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
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
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.
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Russell v. Township of Georgian Bay provides a useful reminder of the fact that while municipal officials sometimes appear to hold all of the cards in disputes with home owners, that is not always the case.
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