Option to Renew a Commercial Lease

What an option to renew does

An option to renew gives the tenant the right to a further term at the end of the current lease. If the tenant exercises it properly, the landlord must grant the new term. If the tenant doesn’t, the right lapses.

The new term is usually on the same terms as the current lease, except for the rent, which is often reset at the start of the option, and the number of options left.

Exercising the option on time

Most leases set a window for exercising the option, for example no earlier than six months and no later than three months before the lease ends. Your notice must reach the landlord inside that window. Courts usually apply these dates strictly, so a notice that arrives a day late can cost you the option.

Check the lease for:

• the exact window and how the dates are counted
• whether the notice must be in writing, signed or in a set form
• where and how the notice must be served, and whether email is allowed
• who must sign for the tenant, especially if the tenant is a company

Keep proof of when and how you served the notice.

Conditions on the option

Most options are conditional. Common conditions are:

• no unremedied breach that the landlord has notified in writing
• no persistent breaches during the term
• rent paid up to date
• new guarantees from the guarantors for the further term

If you have an outstanding breach, fix it before you exercise and ask the landlord to confirm in writing that it’s resolved.

Exercising commits you to the whole further term, and your guarantors usually stay liable for it. Decide whether you want the term before you send the notice.

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Market rent on the option term

Many leases reset the rent to market at the start of the option term. Usually the landlord proposes a figure, the tenant can dispute it within a set time, and a valuer decides if you can’t agree.

Points to watch:

• the deadline to dispute the landlord’s figure, since missing it may bind you to that figure
• whether the rent can go down, or only up
• how the valuer is chosen and who pays
• whether the valuer must take incentives into account

Under many leases you must exercise before you know the new rent. Some tenants ask the landlord to agree the rent first. For retail shop leases, the state’s Act often controls how market rent is set.

What we do

For tenants, we check the option dates, conditions and rent terms, tell you what to do and by when, and prepare the notice for you to sign and serve.

For landlords, we check whether a tenant’s notice is valid and on time, advise whether you can rely on a breach to refuse the further term, prepare the market rent notice, and prepare the deed recording the new term.

If you are agreeing a new lease instead of renewing, we can review the lease for a tenant or draft it for a landlord. If you want to change other terms when the option is exercised, a deed of variation may suit.