To what extent do landlords need to inform tenants of their rights when exercising an option to renew their lease? What are the consequences of a non-compliant option renewal notice?
An option to renew a lease is a tenant’s right to require the landlord to grant the tenant a new lease when the existing term expires. An option clause requires a tenant to give notice to the landlord, during a specified period before the current lease term ends, that the tenant intends to exercise its option to renew the lease for the further term. Commonly, leases will provide that upon exercise of an option, the rent at the commencement of the further term will be determined by a market review.
The remedial nature of retail leases legislation in Australia gives tenants’ rights and protections. In some states, this includes placing the onus on a landlord to give the tenant written notice ‘reminding them’ of their rights to renew their lease under an option clause – referred to as a ‘renewal notice’.(1) In cases where there is to be a market rent review to determine the rent, a tenant will be entitled to request an early market rent review.(2)
In Victoria,(3) three months before the last date that an option may be exercised, a landlord is required to provide a tenant with a renewal notice setting out information as to:
- The last date by which the option to renew may be exercised;
- The rent payable for the first 12 months of the new term;
- The availability of an early rent review process;
- The availability of a cooling-off period; and
- Any changes to the most recent disclosure statement provided to the tenant.
The purpose of the renewal notice requiring this information, is to provide the tenant with sufficient information to enable them to make an informed decision about whether to exercise their option.
If a landlord fails to give the tenant a valid renewal notice, the lease (which applied immediately before the term ends), continues on the same terms and conditions, and the option is exercisable by the tenant up to three months after a compliant notice is given to the tenant by the landlord.
Serving a tenant with a valid renewal notice may seem straightforward, but non-compliance with the requirement to provide all the necessary information can result in an invalid renewal notice.
In the case of Pagica Pty Ltd atf the Oscinah Trust v Inlet Property Pty Ltd(4) , VCAT considered whether a reference to the landlord’s proposed rent as the commencing rent in the renewal notice was valid, noting that the rent was required to be determined by a market review in the absence of agreement between the parties.
Facts
Inlet Property Pty Ltd (as landlord) leased the premises located at 24 A’Beckett Street, Inverloch, Victoria, to Pagica Pty Ltd atf the Oscinah Trust (as tenant), commencing on 20 December 2017 and expiring on 19 December 2022 with four further options for terms of five years each (the ‘Lease’). The Lease stated that on the first day of each further term there was to be a market rent review.
In September 2022, the tenant informed the landlord in multiple email correspondences that it intended to exercise the option under the Lease for a further term. On 2 November 2022 (being two months before the Lease was due to expire), the landlord’s solicitor sent the tenant’s solicitor a renewal notice (the ‘Renewal Notice’) stipulating that the commencing rent for the first 12 months’ rent of the new lease would be $110,000.00 per annum plus GST. Three months after the landlord issued the Renewal Notice, the landlord sought to end the Lease, claiming the tenant had failed to exercise the option within the required timeframe. The tenant alleged the Renewal Notice was defective and the landlord was not entitled to terminate the lease.
The tenant’s contentions
The tenant argued the Renewal Notice was defective because it stated the commencement rent for the further term would be $110,000 per annum plus GST instead of stating “The commencement rent for the further term will be the market rent unless otherwise agreed”.(5) As a result, the landlord had “strongly suggested” the rent had been determined and was not open for negotiation or review.
Further, the Renewal Notice had failed to set out all the required information and explain the tenant’s rights, including the right to an early rent review and the availability of a cooling off period (as applies in Victoria in circumstances where the tenant had not requested an early market rent review).
Without all the necessary information, this potentially leaves a tenant unaware that its right to an early rent review lapses well before its right to exercise the option expires.
The landlord’s contentions
The landlord argued the Renewal Notice contained sufficient information to comply with the legislative requirements. In the absence of a prescribed form, the Renewal Notice cannot be expected to comply with a prescribed form.
The landlord stated that it does not have the power to unilaterally impose commencing rent on the tenant. The Lease and the legislation require that, if the parties cannot agree on a commencing rent, they are to jointly appoint a valuer to undertake a market rent review.(6)
Moreover, the purpose of the Renewal Notice is to be a simple user-friendly notice to “enable the tenant to understand with reasonable certainty what it is which he is required to do to exercise its option to renew the lease for a further term”.(7)
The decision
The Renewal Notice was held to be invalid. It was inconsistent with the requirements of a renewal notice to state a fixed amount as the commencing rent, where the lease provides for a market review. The Renewal Notice stated the commencing rent for the further term is $110,000 per annum plus GST. VCAT said that statement was “on its face clearly incorrect and misleading”(8) where the commencing rent had not been agreed to and was not the product of a market rent review.
The ameliorating purpose of the legislation is to “enhance the certainty and fairness of retail leasing arrangements between landlords and tenants”.(9) This is to ensure tenants are provided with “all relevant price and non-price terms within a reasonable time before they must decide whether to exercise an option to renew the lease”.(10)
As a consequence of the defective Renewal Notice, the Lease continues on foot until three months after a valid notice has been given. The tenant’s interest at the premises is protected until the landlord issues a valid renewal notice. After that, the tenant has three months to decide whether to exercise its option to renew the lease.
Key takeaways
The Landlord “jumped the gun” by stating its proposed rent for the first 12 months of the Lease. This is often a step that is taken in the rent determination process in an attempt to agree on the rental value. The requirement in the Renewal Notice was to provide information to enable a tenant to have an early market rent review before it exercises the option. This is so the tenant understands what the rent payable will be and whether that is an expense the tenant can afford.
Courts and tribunals will take an approach that considers the context and purpose of the retail leases legislation. This is by ensuring tenants are afforded consumer protection. In the context of option renewal notices11, landlords are required to set out all the necessary information so that the tenant can make an informed decision about whether it should exercise its option to renew the lease. If all the necessary information is not set out, renewal notices will readily be found to be defective.
This article by Deren Hassan and Diahna Angelis from Mills Oakley is featured in the latest issue of SCN magazine.
Footnotes
(1) Section 28, Retail Leases Act 2003 (VIC); section 46, Retail Shop Leases Act 1994 (QLD); section 13C Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA).
(2) Section 28A, Retail Leases Act 2003 (VIC); section 27A, Retail Shop Leases Act 1994 (QLD); section 32 Retail Leases Act 1994 (NSW); section 36 Retail and Commercial Leases Act 1995 (SA); section 30, Business Tenancies (Fair Dealings) Act 2003 (NT)
(3) Section 28, Retail Leases Act 2003 (VIC).
(4) [2024] VCAT 830.
(5) See at [39].
(6) Section 35, Retail Leases Act 2003 (VIC)
(7) See at [51].
(8) See at [61].
(9) See at [55].
(10) See at [56].
(11) Where applicable in relevant states, refer to footnote 1 above.
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