Can Landlords Deny Tenants Their Option to Renew?

A landlord is bound under the Retail Leases Act 2003 (Vic) to honour a lease which provides the tenant with an option to renew. However, this obligation to honour an option to renew is subject to some important exceptions. There are specific circumstances in which it is possible for a landlord to resist the tenant’s right to exercise their option. These include circumstances where:

  1. The tenant has not remedied any default under the lease, and the landlord has given the tenant written notice in relation to the default. A default refers to the failure to comply with any terms in the lease. Including payment on the correct date.
  2. The tenant has persistently defaulted under the lease and the landlord has given the tenant written notice of the defaults.

It is recommended that those involved in a potential breach of obligations, whether as tenant or landlord, seek the expert advice of a commercial lawyer.

In order to deny a tenant an option to renew, it will be necessary for the landlord to demonstrate that the tenant has failed to exercise their option to renew within the designated time frame. If the landlord fails to give the notice within six months of the last date available to exercise the option, the tenant is given a statutory extension of six months after the landlord eventually gives the notice to the tenant. Alternatively, the landlord can deny the option to renew if they can prove that the defaults as referred to above were “continued and constantly repeated”. What constitutes this will differ on the facts at hand.

Rental contract issues

Options to renew

A lease is a complex legal document, and an option clause will often contain specific requirements about how the option is to be validly exercised. Seeking the advice of an experienced commercial lawyer can assist retail tenants in ensuring that the requirements to exercise their option to renew are fulfilled by the required date.

Determining whether an option to renew has been exercised by a tenant will differ depending on the facts of each case. However, the following are general requirements to validly exercise the option:

  1. The intention to exercise an option must be clear and unequivocal.
  2. The tenant’s expression of exercising an option should be put in writing.
  3. Once the tenant has provided notice in writing of their intention to exercise an option to renew, the tenant must perform the specific processes as outlined in the lease to finalise the terms of the renewed lease.

Adhering to these general requirements and the specific requirements stated in the retail lease can prevent a landlord having grounds to deny tenants their option to renew.

Other ways to avoid being denied an option to renew:

  • Negotiate the option to renew before entering into a Retail lease
  • Plan ahead for the end of your lease. This involves taking note of any dates by which lease option must be exercised
  • Seek specialist legal advice before you exercise an option to renew. This can help avoid any future disputes in relation to the terms of the lease.

No option to renew

Where a lease contains no option to renew, the landlord is under no obligation to renew the lease, even if the tenant has held their business on the premises for an extended period of time. If an option to renew is not provided for in the lease, the landlord is only required to give the tenant a written notice either offering a renewal or lease or advising that no renewal is available, no less than six months before the expiration of the lease.

It is therefore important for all business owners to review the rights they hold under a retail lease with an experienced commercial lawyer, and to ensure that an option to renew is clearly stipulated in the proposed retail lease if they wish to exercise such an option in the future.