For businesses leasing commercial or retail premises in Queensland, an option to renew can provide security and continuity by allowing tenants to extend their lease for an additional term. These clauses benefit tenants by ensuring stability and can also add value if the tenant decides to sell their business.
However, options to renew are not automatic and must be exercised correctly to be valid. Missing deadlines or failing to meet specific lease conditions can result in the tenant losing their right to renew.
Are options to renew mandatory
Options to renew are not legally required in Queensland commercial leases. Whether a lease includes an option depends on the terms agreed upon when the lease was signed. If no option is included, the landlord is not obligated to offer a new lease.
If a lease does not contain an option to renew, the landlord may:
- offer a new lease, but with new rent and terms
- decide not to offer a new lease at all
Since there is no legal requirement to continue the lease, this becomes a commercial negotiation between the tenant and landlord. If an agreement cannot be reached, the lease will end. Mediation is generally not available through the Queensland Small Business Commissioner for negotiating a new lease in these circumstances.
Terms of an option to renew
If a lease includes an option to renew, it will usually state that the renewal will be on the same terms as the existing lease, except for rent, which is typically reviewed based on the rent review mechanism in the lease.
- the rent is usually the only negotiable term in an option renewal
- if the option is exercised correctly, both the tenant and the landlord are legally bound to the new lease and cannot withdraw
Failing to follow the exact process set out in the lease when exercising the option could result in the tenant losing their renewal rights.
Exercising the option
To exercise an option to renew, tenants must comply with the specific requirements outlined in their lease. This generally includes:
- exercising the option within the required timeframe, which is often between three to six months before the lease expires
- submitting the option notice in the correct format and through the method specified in the lease
- ensuring that the tenant is not in breach of the lease at the time of exercising the option
If the option is not exercised correctly, the landlord is not obligated to extend the lease, and the tenant may be required to vacate the premises.
Options in retail leases
Retail leases in Queensland are regulated under the Retail Shop Leases Act 1994. This act provides specific protections for tenants when exercising options to renew.
Withdrawing the option
Under section 21E(4) of the act, if a retail tenant exercises their option but does not receive an updated disclosure statement from the landlord within seven days, they have the right to withdraw their option unless they waived this right when exercising it.
Notice of option deadline
Under section 46 of the act, if a lease includes an option to renew, the landlord must notify the tenant at least two months before the option deadline to remind them of their right to exercise the option.
However, the act does not impose penalties on landlords who fail to provide this notice, nor does it offer protections for tenants who miss their deadline due to not receiving the reminder.
Key considerations before exercising an option
- most leases require options to be exercised between three to six months before expiry
- start considering renewal options six to twelve months in advance to allow time for planning
- research the current market conditions and compare the costs of renewing versus relocating
When deciding whether to renew a lease, tenants should consider:
- whether the current space still meets business needs
- the availability of alternative locations and potential costs of moving
- the financial impact of rent increases, outgoings, and bond adjustments
- the cost of relocating and fitting out a new premises
- any make good obligations, which require returning the property to its original condition
- the relationship with the landlord and whether renewal negotiations are likely to be favourable
Seeking professional advice from a financial consultant, accountant, or business advisor can help assess the costs and benefits of different options.
Lessor’s obligations when there is no option
If a lease does not include an option to renew, section 46AA of the act requires the landlord to inform the tenant in writing whether they will be offering a lease renewal or extension.
- for leases under one year, the landlord must provide at least three months’ notice
- for leases longer than one year, the landlord must provide at least six months’ notice
If the landlord fails to provide notice, the tenant may request a six-month lease extension. During this extension period, the tenant can terminate the lease early by giving one month’s written notice.
Resolving lease renewal disputes
If disputes arise regarding lease renewals or rent adjustments, tenants should:
- seek legal advice from a commercial property lawyer
- determine whether they are negotiating a new lease or disputing an existing lease term
- review the lease to ensure all actions align with the original agreement
- communicate clearly, professionally, and in writing to facilitate positive discussions
Conclusion
Options to renew provide valuable security for tenants but must be exercised correctly to be enforceable. Understanding the lease terms, meeting deadlines, and evaluating business needs in advance will help tenants make informed decisions about whether to renew or seek alternative premises.
At Ensure Legal, we provide expert legal guidance on lease negotiations, renewals, and commercial tenancy rights in Queensland. If you need assistance understanding your lease or exercising an option to renew, contact us today for professional advice.
