It is important for tenants and landlords equally to be aware of how their commercial lease is renewed (or extended) and what their rights are under the lease and the Retail Leases Act 1994 (NSW) (“Act”).
Subject to the terms of the lease and what terms have been negotiated with the landlord, commercial leases will generally allow the tenant the right to renew the lease for a further term as agreed between the parties.
Landlords do not have to offer a renewal option when the relevant terms of exercising an option are not outlined in the lease. However, in light of the outbreak of Covid-19 pandemic, it is now more likely that both landlords and tenants look into a long-term commercial lease.
What is the process of renewal?
A retail lease must include a nominated period of time that the tenant will rent the retail property.
Some retail leases may also have an option to renew or extend the lease for a further term. There could be more than one further term.
The option will allow the tenant to demand another fixed term of the lease on the same terms as agreed in the existing lease. The renewed lease will have a new rent and period of extension depending on the agreement between the parties.
If the retail lease contains an option, the agreement must be negotiated between the landlord and the tenant prior to entering the lease.
Hence if a lease agreement does not contain a right of renewal, the landlord and tenant are not bound to renew the lease except if negotiated otherwise or where allowed under the Act.
If a tenant wishes to exercise the option, the tenant must notify the landlord in writing prior to the end of the option period as stated in the lease.
The landlord is not obliged to notify the tenant about the deadline to exercise the option. However, the landlord cannot stop the tenant from exercising the option if the option is already included in the lease.
How is the option exercised?
The commercial lease outlines the term related to how and when the option to renew is exercised.
The tenant is entitled to request a new lease, on the terms originally agreed between the landlord and the tenant.
However it should be noted that the tenant must have conformed with all the obligations under the term of the lease.
The Tenant must also send a written notice to the Landlord in relation to the exercise of the option in accordance with the terms of the requirement of a notice noted in the lease. The written notice should generally include the details of the landlord, the tenant, the premises and the lease.
The timing is crucial. It is important that the tenant exercise the option prior to the deadline nominated in the lease for exercising option. Delay in exercising the option may result in a requirement for negotiating a new lease.
Upon receipt of the tenant’s notice to exercise the option, the landlord will then prepare a formal extension of lease to be signed by both tenant and landlord.
This formal document is important and it should be drafted to outline all the necessary further terms required.
The new rent will generally be calculated in accordance to the current market rental value and as agreed by the parties. An independent valuation can also be prepared in absence of an agreement.
The terms of the renewal of lease can always be negotiated by experienced lawyers for tenants and landlords.
Consequences of not exercising an option of renewal?
Subject to the terms set out in a lease there could be potentially damaging consequences if the tenant refuses to exercise the option such as:
- If a tenant continues to occupy the premises after the end of the lease term without notifying the landlord of exercising the option of renewal in accordance to the terms of the lease, the tenant will be on a periodic (for example month to month) lease most likely under the same terms as the expired lease.
- However, the landlord will be entitled to increase the rent or alternatively either party may terminate the lease following a one-month notice.
- The landlord may seek vacant possession following a notice to vacate the premises which usually only requires a 30-day notice.
- The landlord may agree to a new lease however negotiate new terms that may not be favourable to the tenant.
What happens if the option is not exercised within the time limit?
If the tenant fails to comply with the deadline for exercising the option, the tenant may still be able to negotiate with the landlord as soon as possible seeking a new lease on the basis of same or similar terms of the old lease.
Often it is also beneficial for the landlord to allow the tenant to exercise the option out of time to avoid further costs and the uncertainty of finding a new tenant to rent the premises.
Conclusion
An option for an extension of the lease is useful when tenants are uncertain how long they want to continue in the premises after the first lease period. If a tenant is considering staying, it would be beneficial to negotiate this with the landlord before signing the lease. This will allow the tenant to lock in again on the same terms and to have the security of continuing business in the same premises.
Similarly, the Landlord may also be more flexible with accepting the renewal of the lease or negotiate more favourable terms to avoid the costs and hassle of finding new tenants.
Whether you are a tenant seeking to negotiate with the landlord and exercise an option of renewal of lease or whether you are a landlord who wish to consider the benefits and draft a renewal of lease, we can assist you by providing our legal services.
If you require assistance with reviewing the lease, preparing notice of renewal to the landlord or drafting a renewal of lease as a landlord of commercial premises, feel free to contact our office to speak with one of our friendly solicitors today. Call our office on 02 9251 3611 or email us at enquiries@pavuklegal.com.
