Entering into a commercial lease is a significant undertaking for any business. However, it is also equally challenging when an existing lease is up for renewal, and the landlord suggests changes to its terms. In such situations, tenants may not understand the process and their rights in it. We discuss what a tenant can do if their lessor proposes changes to their lease when it is up for renewal.
Option for Lease Renewal
Your rights as a tenant when a lessor proposes changes to your lease depend on whether you have an option to renew when the lease expires. An option to renew is a clause permitting a lessee to call for a new lease for a specified term on the same conditions as the existing lease (save for the new dates). Parties can only vary an option lease by mutual agreement unless the conditions for unilateral variation are present.
While a commercial lease doesn’t need to include an option for lease renewal, many do because these clauses provide landlords and tenants with a greater degree of commercial security. The provision providing the lessee with an option typically specifies how the tenant must exercise it as well as the terms of the new lease.
The valid exercise of an option creates an enforceable and binding agreement. That is, a new lease is created, and both parties are legally bound to that agreement. Until both parties sign the new lease, there is only an ‘agreement to lease’. Accordingly, it is essential that the lessor prepares the new lease document, and it is executed immediately after the exercise of the option.
Parties must document any variations to the lease such as altering the lease premises or changing the agreement as to the term/rental amount. While parties can affect some changes (such as extending the term or amending the rental amount) by way of a variation of lease, others such as altering the leased premises area, require a fresh lease.
If both parties do not agree on a variation of lease upon the exercise of an option, it cannot be varied. Burns Philp Hardware Pty Ltd v Howard Chia Pty Ltd (1987) 8 NSWLR 642 considered the possibility of a unilateral variation of lease. Here, the Landlord attempted to vary the lease terms without the Tenant’s agreement unilaterally. In this case, the Court of Appeal (Supreme Court of NSW) held that the Landlord’s attempt at unilateral variation did not bind the Tenant.
Note, however, that the reason for this was that the Tenant did not accept the variation. If the Tenant had continued with the lease/option lease, without expressly accepting the variation, it would have been binding on the Tenant.
As a lessee, you need to know that if your commercial lease is also a retail lease, it is subject to the relevant state or territory legislation. These statutes provide that if a retail lease provides a lessee with the option to renew at current market rent, a tenant can formally request a review of their rent before they exercise their option.
For example, the Retail Leases Act 1994 (NSW) permits a lessee to ask for a rent review at any time during the period six months before and ending three months before the last day they can exercise your option. The review may also vary the option period so that it is twenty-one days after the determination. Tenants who agree on an amount of rent cannot use this provision. A review would be advantageous for a lessee who is considering exercising their option. Also, if the landlord subsequently makes other proposals concerning the lease, tenants are equipped with more information and can better negotiate.
No Option for Lease Renewal
If your commercial lease does not have an option but your landlord has indicated a willingness to renew the lease, any proposals they make are by agreement only, and every term is up for grabs. You need to negotiate with your landlord and agree to all of the terms of a new agreement. Again, you could think about getting professional help to ensure the outcome is as beneficial as possible. Whether it is more commercially advantageous to you as a lessee to negotiate or to find alternate premises will depend in part on the kinds of proposals your lessor puts forward.
If the amount of rent becomes an issue during negotiations, it may be beneficial for you both to agree to have a market review of the rent. This process involves looking at the rent of similar properties in the area to determine the market rent for those particular premises. The review would provide you with an amount of rent that is independent and fair.
LegalVision has provided many businesses with commercial leasing advice. If your landlord has proposed changes to your lease and you have any questions, get in touch on 1300 544 755.