Options to renew in a commercial lease typically give the tenant the right, on written notice, to renew the lease for a specific period "on the same terms and conditions" as the lease, except for the renewal rents and the inducements initially provided to the tenant, and except for the exercised option to renew, thereby ensuring that the tenant will not acquire an additional renewal option to renew. Insufficient attention to the terms of the renewal option may lead to unintended consequences.
We were recently asked to review various leases of premises within a potential redevelopment site. Some of the leases did not contain a "demolition" clause (i.e., a clause allowing the landlord to terminate the lease and demolish the building), which was troublesome in itself. In addition, a handful of the leases contained poorly drafted options to renew that effectively granted the tenants a perpetual right of renewal. This left the landlord with no ability to redevelop the site without coming to a settlement with these tenants; an uncertain and potentially expensive proposition.
Courts treat perpetual rights to renew as "extraordinary" and tend to favour the landlord when interpreting them. For example, if a renewal option states that the renewal lease will be on the "same terms and conditions as this lease," the option will be treated as not including the exercised option to renew, thereby avoiding the issue of perpetual renewal rights. If, however, the renewal option states that the renewal lease will be "on the same terms and conditions as this lease, including the covenant for renewal," a perpetual renewal option will be created.
While it is a simple matter to draft leases so that perpetual renewal rights do not arise, a lack of attention to detail when drafting renewal options may stifle site redevelopment, and thus adversely impact value.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
