Option to Renew a Commercial Lease inNSW

Exercising an option to renew: Guidance for commercial and retail leases

Commercial and Retail Leasing

Exercising an Option to Renew: Guidance for Commercial and Retail Tenants
in NSW

At Fioro Legal, we act for business owners, landlords and property investors in Beecroft, Cheltenham, Epping, Castle Hill and the wider Northern, Hills and North Shore districts of Sydney, and one issue that comes up repeatedly is what a tenant needs to do to secure a further term under a commercial or retail lease via an option to renew.

What an option to renew actually is

An option to renew is a right granted to a tenant when the lease is first entered into, allowing the tenant to require the landlord to grant a further term once the current term expires. It is the tenant’s right rather than the landlord’s, so where it is validly exercised, the landlord must grant the new lease. This new lease usually runs on the same terms as the existing lease, although the rent is reset by whatever method the lease specifies. This may be determined by market review, a fixed increase, or a CPI adjustment, and the new term and rent runs from a fresh start date to a fresh finish date. An option of this kind is different from a holding over arrangement, where the tenant stays on after expiry as a periodic tenant and different again from negotiating a fresh lease when the term ends, because the option gives the tenant a defined right that the landlord cannot withdraw, provided it is exercised correctly and within the specified period. It is also different to negotiating a further term where the lease does not otherwise provide for such extension.

Commercial leases and retail leases are not treated the same way

Commercial and retail leases are governed by different rules. A general commercial lease is governed by the terms the parties agreed and by the general law, together with the Conveyancing Act 1919 (NSW), whereas a retail lease is governed by all of that and, on top of it, by the Retail Leases Act 1994 (NSW). The Retail Leases Act 1994 (NSW)applies to leases of premises used for the kinds of retail business listed in the Act, generally where the term is between six months and twenty five years, and it imposes mandatory protections that the parties cannot contract out of. We can help identify what type of lease you have if you are unsure.

Strict deadlines and the manner of exercise

In both commercial and retail leases, the exercise of an option is strict and unless agreed, is only exercisable up to a particular date. Therefore, a notice given even a day late will generally be ineffective and the right will be lost, leaving the tenant to negotiate a fresh lease from a weaker position or to vacate upon the end of the current term.

The way the option is exercised is also important, because the lease will usually require the notice to be in writing, served on a particular person or at a particular address, and delivered by a particular method. Where such requirements are specified, a notice which is sent to the wrong address, or sent by email when the lease called for registered post, may therefore be ineffective even though it arrived and even though the landlord understood what the tenant intended.

The exercise must also be clear and unconditional, so a tenant who writes only to say that it is considering renewal, or who attaches conditions of their own, will often not have effectively exercised the option. For these reasons, it is important to read the option clause closely, note the key dates and give notice in the exact form the lease requires, so that the exercise of option is effective.

The breach condition and the protection tenants often overlook

Many option clauses include a condition that the tenant must not be in breach of the lease, whether at the time the option is exercised or across the term, before the option can be relied on. Notwithstanding this, the position in New South Wales is more favourable to tenants than the wording of such a clause suggests, because under section 133E of the Conveyancing Act 1919 (NSW), a landlord cannot treat a breach as defeating the option unless it first serves a prescribed notice on the tenant specifying the breach and stating that the landlord proposes to rely on it to deny the further term. However, it is important to seek legal advice before exercising your option to renew so that matters such as any prior or current breaches can be considered.

Where the renewal rent is set by the market

Where the renewal rent is to be set by reference to the current market rate, a tenant may have to decide whether to commit to a further term before knowing what the rent will be.

To avoid this:

Commercial lease tenants should consider engaging with their landlord well before the exercise of option window to see if an early determination of market rent will be provided. This may assist in providing greater certainty before any option to renew is exercised;
the Retail Leases Act 1994 (NSW) clearly allows a retail lease tenant to ask for the market rent to be determined early, so the rent is known before the tenant has to decide. For most retail leases, the request can be made from around six months and up to three months before the last day for exercising the option, with shorter periods for leases of twelve months or less, and once the rent has been determined the tenant has a further period, generally twenty one days, in which to exercise. However, you should always consult with a solicitor to determine the dates applicable to your lease.

If the parties cannot agree on market rent, a specialist valuer will generally be appointed under the Act or the terms of the lease to determine the rent.

The lesson here is that if a tenant does not consider these issues well in advance of the relevant dates specified in the lease, they may end up having to exercise their option to renew without any indication of what the new market rent will be.

Leases with no option

Where a commercial lease has no option, or where the option has already been exercised and no further options are available, a commercial tenant has no right to a further term and must negotiate a new lease or vacate at the end of the term.

For a retail lease, the Retail Leases Act 1994 (NSW) requires the landlord to inform the tenant in writing, between twelve and six months before the term ends, whether it will offer a renewal and on what terms, and if no such notice is given, the tenant can have the term extended until six months after it is given. This gives a sitting retail tenant time and information rather than an abrupt expiry. However, this extra time does not give the tenant a right to renew where no option exists. If no new lease has been agreed by the time the window closes, the tenant must still vacate.

Disclosure on renewal for retail leases

When a retail lease is renewed, the landlord must generally give the tenant an updated disclosure statement at least seven days before the renewed lease is entered into. The statement sets out the outgoings, the rent and the rent review method, and the other terms of the renewed lease. This matters because a tenant is not liable to pay any outgoings that were not disclosed, so a renewal completed without proper disclosure can leave the landlord unable to recover them. If no statement is given, or it is incomplete or materially misleading, the tenant may in some cases terminate the lease within the first six months and recover the costs it has incurred. It is therefore worth confirming that you have received or provided a disclosure statement and reviewing it carefully so that you understand your obligations.

Frequently Asked Questions

What happens if I miss the deadline to exercise my option?
Does my landlord have to remind me that the option is coming up?

Where the lease contains an option, the landlord is generally under no obligation to remind the tenant or to warn that the deadline is approaching, so the responsibility to act within the window rests with the tenant. Don’t leave this to the last minute! Contact us early to assess your options in advance of any deadlines.
Can my landlord refuse the renewal because I have been late with the rent?

Not necessarily, because if the option clause requires the tenant to be free of breach, the landlord must still serve a prescribed notice under section 133E of the Conveyancing Act 1919 (NSW) and follow the process it sets out. Other options, such as relief against forfeiture from a Court may also be an option here. Early advice from a property lawyer is critical in these instances.
The new rent is to be set at market and I do not yet know the figure. Do I have to commit before I find out?

If your lease is a retail lease and the renewal rent is tied to the market, you can ask for the market rent to be determined early, within the timeframes set by the Retail Leases Act 1994 (NSW), so that the figure is known before you decide. Once it is determined, you are usually given a further short period in which to exercise. Commercial lease tenants should also reach out to their landlord to see if any indication will be provided as to future market rent.
How do I know whether my lease is a retail lease or a commercial lease?

That depends on how the premises are used, the nature of the business, the length of the. term, and a number of other matters under the Retail Leases Act 1994 (NSW), and because the label on the document is not decisive, it is worth having the lease reviewed if there is any doubt.
Can I change my mind after exercising an option to renew?

Generally, no. Once an option to renew has been validly exercised, it creates a binding agreement for the further term. A tenant should therefore carefully consider matters such as future business needs, rental affordability and the likely market rent before exercising the option. If you are uncertain, obtain legal advice before giving notice.
What happens if my landlord ignores my notice exercising the option?

If you have validly exercised your option in accordance with the lease, the landlord cannot simply ignore it or refuse to grant the further term. Depending on the circumstances, legal remedies may be available to compel compliance or recover any loss suffered. Early legal advice can often resolve the issue before it escalates.
Can I negotiate new lease terms when exercising an option?

Yes, but care should be taken. An option to renew is generally exercised by giving an unconditional notice in the form required by the lease. Attempting to negotiate different terms at the same time may create uncertainty about whether the option has been properly exercised. In many cases, it is preferable to exercise the option first and then negotiate any agreed variations separately.
Can my landlord refuse to renew my commercial lease?

If you have a valid option to renew and exercise it correctly in accordance with the lease, your landlord will generally be required to grant the further term. If there is no option, or it has not been exercised correctly, the landlord may not be obliged to offer a new lease. Whether a landlord can refuse renewal ultimately depends on the terms of the lease, the circumstances of the tenancy and the applicable legislation.
When should I speak to a solicitor about exercising my option?

Ideally, several months before your option window opens. This allows sufficient time to review the lease, identify any issues that could affect your entitlement to renew, consider market rent provisions and ensure your notice is served correctly and on time. Waiting until the deadline approaches can significantly limit your options, lead to rushed decisions and increase the risk of costly mistakes.
What if my lease doesn't contain an option to renew?

If your lease does not contain an option to renew, you generally have no automatic right to a further term once the lease expires. However, this does not necessarily mean your tenancy must end. You may still be able to negotiate a new lease with your landlord. Retail tenants may also have additional protections under the Retail Leases Act 1994 (NSW), depending on the circumstances.
Should I have my lease reviewed before exercising the option?

Yes. Having your lease reviewed before exercising an option can help confirm the relevant deadlines, identify any conditions that may affect your entitlement to renew, explain how the new rent will be determined and ensure your notice complies with the lease requirements. Obtaining advice early can help avoid costly mistakes and preserve your rights.
Can I exercise my option by email?

It depends on the terms of your lease. Some leases permit notices to be served electronically, while others require notices to be delivered by a particular method, such as registered post or personal delivery. Sending your notice by the wrong method may render the exercise of the option ineffective, even if your landlord actually receives it. Before exercising your option, ensure you comply strictly with the notice provisions in your lease.

This article is general in nature and does not constitute legal advice. The way the legislation will apply to any particular lease varies based on the terms of that lease and the circumstances of the parties. Every situation should be considered on its own facts.

If you would like your lease reviewed or want to discuss exercising or resisting an option to renew, Fioro Legal is well positioned to assist. Contact us on 0481 848 450 or get in touch at info@fiorolegal.com.au.

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Email: info@fiorolegal.com.au

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