When negotiating a lease, you may want the agreement to include an option to renew. With options to renew, landlords generally cannot unreasonably refuse to renew a lease if the tenant has fulfilled their end of the lease agreement.
What is a lease renewal
From the term itself, a lease renewal happens when an option to renew the lease is exercised. The renewal process should be less complicated if all parties are still happy with the existing lease and don’t see the need to negotiate the rent payable (market review), the lease terms and conditions, etc.
The landlord’s obligation to renew the lease
If the tenant decides to exercise the option to renew included on the lease (i.e. through a formal written notice), the landlord generally has to renew the lease so long as the tenant has exercised the renewal within the time frame and is not in breach or have consistently breached the lease prior to the exercise of the renewal. However, this will depend on your lease agreement.
How to renew a retail lease
With an option to renew
If it is a retail lease, section 27 of Retail Leases Act 2003 states that if a retail lease agreement contains an option to renew, it must include information such as how the option can be used, until when it can be used, etc. However, the tenant will not be allowed to exercise the option if:
(a) the tenant has not remedied any default under the lease even after the landlord has served them a written notice; or
(b) the tenant has persistently defaulted under the lease throughout its term and the landlord has served written notice of the defaults.
Notifying the tenant before the option to renew expires
The landlord is generally responsible for advising the tenant at least 3 months before the renewal period, but both parties should write it down so that you don’t miss the date! Under section 28 of Retail Leases Act 2020, the written notice must include:
(a) the date by which the tenant can exercise the option to renew the lease;
(b) the rent payable for the first 12 months under the renewed lease;
(c) the availability of an early rent review;
(d) the availability of a cooling-off period; and
(e) any changes to the most recent disclosure statement provided to the tenant.
Providing an updated disclosure statement to the tenant
If the tenant has:
(a) exercised or has the right to exercise an option to renew under the lease;
(b) had all the involved parties in the lease agree to renew the lease.
The landlord is required to provide a disclosure statement at least 21 days before the end of the current lease term (and no later than 14 days after entering into the agreement in the circumstances referred to in item (b)). The disclosure statement must include any changes to the previous statement given to the tenant when they entered into the lease.
Requesting an Early Rent Review
If provided by the lease, the tenant may request a rent review based on the current market value of the property. The tenant can give the landlord a written notice after the landlord gives notice about the option to renew.
The current market rent is the rent determined in a free and open market in an arm’s length transaction having regard to:
(a) the provisions of the lease;
(b) the rent that would reasonably be expected to be paid for the property if they were unoccupied;
(c) the landlord’s outgoings to the extent of the tenant’s liability to contribute; and
(d) rent concessions and other benefits offered to prospective tenants of unoccupied retail property.
If the landlord and tenant cannot agree on the amount of rent, the valuation can be determined by a specialist retail valuer appointed by the landlord and tenant or, failing agreement, by the Victorian Small Business Commission (VSBC). The landlord and tenant will equally share the costs of the valuation.
If one party does not agree to the market valuation by the valuer, the other party may seek an injunction at the Victorian Civil and Administrative Tribunal (VCAT), requiring the uncooperative party to sign the agreement.
Frequently Asked Questions About Renewal of Lease
Yes, if you negotiate the lease renewal at the point of negotiating your lease agreement.
In circumstances wherein you signed a 5x5 lease (a 5-year initial lease with a 5-year option to renew), you generally don't have the rights to negotiate the renewal terms unless there is dispute in regard to market rent as above.
The law does not specifically state how much or how little a landlord can raise rent. But generally, rent increases would depend on market rent which, in dispute, can be valued by an expert valuer.
How TNS Lawyers Can Help With Lease Renewals
Expert legal help and market knowledge can make all the difference when it comes to your leasing transactions. Whether you’re a landlord or tenant, TNS Lawyers can help you negotiate, draft, or review your lease agreements.
Give us a call on 03 9052 3214 or fill out the contact form below to schedule a consultation.
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