Retail and commercial leases: rent renewal

Retail and commercial leases: rent renewal

As a tenant of a commercial property, the thought of your lease coming up for renewal can be both exciting and daunting. It signifies a potential continuation of your business in a familiar location, but it also brings the possibility of new lease terms, and often, a renegotiation of rent. One of the most common flashpoints during lease renewal is the rental amount, particularly when a market rent review is involved. Understanding your rights and how to address these issues in your lease agreement from the start is crucial to minimising potential conflict.

The renewal minefield: why rent disputes arise

Commercial leases often include an option to renew. This gives you, the tenant, the right to extend your lease for a further term. However, exercising this option often triggers a rent review, frequently based on the current market rent. This is where disagreements can easily arise.

Landlords naturally want to maximise their returns, while tenants aim to keep occupancy costs manageable. Without clear guidelines in your lease, the process of determining the new market rent can become a battleground, leading to delays, stress, and potentially costly disputes.

Laying the groundwork: addressing rent renewal in your lease agreement

The best way to tackle potential rent renewal disputes is to address them proactively within your initial lease agreement. Here are some key areas to focus on:

Clear option to renew terms: Ensure the lease clearly outlines the process and timeframe for exercising your option to renew. Ambiguity here can lead to the loss of your renewal rights.

Defined rent review mechanism: If the rent will be reviewed upon renewal, the method of review must be clearly stated. Common methods include set percentage increases, Consumer Price Index (CPI) adjustments, or a market rent review.

Market rent review specifics: If a market rent review is included, the lease should detail how the market rent will be determined. Crucially, it should specify that the valuation must be based on the premise being unoccupied and that the value of your business goodwill, fixtures, and fittings should be excluded from the assessment.

Independent valuation process: To minimise disputes over market rent, your lease should include a clear process for appointing an independent valuer if you and the landlord cannot agree. The lease should also specify how the costs of this valuation will be shared (often equally between both parties).

Timeline for market rent determination: The lease could specify a timeframe within which the landlord must propose the new rent and for you to respond. In South Australia, for retail shop leases with a renewal option at market rent, the lessee can request an early determination of market rent within a specific window.

Get on the front foot by ensuring your lease agreement addresses all the issues you may face, call us on 1300 654 590 or email us.

The power to negotiate: don’t be afraid to ask

Tenants often feel they have limited power when it comes to negotiating commercial lease terms. Usually, the landlord provides the lease agreement, and it will be drafted to the landlord’s advantage. However, it’s important to remember that almost everything in a commercial lease is negotiable. This includes the terms surrounding lease renewal and rent reviews. Remember a contract is merely a way to allocate risk appropriately between the parties. Don’t let a response of ‘this clause is industry standard’ dissuade you from asking for changes.

Before signing a lease, don’t hesitate to question and negotiate clauses related to rent renewal. For instance, you might try to:

  • Negotiate a cap on any percentage increase.
  • Specify the CPI measure to be used for adjustments.
  • Propose a more detailed and fairer process for market rent reviews.
  • Include a clause that allows for mediation before resorting to formal valuation if there’s a disagreement on market rent.
  • Remove any ‘ratchet clause’ which provides that the rent cannot fall below a certain level (usually the current rent) even if market conditions worsen.

Remember, a landlord wants a reliable tenant just as much as you need a suitable premises for your business. This creates room for negotiation, especially before the lease is signed.

We can advise you on your negotiation rights to ensure you enter a favourable agreement, call us on 1300 654 590 or email us.

Market valuations: potential pitfalls

We have focused on market valuations in this article because that is where we see most disputes about rent renewal. While market valuation seems like a fair way to determine rent, several issues can arise:

Subjectivity: Market valuations can still be subjective, and different valuers might reach different conclusions. This is why a clear process in the lease for selecting a valuer is important.

Cost: Engaging a valuer can be an additional expense for both parties.

Timing: The timing of the valuation can impact the outcome. Market conditions can fluctuate, and a valuation taken at a peak might not reflect a subsequent downturn.

Disagreement on assumptions: Disputes can arise over the assumptions the valuer makes, even when the lease specifies excluding goodwill and fixtures.

Having a well-defined market rent review clause in your lease, including a clear process for independent valuation and cost sharing, helps to mitigate these potential pitfalls.

Key takeaways for commercial tenants

  • Thoroughly review and understand the lease clauses relating to renewal options and rent reviews BEFORE signing.
  • Don’t be afraid to negotiate the terms of rent renewal and market rent review clauses.
  • Ensure your lease clearly defines the process for determining market rent upon renewal, including the exclusion of goodwill and tenant improvements.
  • Advocate for a clear and cost-effective process for independent valuation in case of disagreement.
  • Document all agreements and understandings in writing within the lease.
  • Be aware of the timelines for exercising your renewal option.

How we can be your ally

Engaging us before you sign a lease is one of the best investments you can make to protect your business interests. We can:

  • Review the lease agreement in detail, explaining complex legal jargon and potential pitfalls related to rent renewal.
  • Advise you on your negotiation rights and help you secure favourable terms regarding renewal options and rent reviews.
  • Ensure that market rent review clauses are fair and clearly defined, protecting you from unreasonable increases.
  • Assist in drafting specific clauses related to the independent valuation process.
  • Provide guidance and representation if a rent renewal dispute arises, helping you navigate negotiation, mediation, or valuation processes.

Don’t wait until a dispute arises. By proactively addressing rent renewal in your commercial lease agreement with the assistance of legal counsel, you can minimise the risk of conflict and ensure a smoother path for your business in the years to come. If you are negotiating the terms of your retail or commercial lease agreement or find yourself in disputes with your landlord, call us on 1300 654 590 or email us.

The information contained in this post is current at the date of editing – 21 March 2025. 

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