In Short
- Lease renewals and terminations require careful planning and understanding of legal obligations.
- Review your lease terms early to assess renewal rights or termination requirements.
- If terminating, ensure compliance with notice periods and any exit conditions to avoid disputes.
Tips for Businesses
Plan ahead for lease renewals or exits—review your lease terms well before expiry. If renewing, negotiate terms that align with your business needs. If terminating, follow the proper notice periods and procedures to avoid penalties. Seeking legal advice can help ensure a smooth transition and protect your business interests.
If your lease is nearing its end, it is essential to consider certain factors to ensure that it concludes smoothly or that your transition into a new term minimises business disruption. This article summarises the key considerations you must consider during the renewal or termination of your lease.
A factsheet that sets out the three ways to end a commercial lease in Australia: surrendering your lease, assigning it or subletting it.
Business Operations
Are you anticipating significant business growth ahead? Will the premises still be a right fit for your business?
Ultimately, this relies on whether the current space continues to meet your business operations and needs. This may involve inspecting the premises to determine if the size and layout still adequately accommodate staff, customers, clients, and storage. Additionally, consider whether any renovations or upgrades are necessary and if the operational costs, such as utilities and maintenance, remain within budget.
Right to Renew
Carefully review your lease for any renewal clause that grants you the right to renew your lease for an option period after the initial term expires. The duration and amount of each renewal period will be specified in the reference schedule or information table. A clause will outline the process for exercising the option. This includes the timeframe within which you must notify your landlord of your intention to renew. If you miss this deadline, you may lose your right to renew.
Continue reading this article below the formMarket Conditions
If you are considering extending or terminating the lease, looking into the market rents for similar properties in the area is essential. You may wish to engage a leasing agent. You may also want to explore recent lease deals, whether by:
- monitoring real estate websites;
- networking with local business owners; or
- seeking assistance from a leasing agent, property lawyer, or property valuer.
Once you have a clearer picture of the property market, you can decide if the location suits your business or use this information to negotiate a fairer rent price when you renew.
Lease Terms
If you exercise an option period, you will be very limited in negotiating any new terms in the extended lease.
If you are extending a lease, you can negotiate the terms of the lease. When negotiating a lease renewal, tenants should focus on financial and operational terms.
It is important to start negotiations early, come prepared with market research and documentation, and consider using legal help. You will aim to secure most if not all, amendments to lease terms that are favourable to your business while maintaining a workable relationship with your landlord.
Make Good Obligations
When terminating the lease, you are expected to return the premises to the landlord in a specified condition according to the lease terms. The “make good” provision is a crucial clause in the lease as it outlines the condition of the premises, allowing for fair wear and tear, that the landlord anticipates you will restore at the end of the lease term. This can vary depending on the type of premises and any fit-out works you have undertaken.
If you have made significant fit-out changes, the landlord will require you to restore the space to a “bare shell.” This may involve removing fixtures and fittings, reinstating walls and other alterations, and restoring modified services such as electrical systems, plumbing, and HVAC systems. If a bare shell is not necessary, you will likely still need to carry out redecoration, which may include painting the internal and external walls and restoring the floors (e.g., replacing carpets and refinishing hardwood floors). These obligations can be extensive and costly, so plan ahead regarding labour, materials, and professional services.
Holding Over Provisions
If you stay on the premises after the lease expires without a new lease agreement in place, you will be holding over on a monthly basis. During a holding-over period, the lease terms will typically remain the same, although the rent may increase, and either party must give one month’s notice to terminate the lease. It is advisable to negotiate a new lease to ensure you are protected against any adverse consequences if you wish to continue residing in the premises.
Security Deposit
Ensure you have complied with all the lease terms at the end of the lease so that there is no delay on your part in recovering the security deposit. This often includes making good the premises so that it is restored to a state or condition as agreed between yourself and the landlord and settling any outstanding rent or outgoings.
Key Takeaways
When approaching the end of a lease, you should carefully evaluate several key factors to ensure a smooth transition. This includes:
- assessing whether the current space still meets their business needs;
- reviewing any right to renew clauses and associated deadlines;
- researching current market rates for comparable properties;
- fulfilling your make good obligations if you are vacating; and
- preparing for lease negotiations if you wish to extend without an option period already included in your lease.
Early planning and potentially seeking professional advice are crucial for protecting business interests while maintaining a positive landlord relationship. If you have any questions, our experienced leasing lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Review your lease agreement for renewal clauses, deadlines, and any restrictions on renegotiating terms. Also, assess whether the space still meets your business needs and compare market rental rates before committing to a new term.
If you miss the renewal deadline, you may lose the right to extend your lease. In this case, you may need to renegotiate with your landlord, who may choose to lease the property to someone else or change the terms.
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