Renewing or extending a commercial lease
It is important for a tenant to be aware of how their commercial lease is renewed (or extended) and what their rights are under the lease and the Retail and Commercial Leases Act 1995. Depending on the terms of the lease and what terms have been negotiated with the landlord, commercial leases will usually contain a right for a tenant to renew their lease for a further term.
What is a right of renewal?
A right of renewal gives tenants the option to extend a lease for a further term. There can be more than one further term.
Landlords do not have to give you a right of renewal. If your lease agreement does not contain a right of renewal, then you will not be entitled to a renewal of the lease except where you have negotiated a renewal (or alternatively a new lease) with your landlord or you have rights under the Retail and Commercial Leases Act 1995.
How is a right of renewal exercised?
Your commercial lease should set out how and when you are able to exercise your right to renew (or extend).
Usually, you must give a written request or notice to your landlord for the renewal of the lease. This written request or notice must be given within a strict timeframe set out in the lease. For example, the timeframe may be between 6 and 9 months before the end of the lease. It is critical that you keep a record of this timeframe as the consequences can be serious if you fail to renew within the period.
The lease may set out how the written request or notice is to be given. A notice should refer to the landlord, the tenant, the lease and the premises, clearly state that right of renewal is being exercised, and be signed by the tenant.
Once you have notified your landlord of your intention to renew, the lease will be extended for the further term and the landlord will then prepare a formal extension of lease document.
The formal extension of lease will contain terms documenting the renewal, such as the rent for the further term. The rent will usually be reviewed to the current market rental value by agreement between the parties or failing agreement, then by an independent valuer. The parties may negotiate and agree to other variations to the terms of the extension of lease, including any additional rights of renewal.
We can assist you in reviewing your lease to determine your rights of renewal and preparing a written notice of renewal to your landlord.
What happens if I do not exercise a right of renewal?
There are potentially serious consequences if you do not exercise your right of renewal in accordance with the procedure set out in the lease.
Depending on the terms of your lease, if you continue to occupy the premises after the end of the lease term and you have not exercised your right of renewal in accordance with the lease (for example, you have not exercised it between 3 and 6 months before the end of the lease) you will be considered a periodic tenant. The tenancy will usually be on the same terms and conditions of the lease but subject to an increase of the rent payable (such as a fixed increase of 3% or 6%) and may be terminated by either party on giving one month’s notice to the other.
A failure to renew can lead to a situation where:
• the landlord decides that it requires vacant possession and can issue to you a notice to vacate the premises (for example, on 30 days’ notice); or
• the landlord may negotiate the terms of a new lease on terms that may be unfavourable to you, such as a new rental amount.
Even if you have not complied with the renewal procedure you may still be able to agree on a renewal of your lease with your landlord.
What rights do I have under the Retail and Commercial Leases Act?
If the Retail and Commercial Leases Act 1995 applies to your lease, you will be entitled to a minimum five-year term. This term is worked out on the assumption that a right of renewal will, in fact, be exercised. For example, if the initial lease term is one year, with two rights of renewal of two years each, the total term of the lease will be five years. But if, for example, the lease term is three years, with no rights of renewal, then this would not comply with the Act and you would be entitled to have the term extended by two years to bring the total term of the lease to five years. There are a number of exceptions to this and the minimum five-year term can be waived through a certified exclusionary clause (signed by a lawyer who does not act for the landlord).
If your lease forms part of a retail shopping centre, you may have rights of renewal under the provisions of the Act dealing with preferential rights which allow you to remain in the premises if the landlord wishes to relet. A retail shopping centre is defined as a group of premises whereby at least 5 are retail shops, that they are all owned by the same person, are located in the same building or other buildings which are adjoined or separated by common areas and that the area is generally promoted as a shopping centre, mall, court or arcade. These are complex provisions and would require further advice by us.
If your lease is renewed, you are entitled to be given a copy of a disclosure statement which sets out important information about the renewal of lease, including rent, rent review, rights of renewal, outgoings (including an estimate of outgoings payable), and other details.
Note that most commercial leases in South Australia are regulated by the Act.
Why trust Johnston Withers Lawyers as your Commercial Property Lawyer
At Johnston Withers Lawyers, our commercial property lawyers have extensive experience in acting for and advising tenants in all aspects of commercial and retail leases. If you are considering renewing your commercial or retail lease and need advice or direction from a lawyer, please contact Michael Stannard on (08) 8231 1110 or get in touch online.
The content of this article is intended to provide a general guide to the subject matter. It is not legal advice. Specialist advice should be sought about your specific circumstances.