Parramatta Blog

When it is time to renew your commercial lease, businesses have the chance to evaluate their current position as tenants, review the commercial real estate market, and use that knowledge to strengthen their lease negotiations.

An option in a commercial or retail lease gives the tenant the freedom to decide whether or not to renew the lease for an additional term at the same terms as the current lease, as long as the option was exercised within the stringent time frame provided in the lease and the lessee was in compliance with the lease up until its expiration.

When approaching this critical time for any tenant to exercise their option period, there are 5 major factors they must first consider prior to any action.

These 5 vital factors are as follows:

1. How is the right of renewal exercised?

In order to exercise your right to renewal, you must provide a written request to the landlord or the managing agent within the strict time frame specified in the pre-existing lease agreement.

2. When should a renewal option be used?

It is crucial that the renewal option is to be used between the agreed upon time frame set in the previous lease. The time frame can be between six and 3 months before the end of the lease and being on-time is essential as the consequences can be serious if you fail to request a lease extension or renewal within the period.

3. Can you renew your lease without an option period?

Without an option period, you can still renew your lease, but it will be much harder because if you can't come to an agreement, you could only have a month to leave the property. On the other hand, if an agreement can be met, a new lease can be drafted up to replicate the newly established terms.

4. What happens if I don’t renew my lease?

If you don't exercise your right to renewal in accordance with the procedure outlined in the lease, there could be serious repercussions. Depending on the terms of your lease, if you continue to occupy the premises after the end of the lease term and you haven’t exercised your right of renewal in accordance with the lease, you’ll be considered a periodic tenant.

The tenancy will usually be on the same terms and conditions of the lease but subject to an increase of the rent payable (such as a fixed percentage increase or CPI based on the permitted use and/or market rent for the premises at the time of renewal.

A failure to renew can lead to a situation where the landlord decides they require vacant possession and can issue to you a notice to vacate the premises in one-months’ notice.

5. What will the rent be if you execute the renewal option?

Market conditions may have changed since you last signed your lease, which could increase your current rental. It is important to note that this is only subject to the terms agreed in the pre-existing lease. These are two key elements to consider when it comes to the rent for a renewal option:

A Ratchet Clause or a Fixed Annual Increase

During the length of the lease, the rent will automatically increase by an agreed upon amount on a predetermined day. Typically, this is at the anniversary date on each year of the lease. 

A Market or Independent Rent Review

Here, the landlord and tenant evaluate the going market rate for rent and attempt to come to an understanding on what is a reasonable rent that should be paid. In the event that they are unable to agree, an impartial valuer is hired, and their final judgement must be agreed upon by both sides.

In conclusion, a renewal option can be a powerful tool if handled correctly to ensure long-term occupancy, secure better rates, offer flexibility needed by start-up businesses and organisations with rapid expansion but uncertain business environments, and create a position of certainty if negotiated correctly.

*Written by Jayden Ayoub | Commercial Sales & Leasing