Lease Renewal: What Tenants & Landlords Should Know

For many businesses, the premises they operate from are an important part of the business itself. A shop, office, warehouse or commercial suite may provide the base from which the business serves customers, stores stock, manages staff, or builds goodwill in a particular location.

Where a business operates from leased premises, the ability to remain in that location can be important for stability and continuity. A lease renewal may allow the tenant to continue occupying the premises after the initial term ends, but renewal rights are often subject to strict conditions and timeframes.

Understanding how lease renewal works is important for both tenants and landlords. This article outlines some of the key issues that commonly arise in lease renewals.

Key Takeaways

A lease renewal allows a tenant to continue occupying the premises after the initial lease term ends.
Many commercial leases include an option to renew, which gives the tenant the right to extend the lease for a further term.
Options to renew must be exercised strictly in accordance with the lease, including giving written notice within the required timeframe.
Rent for the renewal term is often reviewed, commonly based on market rent, CPI increases or fixed adjustments.
Some leases in Queensland are regulated by the Retail Shop Leases Act 1994, which imposes additional disclosure and procedural requirements.
If a lease expires without renewal, the tenant may become a holding-over tenant, usually on a month-to-month arrangement with less security.

What is a lease renewal?

A lease renewal allows a tenant to continue occupying the premises for a further period after the initial lease term ends.

This may occur in two main ways:

the lease contains an option to renew, giving the tenant a contractual right to extend the lease for a further term; or
the parties negotiate a new lease or extension when the existing lease is close to expiring.

If a lease includes an option to renew and the tenant exercises it correctly, the landlord is generally required to grant the further term on the terms set out in the lease.

Options to renew: how they work

An option to renew is a clause in the lease giving the tenant the right to extend the lease for a further specified period.

For example, a lease may provide:

Term: 5 years with an option to renew for a further 5 years.

This means that after the initial five-year term, the tenant may elect to continue the lease for an additional five-year period.

However, options to renew must usually be exercised strictly in accordance with the lease. Common requirements include:

giving written notice to the landlord;
giving that notice within a specified time period (for example, between six and three months before the expiry of the lease); and
ensuring the tenant is not in breach of the lease when the option is exercised.

Leases will also usually contain notice provisions specifying how notices must be given. For example, the lease may require notice to be given to a particular address or by a specified method such as email, hand delivery, or post. If the notice is not given in the way required by the lease, it may not be effective.

If these requirements are not met, the tenant may lose the right to renew the lease. For this reason, tenants should review their lease well before the expiry date to ensure any renewal option is exercised correctly and on time.

Rent reviews during renewal

In most commercial leases, the rent for the renewal period is reviewed at the commencement of the further term, meaning the rent for the renewed term may differ from the rent under the existing lease.

Common rent review mechanisms include:

Market rent review – rent is adjusted to reflect current market rent for comparable premises;
CPI increases – rent increases in line with inflation; or
Fixed increases – the lease provides for predetermined increases in rent.

Where the rent is reviewed to market rent, the lease will usually include a process for determining the market value. This may involve negotiation between the parties or the appointment of an independent valuer if agreement cannot be reached.

Understanding how rent will be reviewed during the renewal term is an important part of assessing whether exercising an option is commercially beneficial.

Retail Leases vs Commercial Leases

In Queensland, leases of premises used for retail businesses may be regulated by the Retail Shop Leases Act 1994. Where the Act applies, it imposes additional statutory requirements that do not apply to ordinary commercial leases.

While the Act does not usually make the renewal process more complex, it does have some practical consequences. For example:

Landlords generally cannot recover their legal costs from the tenant for preparing renewal or extension documentation.
A lessor disclosure statement must usually be provided when an option to renew is exercised, unless the tenant waives that requirement in writing.
The landlord must also give the tenant a written notice reminding them of the timeframe for exercising the option to renew. However, failure to give this notice does not extend the option period, although it may expose the landlord to a statutory penalty.
If the rent for the renewal period is to be by reference to market rent, the tenant may request that the market rent be determined before deciding whether to exercise the option to renew. In that case, the Act extends the option exercise period so the tenant can wait for the market rent to be determined.

Not all commercial premises fall within the Act. Whether it applies will depend on the type of business carried on at the premises and the particular circumstances of the lease.

Documenting The Renewal

Where an option to renew is validly exercised, the lease will often provide that the further term automatically takes effect under the existing lease.

In practice, however, the parties should record the amendment in writing. This may involve entering into a deed of renewal, or in some cases, preparing a new lease on substantially the same terms as the existing lease.

If the lease is registered on title, it may also be necessary to lodge an amendment of lease with the Titles Registry to record the renewal.

The appropriate approach will depend on the terms of the existing lease, whether the lease is registered, and whether any lease terms are to be varied for the renewal period.

What happens if the lease expires?

If the term of a lease expires and the tenant remains in possession with the landlord’s consent, then the tenant may become a holding-over tenant.

In many leases, holding over occurs on a month-to-month basis and may be subject to different rent or other conditions. This arrangement provides significantly less security than a renewed lease and may be terminated on relatively short notice.

For this reason, tenants should avoid relying on holding over where possible and should address renewal well before the lease expiry date.

When to seek legal advice

Lease renewals can have significant legal and commercial implications for both tenants and landlords, particularly where strict option requirements, rent review mechanisms or statutory obligations may apply.

Legal advice may be helpful where:

a lease is approaching expiry and a renewal option needs to be exercised;
there is uncertainty about whether an option has been validly exercised;
the parties are negotiating a new lease;
there is a dispute about rent review or renewal rights; or
the parties need assistance documenting the renewal.

Reviewing the lease well before the expiry date can help avoid missed deadlines and ensure the renewal process proceeds smoothly.

Should you require advice about exercising an option to renew, negotiating renewal terms, or resolving a dispute relating to lease renewal, please do not hesitate to contact our commercial law and property law teams.

Call (07) 5532 3199 or submit an online enquiry.