Renewing a commercial lease is a critical moment for both landlords and tenants. It provides certainty for future operations and the opportunity to document terms relevant to the renewed term. There will usually be a need to consider the terms in any existing lease and any legislative requirements. Whether you’re a landlord or a tenant, it’s essential to understand your rights and obligations.
Director of GM Law, Mark McAvoy shares his thoughts on this matter:
1. What is an Option to Renew?
An option to renew a commercial lease agreement — often called an option to renew clause — gives the tenant a right (but not an obligation) to extend the lease for a further term, usually on the same or similar terms. This clause must be clearly drafted and included in the original lease.
For example, an option to renew clause sample might include the words:
“The Lessee may renew this Lease for a further term of 3 years by giving written notice to the Lessor at least 3 months before the expiry of the initial term.”
Note that the wording and timeframe to exercise the option are critical. If a tenant misses the deadline or doesn’t comply strictly with the clause, they may lose the right to renew subject to any legislative requirements. GM Lawyers can assist with reviewing and interpreting your lease terms.
2. How Do You Exercise an Option to Extend?
To exercise a commercial lease extension option, tenants must usually give formal written notice within a set timeframe. This is often between 3-6 months before the lease expires. The lease may also require specific wording or delivery methods for the notice.
Tenants should avoid assuming that verbal discussions or informal emails are sufficient. If the option is not properly exercised, landlords may, subject to legislative requirements, be under no obligation to grant the renewal. GM Lawyers can assist with drafting and serving the correct notice.
3. CPI Increases and Rent Adjustments
The existing lease will set out how rent is to be reviewed during the renewed term. Some lease renewal clauses include a review to market at the commencement of the renewed term and a rent adjustment based on the Consumer Price Index (CPI) during the second and subsequent years of the renewed term. A commercial lease CPI increase is a method of increasing rent annually in line with inflation. The exact increase depends on the CPI published by the Australian Bureau of Statistics.
For instance, if rent is currently $50,000 and CPI increases by 4%, the new rent may be $52,000. The lease will set out how CPI is applied, and some clauses may include a “cap” or “collar.” GM Lawyers can assist with interpreting rent review clauses.
4. What Are the Costs of Renewing a Commercial Lease?
Commercial lease renewal costs may include legal fees, valuation costs, and registration fees (if the lease is over three years and needs to be registered). It is important to factor in these costs when budgeting. The existing lease will usually set out which party will be responsible for these costs.
5. Queensland-Specific Considerations
While the commercial lease renewal process is broadly similar across Australia, some rules differ in Queensland. For example, retail leases in Queensland are regulated by the Retail Shop Leases Act 1994 (Qld), which includes specific notice periods and disclosure obligations.
Tenants and landlords should not rely on templates or interstate advice. GM Lawyers can assist with Queensland-specific lease renewals.
6. Conclusion
Renewing a commercial lease in Queensland involves more than just signing a new document. Timing and strict compliance with renewal clauses are key to a successful renewal. GM Lawyers can assist with the entire commercial lease renewal process — ensuring your rights are protected and your obligations are clear.
Don’t forget we offer the following:
Conveyancing
We have 25 years experience with commercial and residential conveyancing in Queensland.
Commercial leasing
We are experienced in all facets of retail and commercial leases in Queensland.
Estate Planning
We are highly experienced in Wills, Deceased Estates, and Powers Of Attorney in Queensland.
