Does your commercial tenant have an option to renew a retail premises lease? If so, get your section 28 notice right!
If your commercial tenant has an option to renew a retail premise lease it’s important, as a landlord, that you make sure you get your Section 28 notice right. A recent VCAT decision highlights a common error and the dangers of getting it wrong.
In September 2024, the Victorian Civil and Administrative Tribunal (VCAT) handed down a decision that will impact commercial landlords and tenants alike. The case of Pagica Pty Ltd ATF the Oscinah Trust v Inlet Property Pty Ltd (Building and Property) [2024] VCAT 830 highlights critical issues regarding section 28 of the Retail Leases Act 2003 (RLA) and the validity of notices under this section.
Background of Section 28 (1A) of the Retail Leases Act
Section 28 (1A) of the RLA mandates that landlords must give tenants at least 3 months’ written notice before the final date that an option to renew the lease can be exercised.
This notice must include:
- the date by which the option must be exercised;
- the rent payable for the first 12 months of the renewed term;
- the availability of an early rent review under section 28A;
- the availability of a cooling-off period under section 28B; and
- any changes to the most recent disclosure statement, except for changes related to rent.
In the Pagica Pty Ltd case, the tenant had an option to renew the lease for a further term, subject to a market rent review for the first year. The landlord sought to end the lease, claiming the tenant had failed to exercise the option within the required timeframe. However, the tenant argued that the landlord’s notice under section 28 was defective, meaning the timeframe for exercising the option was extended.
Key takeaways from the decision
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A tenant of a retail premises lease cannot exercise its option until it receives a valid s 28 notice
Prior to 2019, if a landlord did not serve a notice in accordance with s 28 of the RLA on a tenant, the tenant could still serve its own notice to exercise the option.
However, these provisions were amended in 2020 so that the section which specifically dealt with the situation where a tenant can exercise an option for a further term where the landlord has not served a valid notice under s 28 was removed.
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A valid notice should state both the current market rent and proposed rent for the new term
A s 28 notice is invalid if the rent for the new term is the current market rent and the notice only states the landlord’s proposed rent for the new term
In the Pagica Pty Ltd case, the landlord’s notice specified that “the commencement rent for the further term will be $110,000 per annum plus GST.”
The Tribunal found that this statement on its face value was incorrect and misleading as it gave the tenant the false impression that the rental figure was determined as a result of a market review.
It would be prudent for landlord’s drafting s 28 notices to state both that the rent for the new term will be the current market rent as agreed between the parties or determined by a specialist retail valuer, and the figure that the landlord proposes for the new term.
The consequences of drafting a s 28 notice that does not strictly comply with the RLA can be significant to a landlord.
If you require advice on the drafting of a compliant s 28 notice or if you are seeking advice on whether you have been issued with a compliant s 28 notice, please contact our office.
