What is a renewal option?

The option is created by a clause in the lease that says who may exercise it, when and how, how long the renewed term runs and how rent and other terms will be set. Usually the tenant holds the option, but it can be mutual and is often contingent on the tenant not being in breach. Unlike a fresh negotiation, a validly exercised option binds both parties to the further term.

To exercise it, the tenant must comply strictly with the clause: written notice in the specified form, to the nominated address, within the stated window and usually while the lease is on foot. If the notice is late or defective, the right lapses and the lease ends on expiry. A break option works the other way, allowing early termination, and a break exercised by the tenant may extinguish an unexercised renewal option, so check how the two clauses interact.

Fixed renewal rent gives certainty and low dispute risk, but may sit below market by the time the renewed term starts. A market review sets rent at the market rate as at the review date, which usually needs an independent valuer and carries more dispute risk and valuation cost. A formula or cap, such as CPI plus a percentage or a capped increase, sits between the two: less volatile, but it can drift from true market levels.

Where market rent is disputed, the clause should set out the process: comparable evidence, an independent valuer, or binding expert determination or arbitration. It should also say who pays the valuation or arbitral costs. Small business tenants can seek guidance from the small business commissioner or the equivalent dispute resolution service in their state or territory, and retail leases may be subject to statutory limits under state retail leases legislation.

Renewal clauses set an earliest and latest date for notice, often between six and three months before expiry. Missing the window usually means the option is lost, although estoppel or waiver arguments occasionally apply where the landlord led the tenant to believe late notice was acceptable. Retail tenants get more protection: state retail leases legislation requires the landlord to notify the tenant of the last date to exercise, and in some states, including New South Wales, the deadline is extended if that notice is not given. Serve notice to the address in the lease and keep dated proof.

Common dispute triggers are ambiguous notice wording, late or misaddressed notices, landlords adding conditions the clause does not contain, divergent rent valuations and assignees exercising an option that does not run with the lease. If a landlord refuses a valid exercise, collate the evidence, raise it in writing, seek mediation through the small business commissioner or equivalent service in your state or territory, then apply to the relevant tribunal or court.