Commercial leases – it pays to know the renewal and rent review processes in your lease so you don’t get caught out…

A young business owner leased a commercial warehouse to run her business.  She received notice from her landlord that a market rent review was due for the premises and that the rent for the warehouse would be increased at the end of that month.  She thought that the rent increase was extortionate and that it was well above market value.

She reviewed her Deed of Lease, and realised that she had forgotten to renew the lease the previous year, when the initial term of the lease had come to an end.  She contacted her lawyer as she was unaware of her rights during this period and whether she had the ability to fight the increase in rent. 

Lease Renewal

Most commercial leases provide for a right to renew the lease for a further term, or terms. 

In the above example, the business owner’s lease provided that the tenant was required to give written notice of her intention to renew at least three months before the renewal date. 

Given she failed to give written notice within the specified timeframe then she was technically ‘holding over’ the lease, which means it continued to apply on the same terms, except that it turned into a month by month lease.  In this instance, either party was able to terminate the lease with 20 working days’ notice.  Most business owners don’t want the uncertainty of a month by month lease, as they aren’t able to uplift their business and find new premises at such short notice.

Rent Review

For the business owner above, when the landlord issued the notice advising her of a rent review (ie a rent increase), the terms of her lease recorded that she had 20 working days from receipt of the notice to dispute the rent. 

If she did not issue this notice during this timeframe, she could not dispute the rent and would be stuck with it for the following term of the lease.

Dispute notices under commercial leases with regard to rent reviews generally need to record that the tenant does not agree to the rent proposed by the landlord and include a proposed alternative market rent figure.

Once the dispute notice is issued, under the above lease the parties then had 10 working days to reach agreement as to the new rent amount.

If the business owner and her landlord were not to reach agreement as above, then their lease provided for arbitration, or alternatively having two valuers appointed to determine the rent.

Some leases also provide for appointment of a third independent expert if the parties’ valuers are unable to agree.

Luckily for the business owner above, she was able to agree with the landlord to meet in the middle of the figures that they had each proposed, and the landlord was agreeable to renewing the lease (despite it being outside the timeframe agreed in the lease).

It is vital to take advice if you are entering into a commercial lease, and to know the processes for renewal and rent review so you can ensure you comply with all of your obligations.  If you are a tenant or a landlord, you should diarise a reminder in advance of all renewal and rent review dates and notice periods under your lease so you don’t get caught out.