In today’s world of fast paced transactions we often feel like we are stuck on the train of life without any option to get off. Nevertheless, we all have options, including tenants under retail leases.
An option is a clause contained in a retail lease allowing a tenant to renew its lease for an additional term. Although landlords are not obliged to include an option clause in a retail lease, options offer great value:
In a retail lease, the requirements for an option include:
Importantly, if a tenant does not exercise its option in the prescribed way, it may lose its right to renew the lease.
Under the Retail Lease Act 2003 (Vic) (Act), a landlord is obliged to notify a tenant at least 6 months before the date after which the tenant’s option is no longer exercisable.
Once exercised by a tenant, a landlord is bound to honour the tenant’s right to renew the lease unless:
It is often unclear what ‘persistently defaulted’ actually means. Although there is no clear answer, the Westgate Battery Company case provides guidance. Here, the landlord had not given the tenant notice of every breach of the obligation to pay rent, and did not state that such failure was ‘persistent’. Irrespective of this, failure to pay the landlord for 3 consecutive months was considered persistent.
To mitigate the risk of confusion, landlords should notify tenants on every occasion where a default under the lease has occurred. By doing so, this assists to establish ‘persistent’ failure by a tenant to comply with its lease obligations.
While technically speaking, a tenant’s right to a further lease term is created at the time of exercising the option, too often parties fail to formally document this arrangement. For certainty and in order to avoid unnecessary disputes, it is strongly recommended that parties enter into a deed of renewal to reflect this new arrangement.
Leases are complex legal documents. if you’re thinking of entering into one or are unsure about your right to exercise an upcoming option you should contact the Bespoke team for expert leasing advice.
 Retail Leases Act 2003 (Vic) s27(2)(a).
 Retail Leases Act 2003 (Vic) s27(2)(b).
 Westgate Battery Company Pty Ltd v G.C.A. Pty Ltd (Retail Tenancies)  VCAT 2080.
Posted on: 26 February 2018