What landlords need to know.
Lease options are often considered a straightforward process. However, following changes to the Retail Leases Act 2003 (Vic) over recent years, we have found there is often confusion around the different pathways a lease option can take. Understanding the process can help landlords avoid unnecessary delays, minimise disputes and ensure they are responding correctly throughout the lease renewal process.
Retail Leases Act versus non-Retail Leases Act leases
For leases that do not fall under the Retail Leases Act, a lease option notice is generally issued without a proposed market rent. Unless the lease provides otherwise, the tenant must first exercise their option before the market rent review process is triggered.
For leases that do fall under the Retail Leases Act, landlords are generally required to include a proposed market rent in the lease option notice, giving the tenant the opportunity to request an early market rent review before deciding whether to exercise their option.
There are four common scenarios landlords should be aware of.
Scenario 1: The tenant exercises their option and agrees to the
proposed market rent
The tenant exercises their option within the required timeframe and agrees to the proposed market rent included in the lease option notice. The further lease term is secured, the rent has been agreed and the lease renewal can proceed without any further negotiations.
Scenario 2: The tenant requests an early market rent review
If the tenant disagrees with the proposed market rent, they have 28 days from receiving the lease option notice to request an early market rent review. This allows the market rent to be negotiated or, if required, formally determined before the tenant decides whether to exercise their option.
If agreement cannot be reached, the matter may proceed to a formal rental determination. Importantly, provided the tenant has not already exercised their option, they still have the right to decide whether or not to exercise once the market rent has been determined.
This is why it is so important to ensure the proposed market rent included in the lease option notice is realistic and supported by current market evidence.
Scenario 3: The tenant exercises their option but does not agree to
the proposed market rent
If the tenant does not request an early market rent review within the required 28 day period, they lose the right to have the rent determined before deciding whether to exercise their option. They may still exercise their option and dispute the proposed market rent.
At this point, the further lease term has been secured and only the market rent remains to be resolved. If agreement can’t be reached, the rent can be determined in accordance with the lease and the Retail Leases Act.
Unlike an early market rent review, the tenant has already exercised their option, with only the market rent remaining to be determined.
Scenario 4: The tenant negotiates the rent without exercising their option
A tenant may attempt to negotiate the proposed market rent without exercising their option.
Unless they have validly requested an early market rent review within the required 28 day period, negotiating the rent does not preserve their option rights. If the option is not exercised before the deadline, the tenant may lose their right to the further lease term.
Why this matters
Understanding which scenario you are dealing with can make a significant difference to the outcome. It helps ensure you are responding correctly, protecting your position and avoiding unnecessary delays or disputes.
With lease options, timing is everything. Understanding the process early can make the renewal process much smoother for both landlords and tenants.
If you would like to talk through any of this, our Property Management team is here to help.
