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Options in Commercial and Retail Leases – What Tenants Need to Know

Options in Retail & Commercial Leases

Whether you can renew or extend your commercial leases depends on if it includes an option term. If it does and you choose to renew, the landlord must grant you a new lease for the option term, provided you comply with certain lease provisions.

QBM Leasing Lawyer Gold Coast - Commercial Leases - Retail Leases

Failing to exercise your option correctly according to your retail or commercial leases can result in losing the right to renew. The worst-case scenario is the landlord refusing to enter a new lease upon expiry, leaving you without premises.

Questions Asked About Option Terms in Retail & Commercial Leases

Given the serious consequences, we have outlined common questions tenants ask about option terms below.

How Do I Exercise My Options?

How and when you exercise your option will depend on the specific requirements of commercial leases. These are in the “Option for Renewal” clause (also sometimes referred to as a “Further Term” clause) and outline;

  1. Whether the notice exercising the option must be in writing and signed by you
  2. The timeframe in which you must provide the notice to the landlord. For example, the notice period may be at least 6 months but not more than 9 months before the expiry date of the current term of the lease
  3. Deliver the notice to the appropriate party, which could be the landlord, the landlord’s property agent, or possibly the centre manager if your premises are in a shopping centre

It’s crucial to ensure your notice strictly complies with the lease requirements regarding form and delivery, as this affects its validity. For example, if your lease states that a notice can only be served by post to the landlord’s registered office, you cannot exercise the option by emailing the landlord.

Does my Landlord have to Remind me of my Option to Renew?

If your lease is a Queensland ‘Retail Shop Lease’ and subject to the Retail Shop Leases Act 1994 (Qld), your landlord must give you written notice at least 2 months, but no more than 6 months, before the last date on which you may exercise your option to renew your lease.

However, there is no consequence or protection afforded to you under the Retail Shop Leases Act 1994 (Qld) if the landlord fails to remind you of your exercise date within the 4-month timeframe noted above.

The terms of the lease itself will determine whether the landlord must remind you if your lease is a commercial lease (i.e., not a ‘Retail Shop Lease’).

If you want to check whether your lease is a Retail Shop Lease, a useful guide is the list in the Retail Shop Lease Regulation 2016 which is available online.

I’ve Exercised my Option so what Happens Next?

Once you have exercised your option, the landlord will arrange for formal lease documentation. This usually takes the form of an amendment to lease which will vary the terms of your current including the expiry date, the rent payable from the commencement date of the option term and whether there are any remaining options. Importantly, the amendment to the lease will affirm all other terms unless it specifically varies them.

Where your lease is a ‘Retail Shop Lease’, the landlord must provide you with a current disclosure statement within 7 days of receiving your notice exercising the option unless you have provided a signed waiver notice stating that you waive the landlord’s obligation to do so (section 21E(2)-(3), Retail Shop Leases Act 1994 (Qld)). The landlord’s failure to provide a current disclosure statement will result in you having a right to terminate the lease within the first 6 months of the option term.

I’ve Exercised my Option but the Landlord won’t Renew my Lease, Why?

When your lease includes option terms, the landlord does not automatically grant them when it is time to renew the lease. Depending on the terms of the lease, your right to renew a lease is almost always subject to the following:

  1. You provide the landlord with a valid notice exercising the option; and
  2. You not being in default or breach of the lease.

For example, if you are behind in paying your rent or have not maintained the condition of the premises in accordance with the lease at the time you exercise your option, then the landlord need not grant a further lease to you.

I Missed Exercising my Option in my Lease, Can I still Exercise my Option Late?

If you miss the notice period to exercise your option, you forfeit your right to a further term. Once the notice period expires, the landlord cannot waive this requirement. This means if you exercise the option late, the landlord is not obligated to grant you a new lease after the current one expires.

However, we often find that landlords are willing to proceed with a renewal as if you had properly exercised the option. In these cases, they treat the renewal as a new lease, and all terms are subject to renegotiation.

I’ve Exercised my Option but I’ve Changed my Mind and Want to Vacate When My Lease Expires. Can I take it Back?

If you provide the landlord with notice exercising the option according to the terms of the lease, the notice will bind both you and the landlord to the further term.

However, you may withdraw your exercise of the option in certain circumstances, typically when the notice was invalid.

  1. Giving the notice outside the specified notice period in the lease.
  2. Failing to deliver the notice to the landlord in strict compliance with the lease’s service requirements.
  3. Providing the notice orally when the lease requires it to be in writing and signed by the tenant, or vice versa.
  4. Using wording in the notice that does not clearly indicate the option is exercised, such as stating an “intention to exercise,” may not be sufficient to demonstrate a clear and unequivocal exercise of the option.
  5. Having an individual give the notice on behalf of the tenant without the requisite authority or power.
  6. Requesting substantial amendments to the lease and renegotiation of terms in the notice, to the extent that it could not be considered a renewal of the lease on the same terms.
  7. If your lease is a ‘Retail Shop Lease,’ providing the landlord with a written notice within 14 days of receiving the landlord’s current disclosure statement, withdrawing your exercise of the option (section 21E(4), Retail Shop Leases Act 1994 (Qld)).

For all leasing enquiries, please contact our leasing lawyer Gold Coast Peter Muller (peterm@qbmlaw.com.au) for assistance.

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