Where a tenant has an option for a further term granted to it under the terms of a lease (or a subsequent deed varying the lease), in the majority of cases for standard commercial (non-retail) leases it is the tenant that takes the first step in exercising the option.  

For the exercise of the option to be valid, the option must be exercised within the option exercise period defined in the lease.  If the tenant exercises its option outside the option exercise period, the landlord is generally not obliged under the terms of most leases to renew the lease for the further term, and the lease will terminate at the end of the current term.

However, for leases of “retail premises” governed by the Retail Leases Act 2003 (VIC) (Act), the landlord is required to act first.

As mentioned in our earlier blog on 13 October 2016, Section 28 of the Act provides:

  • If a lease contains an option exercisable by the tenant to renew the lease for a further term, the landlord must notify the tenant in writing of the date after which the option is no longer exercisable (Last Date for Exercising the Option).  That notice (Notice) is to be given at least 6 months and no more than 12 months before the Last Date for Exercising the Option. 

  • However, the landlord is not required to provide the Notice if the tenant exercises or purports to exercise the option before receiving the landlord’s Notice;

  • If the landlord fails to provide the Notice to the tenant within the required timeframe, the lease is taken to provide that the Last Date for the Exercising Option is extended to a date which is 6 months after the date landlord provides the Notice to the tenant (Extended Last Date);

  • If the Extended Last Date occurs after the expiry date of the current term set out in the lease, the lease continues until the Extended Last Date; 

  • If the tenant exercises the option prior to the Extended Last Date, the new lease commences at the expiry date of the old lease, rather than the total term of the lease being extended.

Consequently, an unplanned extension of the option exercise period may occur where a landlord fails to provide, or is late in providing, the Notice to the tenant.

For tenants, however, it would be prudent to formally exercise their option for a further term within the option exercise period, rather than wait for the landlord to serve the Notice.  Section 28 does not prevent tenants from the exercising their options prior to receiving the Notice.

In circumstances where:

  1. a retail leasing tenant has failed to exercise its option for a further term within the option exercise period recorded in the lease; and
  2. the landlord has indicated that it is not willing to accept the tenant’s exercise of its option outside that option exercise period, and has required the tenant to vacate the premises at the end of the current term.

Section 28 may provide a solution (by extending the Last Date for Exercising the Option) if the landlord has not served the Notice on the tenant.

If you require assistance regarding exercising an option under a retail premises lease in Victoria, please contact Nevett Ford Melbourne.