One of the most important issues for a tenant to consider before
it enters into a lease is the rent payable for the term of the
lease. What happens to the rent if you have an option to renew the
Usually, when the time comes for the tenant to renew the lease
by exercising an option, they fly blind on the issue of future
rent. Unless the rent for the option term is pre-agreed, or tied to
an agreed formula, the rent on renewal is often based on a market
Once an option to renew is exercised, the tenant is
contractually obliged to continue with the lease. If an agreement
cannot be reached about the starting rent for the new term, most
leases provide for a market determination by a qualified valuer.
This process is often lengthy and costly and can produce unwanted
As a consequence in a tough economy, the determination of
current market rent can become a major issue for the tenant to
consider when exercising its option to renew. Most tenants enter
into 2 types of leases:
Commercial Leases are rental agreements for
commercial premises, excluding those that fall under the provisions
of the Retail Leases Act. In a commercial lease, rent is either
agreed at the time the option is exercised or, failing agreement,
the landlord will obtain a determination of the current market rent
after the option is exercised. Unfortunately for tenants, unless
pre-negotiated, most commercial leases do not allow for rental
determinations before the option is exercised.
Retail Leases are leases for premises which
carry out some form of retail activity. The Retail Leases Act
governs the terms and conditions of a retail lease – whether
they are in writing or not – and most importantly, contains a
provision which allows a tenant to apply to the landlord for a
rental determination up to six (6) months before the time to
exercise the option to renew.
Section 32 of the Retail Leases Act not only allows the tenant
to request a rental determination, in the event such determination
is not made before the option date, the Act extends the option
period until the determination is duly notified to the tenant.
Where an early determination is made the tenant must exercise
its option within 21days of the determination instead of the time
frame noted in the lease. Also, the time frame to request an early
market determination is reduced to 3 months for a lease term of 12
months or less.
Section 32 provides certainty to a tenant who wishes to exercise
an option to renew, but has concerns about its ability to meet the
new rent payments if the market review is significantly higher than
it budgeted for. If an agreement cannot be reached about future
rent, the tenant can avoid the risk of exercising its option to
renew and look for alternate premises.
This opportunity for the tenant to have the rent determined
early is an important differentiation between a retail lease and a
commercial lease and a useful tool for all retail tenants.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Many retail leases include a covenant to trade, requiring the tenant to open the premises for trade during certain hours.
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