Keep your options open

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.

What are my options?

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:

to landlords – by securing income and increasing property value; and
to tenants – by securing tenure.

Let’s exercise!

In a retail lease, the requirements for an option include:

A deadline by which the tenant must notify the landlord of its decision to renew the lease. For example, at least 3 months before the expiry of the initial lease term; and

How the tenant must notify the landlord of its decision to exercise the option.

Importantly, if a tenant does not exercise its option in the prescribed way, it may lose its right to renew the lease.

Can a landlord deny a tenant’s right to exercise an option?

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:

The tenant has failed to remedy any default under the lease, of which the landlord has provided written notice; ^[1]
The tenant has persistently defaulted under the lease throughout the lease term, and the landlord has given written notice of the defaults.^[2]

It is often unclear what ‘persistently defaulted’ actually means. Although there is no clear answer, the Westgate Battery Company case provides guidance.^[3] 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.

When will I have a new lease?

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.

Still unsure?

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.

^[1] Retail Leases Act 2003 (Vic) s27(2)(a).
^[2] Retail Leases Act 2003 (Vic) s27(2)(b).
^[3] Westgate Battery Company Pty Ltd v G.C.A. Pty Ltd (Retail Tenancies) [2005] VCAT 2080.

^{Is my lease a retail lease.}
^{Retail leasing: do your homework.}
^{Splitting the bill: retail lease outgoings.}