Advan­tages in final­is­ing the mar­ket rent before a ten­ant exer­cis­es an option for a new lease term

In brief – Both land­lord and ten­ant ben­e­fit by agree­ing on the mar­ket rent

Ten­ants who have an option for a fur­ther term con­tained in their lease can ben­e­fit from ask­ing the land­lord to con­firm the mar­ket rent payable for the first year of the option term before exer­cis­ing the option. This avoids the unde­sir­able sit­u­a­tion of a ten­ant being bound by a lease where it can­not afford to pay the rent.

Retail ten­ants are enti­tled under the Retail Leas­es Act NSW to ask the land­lord to have the mar­ket rent deter­mined before the ten­ant exer­cis­es its option. Com­mer­cial ten­ants do not have this protection.

Mar­ket rent review procedure

A lease which con­tains an option for a fur­ther term gen­er­al­ly pro­vides that the rent for the first year of the option term will be deter­mined by a mar­ket rent review process.

If the land­lord and ten­ant can­not agree on the mar­ket rent, the review process will usu­al­ly take the deci­sion away from them and place it in the hands of a valuer.

This means nei­ther par­ty can be cer­tain of the result of the rent review and both will gen­er­al­ly be bound by the result, even if they do not agree with it.

The val­uer’s deter­mi­na­tion of the mar­ket rent can only be chal­lenged if it has not been made in accor­dance with the lease. It is not pos­si­ble to chal­lenge the deter­mi­na­tion on the grounds that the val­uer has made an error or has over or under val­ued the premises.

Retail leases

A ten­ant of retail premis­es is enti­tled under the Retail Leas­es Act NSW to ask the land­lord to have the mar­ket rent deter­mined before the ten­ant exer­cis­es its option.

The Act allows the ten­ant to make this request at any time with­in the peri­od that begins 6 months before and ends 3 months before the last day on which the option may be exer­cised (or the peri­od that begins 3 months before and ends 30 days before the last day on which the option may be exer­cised in the case of a lease with a term of 12 months or less).

If a ten­ant makes a request of this nature, the peri­od with­in which the ten­ant must exer­cise the option is var­ied so that the last day on which the option may be exer­cised is 21 days after the deter­mi­na­tion of rent is made and noti­fied to the ten­ant in writing.

Com­mer­cial leases

Com­mer­cial ten­ants are not pro­tect­ed by the Retail Leas­es Act NSW. A com­mer­cial ten­ant could attempt to nego­ti­ate some pro­tec­tion into the lease pri­or to enter­ing into it, for exam­ple, by adding a clause which oblig­es the land­lord to pro­vide a notice of mar­ket rent pri­or to the option expiry date. Claus­es of this nature are not common.

A com­mer­cial ten­ant is free to ask the land­lord before the option expiry date for details of the pro­posed rent for the first year of the option term, even if the right to do so is not con­tained in the lease.

If the land­lord does not agree to pro­vide an ear­ly deter­mi­na­tion of mar­ket rent then the ten­ant may wish to obtain its own val­u­a­tion before exer­cis­ing the option. If the ten­ant does so, it needs to be aware that this val­u­a­tion is indica­tive infor­ma­tion only. The land­lord is not required to con­sid­er this val­u­a­tion and is not bound by it.

If you have a ques­tion in rela­tion to an option clause in a lease or whether an option has been cor­rect­ly exer­cised, please contact: