally assess what the new market rent should be.

Our commercial lease lawyers can assist with rent review issues in addition to ensuring that all the relevant key issues are considered by the valuer.

There are key issues to consider when exercising lease options and our lease lawyers regularly assist clients in drafting leases and all types of lease disputes.

Please contact our lease lawyers today to see how we can assist with your lease. Complete the enquiry form or call us on 1300 907 335.

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