Written By Jean-Paul Fraticelli, Esq.
Kells The Lawyers
Not sure whether you want to exercise an option for renewal of a retail lease? Don’t forget section 32 of the Retail Leases Act 1994.
A lease will often contain an option for the tenant to take a further term to commence when the current term expires. This is known as an option for renewal. The lease for the further term will generally have the same conditions as the lease in which the option is contained, subject to the determination of the new starting rent.
Commonly, the starting rent for the further term will be determined by a market review and will only be determined after the option is exercised. This can create difficulty for tenants in deciding whether to exercise an option.
Once the option is exercised, the tenant will generally be obliged to proceed with the lease for the further term. However, the tenant can generally only exercise the option at a time when the starting rent for the further term is unknown.
While this difficulty may be alleviated to an extent by obtaining advice from valuers, the valuation of market rent is an imprecise science and the tenant may be “flying blind.”
Section 32 of the Retail Leases Act
For tenancies that fall under the Retail Leases Act 1994 (“RLA”), it is often not known that the RLA seeks to remedy this situation.
Section 32 of the RLA applies to the scenario where a retail shop lease contains an option to take a further lease at current market rent. In these circumstances, the tenant can have the starting rent for the further term determined early, before the time for exercise of the option lapses.
The tenant will only be entitled to an early rental determination if a written request is given to the landlord. However, the request must be given within the period commencing 6 months before and ending 3 months before the last day on which the option may be exercised.
If the tenant validly requests an early determination, the current market rent is determined as at the time of the request.
Additionally, the timeframe within which the tenant may exercise the option is varied so that it expires on the earlier of:
• 21 days after the rent is determined and notified to the tenant in writing; and
• the end of the term of the lease.
However, if the determination of the rent is not notified to the tenant within 21 days before the end of the term of the lease, the tenant may exercise the option within 21 days after the determination is notified in writing to the tenant. This is irrespective of whether the period of 21 days would expire after the end of the term of the lease.
Which tenancies fall under the RLA?
The RLA applies to “retail shop leases”.
A “retail shop lease” is an agreement under which a person grants, or agrees to grant, to another person for value a right to occupy premises for use as a “retail shop.”
“Retail shops” are premises which are:
1. used, or proposed to be used, wholly or predominantly for the carrying on of one or more of the businesses listed in Schedule 1 of the RLA (e.g. restaurants, pharmacy shops); or
2. used or proposed to be used for the carrying on of any business in a retail shopping centre.
A retail shop lease does not need to be in writing and does not need to grant exclusive possession of premises. An informal licence or permit can be a retail shop lease in certain circumstances.
However, it should be noted that the RLA expressly excludes certain leases and retail shops that would otherwise be caught by the RLA. Furthermore, it will often not be immediately apparent whether the RLA applies. Accordingly, legal advice should be sought if you are seeking to determine whether a lease falls under the RLA.
If your lease falls under the RLA and contains an option for renewal at current market rent, section 32 of the RLA may be of assistance.
It may help you to obtain certainty regarding your initial rental obligations if the option is exercised. However, more importantly, it may help you to assess the viability of your business moving forward.
Need assistance with leasing?
Kells has a specialised retail and commercial leasing practice. If you have any queries about leasing issues, call us for a no obligation discussion or send us an email.
For more information about Kells The Lawyers, please visit www.kells.com.au or the International Society of Primerus Law Firms.