As commercial tenants do not have a default legal entitlement to
renew or extend an existing lease, a common element of many leases
is a right in favour of the tenant to continue its occupancy beyond
the expiry of the current term. While the terms used to describe
such rights ("Right to Renew" and "Option to
Extend") are often used interchangeably, the concepts have
distinct legal ramifications which merit careful consideration by
tenants and landlords.
The legal effect of exercising an option to renew is to
terminate the original lease upon its expiry and immediately begin
a new lease. Generally speaking, the renewal lease will contain all
of the terms of the existing lease, with the exception of: (i) any
rights which are personal to the tenant and (ii) the rental rate to
be paid during the renewal term. In contrast, the effect of a lease
extension is to continue the original lease for an extended term,
generally on the same terms and conditions as the initial lease
term, with the exception of the rental rate to be paid during the
There are two key impacts of this distinction: first, on any
rights deemed to be personal to the tenant and second, on the
parties following an assignment of lease.
Even where a renewal lease is granted on the same terms and
conditions as the initial lease, unless the lease expressly
provides otherwise, personal covenants, such as a right of first
refusal, a right to purchase the property, or any exclusivity
rights, will not apply during any period of renewal. The courts
have found that these rights do not run with the land and are
personal to the tenant. One right which has been found to run with
the land is a right of renewal/extension. From the tenant's
perspective, a right to extend the lease may be preferable because
it operates to continue, without interruption, all rights in the
lease, including those that are personal to the tenant.
Conversely, in the case where the original tenant has assigned
its interest in a lease, the original tenant may benefit when a
right to continue the tenant's occupancy of the premises beyond
the expiry of the current term is structured as a right to renew.
The exercise of the renewal option by the assignee operates to
create a new lease directly between the landlord and the assignee
after the expiration of the original term. This precludes any
continued liability on the part of the tenant during the renewal
period, absent express language to the contrary. If, instead, an
option to extend the lease is exercised, the original tenant will
remain responsible to the landlord for performance of lease
covenants by the assignee as a result of the continuation of the
lease and privity of contract between the original tenant and the
Accordingly, both tenants and landlords are well advised to
think carefully about whether a negotiated right on the part of the
tenant to continue its occupancy of leased premises should be
drafted as an option to renew the lease or as a right to extend 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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