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Critical obligations to exercise a further term of your lease

A key element of occupying a commercial premises as a tenant is ensuring you exercise an option to renew your lease within the desired timeframe provided.  Correctly undertaking this obligation is critical to the longevity of any business looking to maintain occupation for continued success.  By not acting within the required time, or by undertaking the option within the desired manner, can result in undue stress and conflict with the landlord or its agent.

Key aspects that need to be considered:

  • Lease Agreement – read this document. It is a binding contract between you and the landlord.  It sets out the terms and conditions of the agreement and those which each party agrees to fulfil during the period of the lease.  Many commercial leases have strict obligations of the tenant or the landlord which need to be respected.  Some leases have additional annexure documents that extend or modify the standard conditions of the lease agreement document.  Ensure you have read and understand these documents.
  • Options for Exercising – ensure you act as early as practicable. In Victoria, the Retail Leases Act 2003 requires the landlord to notify the tenant of any further option period it may have and requires the landlord to notify the tenant not more than 12 months, or less than six months from the last date to exercise the option.  In most cases, this means that between 9 and 15 months before the expiry of the term, you will be notified of your further term.  This is a good prompt for you to make some decisions as to the next few years your business plans to occupy the premises.  A commercial lease which is not governed by the RLA 2003, does not require the landlord to notify the tenant so the obligation of exercising the option sits with the tenant.  Diarising the last date to exercise your option, or the deadline date, and maybe some prompt dates a month or two prior, is smart to ensure you don’t leave yourself in a precarious position.  Failing to exercise your option by the required date, may result in you forfeiting your further option periods and open to be vacated by the landlord.
  • Written Notification – When notifying your landlord or its agent, ensure it is done in a written form and by the authorised person within the business.  Having the office manager sign the documents would not entitle you to exercise your option when the Director has executed the lease.  Many commercial leases now have an allowance for acceptance via digital form so email would be acceptable.  If you post the document, keep a copy for your records.  Ensure you receive confirmation once submitted that the landlord or its agent has received your intention to exercise the option.

One important element to keep in mind is that by signing the option to renew a lease for a further term, you are legally binding yourself to the next period, regardless if the agreement is documented in the form of a lease renewal.  Many tenants think they can sign the option and until they sign the renewal documentation, can back out and vacate.  Be very careful that you fully understand the implications of notifying the landlord of your intention to renew, if you are unsure of the intent of the business to remain in the premises.

McRae Property Commercial is well placed to assist you with navigating this period and to act on your behalf as an independent voice.  As tenant advocates, we are in-tune with the current market rates and incentives offered to the market and are well placed to negotiate these in your favour.

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