Renewal Options in a Lease: Tips and Traps for Landlords and Tenants

by Field Law
Contact

Whether you are a landlord or a tenant, one of the crucial terms to consider when negotiating a lease is the renewal clause. The renewal clause grants the tenant an option, or several consecutive options, to renew the lease for a set term or several set terms after the expiry of the initial term of the lease. It is important for a landlord to ensure that the renewal clause is drafted to maximize the rent payable during the renewal term, and to deny a troublesome tenant the ability to exercise the option to renew. Conversely, a tenant wants to ensure that the renewal rent can be fairly negotiated or determined, and that the option to renew cannot be revoked for minor infractions under the lease.

It is common for a renewal term to be continued on the same terms and conditions of the lease, with the exception of rent, any financial incentives offered to the tenant for the initial term (such as a tenant’s improvement allowance) - and the renewal clause itself.  It is very important for the landlord to exclude the renewal clause from the “continued” terms, otherwise the lease would allow the tenant the right to renew the lease in perpetuity.

The rent during a renewal term is often based on “market rent” at the time of renewal, or simply determined by negotiation between the parties based on a minimum rent set in the renewal clause. “Market rent,” from a landlord’s perspective, should be defined by using language such as ‘similarly improved premises in the market,’ while a tenant would prefer ‘unimproved premises in the market,’ for obvious reasons. From the tenant’s perspective, if rent is to be negotiated, the lease should allow for arbitration if the parties cannot reach an agreement – or, alternatively, state that the negotiated rent must be satisfactory to the landlord. A strong term for the landlord to insert in the renewal clause is that the rent cannot in any case be lower than the maximum monthly rent that was payable during the initial term.

The renewal clause should set a specific time frame for the tenant to give notice that it is exercising an option to renew. A typical time frame is no earlier than 12 months, and no later than 6 months, prior to the expiration of the initial term. During that period, negotiation of the rent payable, and any other items to be determined, must take place.

Most renewal rights are contingent on the tenant not being in default at the time the option to renew can be exercised, or having never defaulted under the terms of the lease at any time during the initial term. In the latter case, the landlord should always remember to give written notice of any default to the tenant, and set out in the notice that the option to renew has been forfeited due to the breach. If the landlord does not do so, and the tenant subsequently remedies the breach, the tenant could later argue that the landlord cannot rely on the prior breach to prevent the exercise of the option. A landlord can also place other conditions on the option to renew – for example, in a retail setting, a landlord could require a substantial renovation of the leased premises in a certain year as a prerequisite to exercising the option to renew in the last year of the lease.

Finally, if you are planning to assume an existing lease, it is crucial to obtain confirmation in writing from the landlord that the existing tenant is not, and has never been, in default under the terms of the lease, and that any right or rights to renew are still valid and exercisable by the tenant. Otherwise, you may be assuming a lease in which the right to renew has already been forfeited by a prior default of the existing tenant.

Written by:

Field Law
Contact
more
less

Field Law on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.