Are you renting Retail premises ? Options for Renewal – Opportunity for tenant to determine current market rent early (Retail Leases Act 1994 – Section 32)

One of the most important issues for a tenant to consider before it enters into a lease is the rent payable for the term of the lease.  What happens to the rent  if you have an option to renew the lease?

Usually, when the time comes for the tenant to renew the lease by exercising an option, they fly blind on the issue of future rent.  Unless the rent for the option term is pre-agreed, or tied to an agreed formula, the rent on renewal is often based on a market rent review,

Once an option to renew is exercised, the tenant is contractually obliged to continue with the lease. If an agreement cannot be reached about the starting rent for the new term, most leases provide for a market determination by a qualified valuer. This process is often lengthy and costly and can produce unwanted outcomes.

As a consequence in a tough economy, the determination of current market rent can become a major issue for the tenant to consider when exercising its option to renew.  Most tenants enter into 2 types of leases:

Commercial Leases are rental agreements for commercial premises, excluding those that fall under the provisions of the Retail Leases Act. In a commercial lease, rent is either agreed at the time the option is exercised or, failing agreement, the landlord will obtain a determination of the current market rent after the option is exercised.  Unfortunately for tenants, unless pre-negotiated, most commercial leases do not allow for rental determinations before the option is exercised.

Retail Leases are leases for premises which carry out some form of retail activity. The Retail Leases Act governs the terms and conditions of a retail lease – whether they are in writing or not – and most importantly, contains a provision which allows a tenant to apply to the landlord for a rental determination up to six (6) months before the time to exercise the option to renew.  

Section 32 of the Retail Leases Act not only allows the tenant to request a rental determination, in the event such determination is not made before the option date, the Act extends the option period until the determination is duly notified to the tenant.

Where an early determination is made the tenant must exercise its option within 21days of the determination instead of the time frame noted in the lease. Also, the time frame to request an early market determination is reduced to 3 months for a lease term of 12 months or less.

Section 32 provides certainty to a tenant who wishes to exercise an option to renew, but has concerns about its ability to meet the new rent payments if the market review is significantly higher than it budgeted for.  If an agreement cannot be reached about future rent, the tenant can avoid the risk of exercising its option to renew and look for alternate premises.

This opportunity for the tenant to have the rent determined early is an important differentiation between a retail lease and a commercial lease and a useful tool for all retail tenants.

Disclaimer

This article contains general information only and is not provided as advice.  If you require specific information on s.32 of the Retail Leases Act or any other questions you may have regarding your own lease arrangements please contact us.

Maged Jebeile maged.jebeile@surrypartners.com.au

Ashwani Naidu ashwani.naidu@surrypartners.com.au