A Look at Lease Renewals
Comprehensive Guide to Lease Renewal Agreements
Understanding Lease Renewal Basics is a very important part of this whole process. A lease renewal is an existing contract that both the tenant and landlord agree to. It serves as an amendment to the original lease, extending the term of occupancy for the commercial tenant. A well-written lease renewal will not only extend the lease agreement but will also contain any changes neither party has addressed during the initial term. The lease renewals are generally signed before the lease termination date wherein the tenant wishes to continue occupying the premises for another term.
Some clients believe that during a renewal they can change the original lease’s monthly rent or the security deposit. For these clients, we advise that the lease’s terms and conditions are set for a given period so that both parties are bound by the terms. However, this does not mean that you cannot develop an addendum that changes the terms. If the changes would be substantial to not only the landlord but also the tenant, then it might be advisable to create a new lease altogether, including the updated information as a leasing amendment.
Landlords and tenants have their own reasons for renewing a rental agreement . A landlord may want to renew the lease with the current tenant to avoid incurring the cost of finding a new one. Some commercial tenants may be in a location that is a good fit for their business. Other clients do not believe that there is a reason to part ways from the lease other than the fact that the parties may no longer be on good terms.
A typical problem that arises in lease renewals is when the tenant wants to renew, but the landlord does not. In these cases, if a landlord does not want to renew the lease, they must have a legal basis to do so. In New York City, the landlord must give, by registered mail return receipt requested, to the tenant a notice of non-renewal. The notice is mailed not later than the date 60 days prior to the expiration of a residential tenancy of less than two years, and not later than 90 days prior to the expiration of all other tenancies. If the commercial lease is governed by or subject to the Real Property Law Article 7-C or ETPA, the landlord is also required to provide a non-renewal notice. Leases such as these include the following: Given all of the different parts of New York State laws, we would not recommend that parties try to navigate the lease renewal process without the help of an attorney that specializes in these types of agreements.
Key Components of a Lease Renewal
When executing a commercial lease renewal, it’s not enough to think of it simply as a simple extension of the agreement. Your commercial lease renewal contract should contain all of the same elements as a new commercial lease such as terms, conditions, duration and changes from the original lease.
Term. One of the first things to consider is the lease renewal term. If necessary, the lease renewal can begin immediately upon execution. However, the more common approach is to allow the lease to continue coming to an end and then begin a new term once a mutually agreeable business rhythm has been established. Agreeing to a series of five-year renewal contracts is a great idea. It gives both parties a plan to follow, but also allows for the lease to be terminated after the end of each period.
Conditions. Conditions of the lease are the next thing to decide upon. Any new conditions that have not been met need to be addressed in the lease renewal agreement. In some cases, the existing conditions are nowhere close to being met. You may even need to have an attorney involved to help figure out what your original (or newer) lease conditions have been and whether they have been met.
Duration. Of course, you’re going to know what the duration of the lease is going to be. Whether or not you’re going to be ready for renewal the next time around isn’t that important. You will want to make sure that you have an exact date, though, as real estate professionals get jittery about any missing information in these types of contracts.
Changes in the terms of the original lease. If any changes are to be made to the original lease, you should address those as well. There are even times when you will want to decide how expenses that were previously shared between the landlord and you are apportioned during the term of the lease.
How to Renew a Lease Agreement
As per the general practice in the UAE, before the termination of a lease contract, a tenant may issue a renewal request (in writing) prior to expiry of the lease term. In particular, Article 18 (Deferring the renewal or extension of the real estate lease) of the Dubai Land Department Regulation No. (2) of 2010 concerning the Regulation of the Relationship between Landlords and Tenants in the Emirate of Dubai states that: "Unless otherwise agreed, the lessee shall notify the lessor in writing and by registered mail in relation to real estate, and in all other contracts in writing, either for extension of the contract or for having the real estate vacated one of the following dates: 1. 90 days before the expiry of the contract, for leases less than five years. 2. 120 days before the expiry of the contract for leases for a term exceeding five years. 3. After the lapse of one year and a maximum of two years in relation to non-exploration of contracts." In a similar vein, Article 5 of the Abu Dhabi Law No. (20) of 2006 on Rental of Properties in the Emirate of Abu Dhabi requires advance written notice of thirty (30) days to be issued from one party to the other of its intention to renewal the agreement at least fourteen (14) days prior to the expiration of the term. All Lease Issuance Notices are to be issued to the other party at a minimum of 90 days before the end of the term. Once received, a landlord may then proceed to issue the Lease to Renew providing the terms of the renewal – the reader should be wary that the terms of the renewal may change from year to year. A system of normalising the relationship between a landlord and tenant is not easily implemented overnight, but rather it is established and developed over the course of renewing each individual lease. The process will take some time dependent upon the complexity of the relationship and the personalities involved but once achieved can lead to major convenience for all parties.
Lease Renewal Sample Made Simple
As with a lease, you must draft a lease renewal to clearly state the parties’ intentions. A sample clause is:
LESSEE:
This lease is hereby renewed and extended for an additional period of ___ months, commencing on date, and ending on date, in accordance with the terms and conditions of the original lease, except as follows:
LESSOR:
This lease is hereby renewed and extended for an additional period of _____ months, commencing on date, and ending on date, in accordance with the terms and conditions of the original lease, except as follows:
IMPORTANT: Before using this, do not keep any clause or provision; rather, you should delete all provisions that are not applicable to your situation.
Negotiating a Lease Renewal
Before even sitting down with the landlord and formalising the terms of the lease renewal, it is crucial to know exactly what it is that you are after from a new agreement. If you have been a responsible lessee, there may be many aspects of a renewal that can be negotiated on your behalf. Even if the lessee in question has done nothing wrong, there is always room for manoeuvre on the other side of the negotiation table, particularly where the timeframe involved is somewhat lengthy. For as long as we have been assisting clients with their lease renewals, one particular aspect of negotiations has been discussed and debated more than any other – rent. There is no set formula for determining what a fair figure is, and often, the figures themselves are more important than their source, but certain principles apply. In setting an appropriate level of rent, both parties will have the same, general target – a figure that they believe can be proven in a court. Given that ultimately, lease renewal disputes (including rent disputes) are ordinarily decided in court, it is not surprising that lessees and landlords alike assess the relevant figures in line with what can be justified in court . If a landlord wants to prove that a rent of £50,000 is fair, he has two choices – to argue that a rent at that level is what would be agreed between willing participants in an open market; or alternatively, he could argue that a rent of £50,000 is one that a lessee would be prepared to pay in order to evade the hassle of a court hearing (the time taken to procure a new lease and the consequential costs). As such, if the landlord is aware of the amount of rent actually being paid by similar commercial units in the local area, this would be a good starting point, as this would demonstrate that the market value of the property concerned is closer to £X, than £Y. Notwithstanding any increase in rent, it is important to bear in mind that a lease ending through a renewal is unlikely to provide either party the opportunity to claim restitutionary damages. Based on that logic, any lessor or lessee entering into renewed lease negotiations should enter with the hope that the new lease remains in force for a number of years to come, thus the terms agreed at the start of the new lease are likely to be those that will remain for some time. Finally, perhaps the obvious, but most important factor to bear in mind when negotiating a lease renewal is that the terms of the new lease do not necessarily have to be identical to those of the old lease. Both parties retain the freedom to make changes to the terms of the agreement and if both agree that a higher rate is appropriate on renewal, there is nothing to stop it being decided (in the beginning at least).
Mistakes to Avoid During a Lease Renewal
Renewing a lease contract is a significant move for tenants and a crucial financial decision for landlords. A comprehensive understanding is critical to avoid mistakes that can have serious implications on your financial circumstances. Below we discuss some common pitfalls when it comes to lease renewal contracts and how you can overcome them to ensure a successful renewal process.
Mistake #1: Not Reviewing the Renewal Clause
Many lease contracts will contain a renewal clause which specifies the terms of the renewal to which both parties are legally bound. As such, it is critical that a tenant check this clause before any pre-existing arrangements are made with their landlord and certainly before agreeing to anything. It is common for landlords to try and persuade tenants to renew their lease on beneficial terms which have not been formally agreed. This is done with the hope that the tenant will back out of their pre-existing arrangement to sign a fresh lease with terms more favorable to the landlord. Be sure to check the renewal clause to familiarize yourself with your options before committing yourself or being coerced into an agreement.
Mistake #2: Failing to Look at the Bigger Picture
As we stated above, renewal contracts are a major decision for tenants. However, people can sometimes be too focused on the renewal process and overlook other matters that may require attention. If your landlord has not provided a few months’ notice before the lease expiry, contact them to check that they intend to allow you to remain at the property. If your landlord decides not to renegotiate a fresh contract (which is not uncommon), be sure to secure a right to remain until a new lease can be negotiated. It is also sensible to add an early termination clause in the event you wish to remain on the property but are unhappy with the new contract.
Mistake #3: A Casual Approach
Many landlords operate relatively informally with their tenants. However, informal arrangements can leave a tenant vulnerable when it comes to a renewal contract and its subsequent extension. For example, seeking interim agreements in the form of monthly rolling contracts can be dangerous. These rolling contracts can result in a lack of clarity over the tenant’s rights and obligations. Ultimately, this will create a lack of protection from unwanted requirements, such as increased payment, from the landlord. It is crucial that tenants are able to rely on the term of their contract without any threat of on the spot changes.
The Legalities of Lease Renewals
When considering a lease renewal, there are several critical legal considerations. In particular, there are state specific law considerations pursuant to the Real Property Code, Sherriff’s Sale Act, or the Commercial Lease Terminations Law. Are you renewing residential lease, commercial lease, or both? If you are renewing a commercial lease or both, are you renewing in accordance with N.J.S. 54:4-2 . 2 "Inclusion of Market Value of Leased Land as to Certain Leases"? For New Jersey leases, is this a residential lease with on of the following residential settings: hotel; motel; apartment; single, two or three family home; condominium unit; rooming house and boarding house; care or treatment facility; or room chartible use or religious use?" When dealing with a residential lease, is it a month-to-month with an eviction date, or does it fall under the Landlord Tenant Act with 1, 3, 5 or 12 month delay in eviction date? If you are renewing an older commercial lease, is there a fair and agreed adjustment to rent, property tax and other expenses?