Alex is Sprintlaw's co-founder and principal lawyer. Alex previously worked at a top-tier firm as a lawyer specialising in technology and media contracts, and founded a digital agency which he sold in 2015.
If you’ve found the right premises for your business, you’re probably thinking beyond the first lease term.
You might be investing in fit-out, building a customer base in the area, and signing suppliers based on the assumption you’ll be there for a while. That’s where having an option to renew can make a huge difference.
An option to renew clause is often one of the most valuable parts of a commercial lease for a tenant. But it can also be one of the easiest to misunderstand (or miss entirely), especially if you’re signing your first lease, taking over an existing lease, or negotiating a renewal after a few years in the space.
Below, we’ll walk you through how an option to renew generally works in Australia, why it matters, what can go wrong, and what you can do to protect your business before you sign.
What Is an Option To Renew in a Commercial Lease?
An option to renew is a clause that gives you (the tenant) the right to extend your lease for an additional term (or terms) after the initial term ends.
It’s important to note the word “option”. It’s typically your choice to extend. If you exercise the option validly and meet any conditions in the lease (and any relevant laws), the landlord will usually be required to grant the renewal under the lease terms.
How an Option To Renew Usually Works
Most option clauses set out:
- When you can renew (for example, “one option of 3 years” after the initial 3-year term)
- How you must exercise the option (often written notice)
- The deadline for giving notice (for example, “between 6 and 3 months before the end of the term”)
- How rent will be calculated in the renewed term (fixed increase, CPI, market review, or a formula)
- Conditions you must meet (for example, not being in breach of the lease)
In practice, an option to renew is your “plan B” if your business is going well and you want to stay. It can also be your “plan A” if the location is critical to your business model.
Option To Renew vs New Lease: What’s the Difference?
This is a key distinction for small businesses.
- Exercising an option extends the existing lease relationship under predetermined terms (with rent usually reviewed in a particular way).
- Negotiating a new lease means you and the landlord can renegotiate everything, and the landlord can potentially decide not to offer you a further term.
If you don’t have an option to renew (or you miss your window), you may be forced to negotiate from scratch at a time when you have less leverage.
Why an Option To Renew Matters for Small Businesses
For many businesses, the lease isn’t just “rent”. It’s your footprint, your brand presence, your customer access, and your operational base.
Having an option to renew can help you protect that investment.
It Helps You Protect Your Fit-Out and Location-Based Goodwill
Fit-outs can be expensive. Even if you have a relatively simple setup, you’ll likely spend money (and time) tailoring the space to your business.
If your lease ends and you have no renewal right, you could be forced to move right when your business is gaining momentum.
It Can Reduce the Risk of Rent Shocks and Disruption
Options don’t always guarantee “cheap rent”, but they can create a structured pathway for rent review rather than a sudden, high-pressure renegotiation.
They also reduce the risk of operational disruption-moving premises can mean downtime, lost customers, and unexpected costs.
It Strengthens Your Planning (and Sometimes Funding) Position
Whether you’re negotiating supplier contracts, considering hiring more staff, or seeking finance, being able to show stability in your premises can be helpful.
Even if a lender doesn’t ask about it directly, your own risk management improves when you’re not facing a forced relocation every couple of years.
Key Terms to Check in an Option To Renew Clause
Not all option clauses are created equal. Two leases can both say “option to renew”, but one can be far more tenant-friendly than the other.
Here are the main legal and commercial points to check before you sign (or before you assume you have a renewal right).
1. The Notice Period (And How You Must Give Notice)
Most options have a strict notice window.
For example, you may have to give written notice:
- no earlier than 6 months before the lease ends, and
- no later than 3 months before the lease ends.
If you give notice too early or too late, it may be invalid.
You should also check how notice must be given. Many leases require notice to be delivered to a specific address, by a specific method (email may or may not be permitted), and sometimes to specific representatives.
If you’re not sure whether your lease notice method is compliant, it’s a good time to get a Commercial Lease Review before you rely on it.
2. Conditions: When You Can Lose the Option
Options often come with conditions. A common one is that you must not be in breach of the lease at the time you exercise the option (or sometimes throughout the lease term).
This can be trickier than it sounds. “Breach” can include things like:
- late rent payments (even if later paid)
- not providing required certificates of currency for insurance
- unauthorised alterations to the premises
- subleasing or assigning without consent
Sometimes the landlord will rely on a minor or technical breach to argue the option is not available. This is one reason it’s important to track your compliance obligations throughout the term.
3. How Rent Is Set During the Renewal Term
Option periods usually include a rent review mechanism. The most common are:
- Fixed percentage increase (predictable, but may be higher than market in some years)
- CPI (ties increases to inflation, but still varies)
- Market rent review (can increase or decrease depending on market conditions, but the clause often sets a process that can favour the landlord if it’s not drafted carefully)
- Agreed rent (rare, but can occur if the parties lock in the rent figure)
Market rent clauses need careful reading. Some leases include restrictions like “market rent cannot be lower than current rent” (sometimes called a ratchet clause). Whether these are allowed can depend on your state or territory and whether the lease is covered by retail leasing legislation, so it’s worth checking the relevant rules and the wording used.
4. The Length and Number of Options
From a business planning perspective, you should think about:
- How long you realistically want to stay in the premises
- Whether you may expand or relocate as you grow
- Whether the lease gives you one renewal term or multiple (e.g. “3 + 3 + 3”)
Longer total tenure can be great, but you still want flexibility. Sometimes, negotiating the right balance between security and adaptability is key.
5. Renovations, Make Good, and Refurbishment on Renewal
Even if you have an option to renew, check whether the lease requires:
- a refurbishment at the start of the option term
- upgrades to comply with new standards
- make good obligations at the end of the lease (which can still apply even if you renew later)
These clauses can materially change the cost of exercising your option. If you’re budgeting for renewal, don’t look at rent alone.
Common Mistakes Businesses Make With an Option To Renew
An option to renew is only valuable if it’s usable in practice.
Here are some of the common pitfalls we see for Australian small businesses.
Missing the Deadline to Exercise the Option
This is the big one.
If you miss the option window, you may lose the legal right to renew. At that point, you’re relying on the landlord’s goodwill (or their commercial interest) to offer a new lease.
A practical tip is to set reminders well in advance-think 9–12 months before expiry-so you have enough time to check rent review clauses, negotiate any issues, and provide valid notice.
Assuming a “Handshake Deal” Is Enough
You might have a great relationship with the landlord. But if the lease says notices must be in writing and served in a certain way, a phone call or informal email may not exercise the option properly.
If the landlord later changes their mind or sells the property, you want your rights clearly documented.
Not Checking Whether You’re in Breach
As mentioned above, many option clauses require the tenant not to be in breach.
Before exercising an option, it’s wise to:
- check your payment history
- confirm any required insurance documents have been provided
- ensure any alterations had landlord consent
- resolve any outstanding disputes in writing
If you’re unsure whether something counts as a breach, getting advice early can prevent nasty surprises.
Renewing Without Understanding the Flow-On Effects
When you renew, you’re usually continuing the same lease framework.
That means if the lease has unfavourable terms (like broad make good obligations, strict outgoings provisions, or limited use clauses), you may be locking those in for years longer.
This is why many business owners do a lease review when renewal time is approaching, not just at the start of the initial term.
How To Negotiate an Option To Renew Before You Sign
If you’re negotiating a new lease, you’re in the best position to set yourself up properly. Once you sign, your leverage usually drops significantly.
Here are some practical negotiation points to consider.
Ask for an Option (If It’s Not Included)
Some leases don’t automatically include an option to renew.
If you want security, ask for it during negotiations. If the landlord pushes back, you can consider trade-offs (for example, a slightly longer initial term, or a shorter option term).
Make the Notice Requirements Clear and Practical
Options often fail because notice clauses are overly strict or outdated.
Where possible, ensure the lease allows notice by email and identifies the correct addresses. This reduces the risk of a technical dispute later.
Try to Remove “Gotcha” Conditions
Landlords often want the option to be conditional on you not being in breach. That’s common, but you can sometimes negotiate the scope.
For example, the lease might allow you to exercise the option as long as:
- you are not in “material breach” (rather than any breach), and/or
- you have remedied any breach after receiving notice.
This can help protect you from losing the option due to a minor technical issue.
Understand the Rent Review and Consider a Framework You Can Live With
Rent review clauses are some of the most commercially important parts of the option period.
If the renewed rent is a market review, consider whether the clause includes a fair process for determining market rent (for example, an independent valuer mechanism if you can’t agree).
If you’re signing a retail lease or something that might be regulated differently, the drafting matters even more, because retail leasing laws vary between states and territories.
Get the Right Documents in Place If Your Business Structure Changes
Sometimes the lease is signed early-before your structure is final, or before you bring in investors.
If you’re operating through a company, having your foundational documents organised (like a Company Constitution) can help when you negotiate longer lease terms or deal with landlord requirements like guarantees.
And if you’re bringing on co-founders or investors, you may also want to align decision-making about major commitments (like long lease terms) with a Shareholders Agreement.
What If You’re Buying a Business or Taking Over an Existing Lease?
If you’re purchasing an existing business (or stepping into a lease as an incoming tenant), the option to renew becomes part of your due diligence.
At a minimum, you’ll want to confirm:
- whether the lease actually includes an option to renew
- whether the outgoing tenant has complied with the lease (so the option hasn’t been jeopardised)
- whether the option is still available (and the deadline hasn’t passed)
- whether the landlord must consent to an assignment or new lease
This is also where the details of the assignment process matter. If you’re taking over the lease, you’ll often be documenting the transfer properly (and making sure the landlord’s consent is obtained where required).
If you’re at this stage, advice around a Deed of Assignment of Lease can help ensure the transfer is clean, and your rights (including any option to renew) aren’t accidentally lost in the process.
Don’t Forget the Bigger Legal Picture
A lease is one part of your broader legal setup.
For example, if you’re also running online sales, collecting customer details, or marketing via email lists, you’ll want to make sure you have fit-for-purpose online terms and a Privacy Policy in place.
And if you’re hiring staff as you grow into a renewed term, locking in the fundamentals with an Employment Contract can reduce disputes and set expectations from day one.
Key Takeaways
- An option to renew gives you the right (not the obligation) to extend your commercial lease for an additional term, as long as you follow the clause requirements (including strict notice requirements).
- The value of an option to renew comes down to the details: notice windows, conditions about breaches, and how rent is reviewed during the renewal term.
- Common problems include missing the exercise deadline, giving notice in the wrong way, or losing the option due to a technical breach of the lease.
- Before you sign a lease, negotiating a workable option clause can protect your fit-out investment, business goodwill, and location stability.
- If you’re buying a business or taking over a lease, you should confirm the option is still valid and transferable, and document the handover properly.
If you’d like help reviewing your lease terms or negotiating an option to renew, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
