A right of renewal and a lease extension may have the same practical effect, however, there is a separate and distinct legal difference between the two.
A right of renewal is the tenant’s option to enter into a new lease with the landlord. The landlord does not have a choice whether or not to grant it, provided certain conditions are met. An extension of the lease is a continuation of the original lease, without interruption.
Where the lease is renewed pursuant to a right of renewal, it is deemed to be a new lease, rather than an extension of the existing lease.
The landlord is entitled to require, as part of the renewal, that any guarantor of the existing lease also guarantees the new lease. The landlord will usually request that the renewal be formally documented. This includes any guarantor(s) signing it to record their ongoing obligations.
It is common for a lease to state that the tenant’s exercise of the right to renew is subject to certain conditions having been met. These may include things like a minimum time frame for giving of notice of renewal. Also that the tenant is not in breach of any of its covenants under the lease.
If you have a further right or rights of renewal under your lease, most standard form leases require you to give the landlord at least three calendar months notice of your intention to exercise your right of renewal. When you give the required notice, the landlord is required to renew the lease for the further term. If you do not give the required notice, then you are at risk of losing your right to renew. Recent court decisions indicate however that the landlord must remind the tenant that the lease is due for renewal. This thereby gives the tenant every opportunity to renew the lease.
Factors for consideration
Whether or not you exercise a right of renewal is often a decision of critical importance to a tenant. For a tenant, there are many factors to take into consideration. These include
- suitability of the premises
- the market rent
- any reinstatement obligations under your existing lease
- availability and the fit-out of new premises
- You may also need to consider the ‘direction’ your business is taking.
It is also worth remembering that in most cases, the exercise of a right of renewal will trigger the ability for the landlord to review the rent. Therefore you need to be aware of your rights contained in any rent review provisions in your existing lease.
Key differences between the consequences of a lease renewal and a lease extension
- A renewal term can extinguish or limit any personal covenants and rights that benefit either the landlord or the tenant. Whereas they will probably continue during an extension of term. Personal rights include a free rent period, a tenant improvement allowance or a right of first refusal held by the tenant on additional space.
- With a renewal, any improvements made by a tenant may be taken into account to determine fair market rent for the renewal term. Whereas with an extension of the term, this would likely not be the case.
- In cases where a lease has been assigned, there is a risk that the original tenant’s liability will end when the original term ends. However, with an extension of term, the previous tenant may remain liable, unless the lease provides for its release.
- To the extent that a breach by a tenant gives rise to a right for the landlord to terminate the lease, the landlord may be able to terminate the lease during the extension term for a breach which occurred during the original term.
An option to extend the lease may have potential benefits to the landlord. One example might be where the tenant’s use of the premises is for an industrial activity or creates or uses potential contaminants. This might make the tenant’s covenant during the original term, to repair and maintain the premises a key concern.
If you do not exercise your rights of renewal and the current term of the lease expires then most leases provide that the term is then on a month by month tenancy. The consequence of this is that either party can then cancel the lease by giving twenty working days written notice. The tenant may also apply to the court for relief against cancellation of the lease by the landlord for failure to give the required notice. This is an expensive process though.
Seek specialist advice
In deciding which option is best for you, it is important to ensure that the parties intentions are accurately reflected. This avoids any unintended consequences. We recommend seeking specialist advice so that the structure is carefully considered. Your lawyer can make you aware of the potential benefits and drawbacks of each scenario.