When there is no option to renew in a Lease Agreement, the Lessor is under no obligation to extend the current Lease Agreement at the expiration date. It is important to take into account the potential consequences of this, when negotiating and entering into a Lease where there is no option to renew.
As there can be different names used to describe the Parties, let’s start by clarifying this:
- Lessee – Tenant
- Lessor – Landlord
What is an option to renew?
An Option to Renew is an opportunity for Lessee to have their Lease renewed for a further period of time, which will be detailed in the Lease Agreement. However, this will be subject to conditions the Lessor may impose. For example in order to exercise the option, the Lessee must not be in breach of the existing Lease.
Is the Lessor required to provide an option to renew?
The Lessor is not required to provide an option to renew in a Lease, nor are they required to offer the Lessee a further term at the expiry of the Lease. This is to be determined between the negotiations of the Parties. Where there is no option to renew, the Lessor may still offer the Lessee a further term under a new Lease agreement, however this will be dependent on a number of factors. These factors may include whether the Lessee has breached the terms of the current Lease, the Lessee’s relationship with the Lessor and other businesses in the shopping centre or complex, the Lessors plans for the Premises, whether a third party has made an offer to the Lessor for the same Premises.
In short, the Lessor is likely to only offer an option to renew or a further term where it is in their best interests to do so.
What are the possible consequences of the Lessor granting a further term?
If the Lessor does offer/agree to a further term for the Premises, the Parties will need to negotiate the terms of the new Lease. One of the benefits of having the option to renew on the Lease is that the Parties are guaranteed the terms and conditions of the Lease applying to the option period. This is a very secure position for both Parties as it allows both to plan and be certain of expenses, obligations etc for the specified time frame.
Conversely, it also locks both Parties into the terms and conditions. There may be factors that increase either Parties negotiating ability toward the end of the Lease. For example, where a Lessee does not have an option to renew and there is an increase in vacancies in the shopping centre or complex, the Lessee may be able to negotiate more favourable terms and conditions on the new Lease as they have more bargaining power.
What are the possible consequences of the Lessor not granting a further term?
In the event that the Lessee does not enter into a further agreement for the premises, the Lessee will need to consider relocation. There are a number of concerns with this, primarily the potential costs associated with relocation, including but not limited to:
- Relocation of all plant, equipment, fixtures, fittings and stock;
- Obligations to make good and restore the original Premises;
- Loss of goodwill and reputation from the original Premises;
- Costs of finding a new Premises;
- Costs of negotiating and executing the new Lease;
- Costs of registering the new Lease with the Department of Natural Resources, Mines & Energy;
- Fit-out costs for the new Premises; and
- Where the new Premises is a Retail Shop Lease, there will be Legal and accounting expenses in fulfilling your obligations under the Retail Shop Leases Act i.e. obtaining a Legal Advice and Financial Advice Certificate.
Given the potential cost to the Lessee, it is important to make sure that prior to executing a Lease, the Lessee obtains legal advice and understands whether there is an option to renew and the process for exercising the option.
12 November 2018