Renewing your lease – the importance of an option to renew

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It is important when negotiating a commercial or retail lease to consider whether an option to renew should be included. This is equally important for landlords and tenants.

What is an option to renew?

An option to renew is a provision contained in commercial (and retail) leases that permits a tenant to require the landlord to grant them a new lease at the end of the existing lease. Usually, the new lease is on the same terms as the existing lease, with an update to the rent. Sometimes parties might want to vary the terms of the option lease, but this can only be done by mutual agreement. 

Although it is not mandatory for commercial leases to include an option, tenants often negotiate to include an option because it provides more security in the form of a longer term. The benefit of an option is that it grants a tenant the ability to secure the premises for a further period but also the additional flexibility to decline taking up the option and end the lease instead. This flexibility is important for a range of reasons, but it usually boils down to the same thing: no one has a crystal ball. Businesses fail, grow, shrink, change, preferences change. There are a number of good reasons why a tenant would want the flexibility to stay on in premises if appropriate and desirable but also to move on if need be. 

Exercising an option to renew 

The mechanism for exercising the option to renew is set out in the lease terms. In most leases, the process of renewal will involve the following steps and requirements: 

  • written notice must be sent to the landlord or managing agent of intention to exercise the option;
  • the notice must be provided within a certain period as set out in the lease – often around six to three months before the terminating date of the current term;
  • the tenant must not be in breach or default of the lease (i.e. being in rental arrears); and 
  • the tenant must comply with any pre-agreed requirements for the renewal (i.e. refurbishments of the premises). 

Landlord’s obligations on exercise of the option

If the notice to exercise the option to renew the lease is validly served on the landlord the landlord must then:

  • prepare the new lease on the same terms (unless varied by mutual agreement or per the terms of the original lease) for the further term; or 
  • a variation of lease which extends the current lease and incorporates any agreed changes for registration with Land Registry Services. 

The landlord will then be required to facilitate execution of the documents by all parties and attend to registration of the variation and new lease.  

Depending on the terms of the lease and whether it is a retail lease, the landlord can require the tenant to pay the costs of preparing the new lease, variation and registration costs. 

Failure to exercise the option 

If a tenant intends to stay on in the premises, failing to exercise the option to renew can be catastrophic. If the procedure for exercising the option is not followed properly, then the landlord is under no obligation to grant the new lease. This means that the landlord does not have to grant a further term. If this happens the lease will come to an end and the landlord can require the tenant to vacate the premises at the end of the term. 

If a tenant fails to exercise the option validly, it will be at the landlord’s discretion to renew the lease or to negotiate fresh lease terms. This puts the tenant at a significant disadvantage: the landlord may require a rent increase or other unfavourable terms that could have been avoided by renewing the lease validly.

In some cases the landlord will allow a tenant to remain in the premises as a periodic tenant. This means that the tenancy will be on the same terms as the original lease, however the landlord can increase the rent and the lease can be terminated by either party on one month’s notice. Again, the terms of the lease may stipulate terms for periodic tenancies.

Final comments

Exercising an option to renew can be a simple and straightforward process with little stress. However, if the mechanism in the lease is not properly followed or timeframes not met tenants can be left in a precarious position. This can happen when tenants forget about these requirements or are not properly advised about the requirements in the first place. 

The starting point for tenants is whether an option is included in the lease at all. When negotiating a lease, tenants should consider whether an option to renew should be included and the terms of that option. For many tenants, a properly negotiated option to renew will be incredibly valuable. 

Assuming the lease includes an option to renew, to avoid any unnecessary issues, tenants should:

  1. Get familiar with the option to renew mechanism and requirements at the beginning of the lease.
  2. Write down the key dates to exercise the option and diarise a reminder so it is not missed.
  3. Ensure that a notice to exercise the option unequivocally expresses the intention to exercise the option. 
  4. Ensure the notice is served in compliance with the lease requirements (i.e. email or post).

Landlords should also be familiar with the mechanism and requirements and dates for lease renewals so that they are able to exercise their rights if a tenant fails to comply with the lease requirements. 

For further advice about options to renew and commercial / retail leasing generally, contact us.