What to do at the end of the lease

Ending, renewing, extending or transferring the lease

Your lease will outline when the lease is due to end as well as whether there are any options to extend or renew the lease. As the end of your lease approaches it is important for lessors and lessees to discuss their options so that there can be a smooth transition to appropriate future arrangements.

What happens when a lease, without an option, ends?

If the lease does not have an option to extend or renew then when the lease ends, the lessor is free to find a new lessee.

The lessor must give the lessee written notice about whether they intend to offer the lessee a new lease or if they want the lessee to move out at the end of the current lease. This notification must be given at least six months before the lease expiry date and not more than 12 months before expiry.

If the lessor offers the lessee a new lease and the lessee does not accept it within one month, the lessor can withdraw the offer.

If the lessor doesn’t issue a notice telling the lessee whether there will be an offer of a new lease, the lessee should consider writing to the lessor before the lease ends to ask the lessor for this notice indicating their intentions. Otherwise, the lease may continue on a month-to-month basis.

The lease can be extended by up to six months from the time the lessor gives the lessee the notice.

The lessor does not have to negotiate a new lease, or an extension, and they can stop negotiations at any time. They must tell the lessee in writing that they have finished the negotiations before they can advertise the premises for lease.

If no extension is offered or agreed between the parties then by the end of the lease you must vacate the shop, remove your belongings and ‘make good’ the premises as outlined in the lease.

For more information, see what happens when a lease, without an option, ends?

What happens if the lease has an option to extend or renew the lease?

A retail lease may include an option to renew or extend the lease.

Check the lease to see what you need to do to exercise the option and when it needs to be done.

If the lessee wants to take up the option, they must normally tell the lessor in writing during the ‘option exercise window’ stated in the lease. If the lessee misses the last date to exercise the option, they will probably lose the right to the option.

Read more about lease options.

Rent changes resulting from a lease extension or renewal

If the option to extend or renew the lease states that the rent changes to current market rent, the lessee may ask the lessor in writing to outline what the new rent will be. The lessee may send this request to the lessor before the time to exercise the option starts, usually nine to six months before the end of the lease.

If the lessee and lessor cannot agree on the current market rent, then the Act provides a process for a specialist retail valuer to determine the rent. The NSW Small Business Commission appoints the valuer and the lessee and lessor share the costs equally.

These costs can be upwards of $1,500 per party, however, will vary depending on the valuer and matter. If either party seeks a review, then both parties may be required to pay for the costs of a further two valuers.

Once the current market rent is agreed or determined, the lessee has up to 21 days to exercise the option. If the lessee misses the date to exercise the option, they will probably lose the right to the option.

Download an application for appointment of a specialist retail valuer.

Continuing the lease on a month-to-month basis

While the lease may not include an option to renew, many leases give the lessee an opportunity to ‘hold over’ the lease and stay in the premises on a month- to-month basis at the end of the lease. The lessee becomes a ‘periodic lessee’ or ‘lessee at will’ and in this situation, either the lessee or the lessor can end the lease with one month’s notice.

Be aware that some franchise and licence to sell agreements require a lease not to be month- to-month.

If a lessee wants to hold over on a month-to-month basis, they should check the terms of the lease to see whether this is permitted and consider asking the lessor for their consent in writing before the lease ends.

It can be risky to remain in a month-to-month lease without negotiating for a new fixed term lease.

For example, it can and does happen that lessees are unable to sell their business because their lessor is able to choose to terminate the month-to-month lease and a buyer typically wants a longer term lease.

It may be wise business practice to actively seek to negotiate a new lease with a new fixed term before you enter into a month-to-month lease unless that works for you (e.g. because you are seeking premises elsewhere).

Read more about lease hold overs and renewals.

Are you required to ‘make good’ the premises at the end of the lease?

‘Make good’ provisions set out the obligations of the lessee before the lease ends, if any.

Check if the lease has a ‘make good’ provision. Typically, these provisions require a lessee to return the premises to the lessor in a similar condition to that at the start of the lease. In some cases, make good involves a requirement for a lessee to strip back the premises to base building (or bare shell) condition and redecorate the premises (e.g. re-paint). Ideally, you may be able to refer to the condition report prepared at the beginning of the lease.

If the lessee is vacating the premises be sure to leave enough time to remove your property and restore the premises to the state agreed in the lease. Alternatively, parties often agree to a payment by the lessee to the lessor in lieu of the lessee carrying out the make good, leaving it to the lessor to carry out as necessary. Lessees can try negotiating with their lessor for this arrangement, if preferable. If lessees don’t carry out the make good, they will normally be liable to pay the agreed costs.

Retail leases may include a clause which states where the lessor and lessee cannot agree on the make good costs, the President of the Australian Institute of Quantity Surveyors (AIQS), or another industry body, will nominate an independent certified quantity surveyor to make a binding determination about these costs.

Selling the business

If the lessee decides to sell their business, they will often be expected to transfer (assign) their lease to the buyer (the assignee). So, there are two transactions that may need to occur – a sale of business and a transfer of lease. Asking the lessor to agree to the assignment of the lease involves giving information to the lessor and to the new lessee, in order to be released from the financial obligations of the lease.

Under the Act, an Assignors Disclosure Statement is to be provided to the lessor when a lessee is requesting the lessor to consent to the assignment (transfer) of a lease. A copy should also be given to the assignee (proposed new lessee). Download a copy of Retail Lease Assignor's Disclosure Statement.

You should also consider getting independent advice. Read more about transferring your lease.

Collecting your property after the lease has ended

Usually, unless the lease states otherwise, the property the lessee brings into the premises remains the lessee’s property after the lease has ended. The lessor has to give the lessee reasonable opportunity to remove their goods, whether the lease has expired, or it has ended early because of a breach of the lease terms. The lessee should contact the lessor and arrange a suitable time to collect their goods. Lessees may be liable to the lessor for compensation or damages for leaving their goods at the premises if this has not been agreed. Read more about the lessee’s right to enter a property after a lease ends.

Tips

• The lessee should ask the lessor for an updated Disclosure Statement before they exercise the option to renew or extend the lease.
• If the lessee is vacating the premises be sure to leave enough time to remove your property and restore the premises to the state agreed in the lease (see sections 2 and 4 of this guide which refer to ‘make good’ provisions).