In this article we will be looking at retail leases and options to renew. In particular we will be focusing on how an option to renew under a retail lease should be exercised.
To begin with we need to be clear that this article is focusing on options to renew of retail leases in New South Wales, as opposed to options to renew under a general commercial lease. This distinction is important because retail leases in New South Wales are subject to particular rules under the Retail Leases Act 1994 (NSW). This means that certain statutory requirements apply to retail leases that cannot be varied or amended by the landlord or tenant.
What is a Retail Lease?
As a guide (there are exceptions) the Retail Leases Act deems a lease, to be a retail lease if:
- the premises in question are less than 1,000m²;
- the business in question sells goods or services of a type listed in Schedule 1 of Retail Leases Act (being over 160 different types of retail businesses); and
- the term of the lease is between six months and 25 years.
What is an Option to Renew?
An option to renew is (generally) a tenant’s right to require the landlord to grant the tenant a new lease when the existing lease term ends.
Sometimes an option can be a landlord’s right and sometimes a lease will have automatic renewal provisions, but most options are drafted as a tenant’s right.
An option to renew is an agreement negotiated by the landlord and tenant when entering into a lease, for the granting of a new lease (sometimes called a renewal of a lease) when the current lease term ends, usually on the same terms as the existing lease, except that the dates are adjusted to reflect the new term (new start and end dates) and the rent is usually reviewed and adjusted to a current market rent.
And if you want to get technical, an option to renew is what is known as a “call option” in that a tenant (generally) has the right to call on the landlord to grant them a new lease. This is important because a landlord cannot exercise the option and has no right to force a tenant into renewing the lease under an option.
Option Clauses Under a Lease
When it comes to an option clause in a lease, it is always important to read and consider the terms of the applicable clause. This is because option clauses are a negotiated term and can contain such terms as the landlord and tenant agree. That being said, an option clause in a lease usually requires that:
- the tenant give written notice to the landlord stating that the tenant is exercising their option to renew,
- the notice must be given during a prescribed time frame (usually no earlier than six months and no later than three months before expiry of the current term), and
- that at the time of the tenant giving the notice there can be no existing breach of the lease or any outstanding payment of rent or other monies under the lease.