All About Lease Renewals
The most straightforward format for extending a lease is simply signing a new lease with a longer time period. While it is essentially an extension of the previous lease, this format provides a standalone document that will be useful if the need arises to prove the terms of the earlier lease. It is also easy to sub-lease, which some tenants may decide to do when they can no longer afford rent, have to relocate, or want to downsize their living space for any reason. This option will provide an opportunity to obtain new leases from the sub-leasers as well.
Simply extending the existing lease is another of the available formats, but it may not be appropriate and in some cases is not legally binding.
For instance , if a tenant and landlord have agreed to extend the lease in writing or via email and a court hears the case, the court may uphold the extension. If the landlord accepts rent money from the tenant from the time the first lease expires until the second lease takes effect, some courts consider that binding, while others do not. The tenant’s actions may support a valid extension, such as by requesting the landlord deposit a set amount of rent into an escrow account to cover the cost of restoring the apartment to its original condition when the lease ends. Another format is an automatic renewal, which occurs if the tenant does not give the landlord notice that he or she intends to move out when the lease term finishes. The lease likely stipulates a timeframe for how far in advance that notice must be given.
Essential Components of a Lease Renewal Letter
When an existing tenant requests a lease renewal, the focus is typically on the rent increase instead of the finer details, but a lease renewal should always include these essential components:
- Extension Term: It is essential to set forth that the lease will automatically renew at the end of the term for at least one extension term. Also specify the duration of the extension term in the renewal agreement.
- Rent Adjustment: Unless a certain amount is added to the current rent (which is rarely done), rent adjustment clauses should state the method by which the new rental amount will be calculated. A percentage increase, or increase by a fixed dollar amount, does not require any information regarding the calculation. But if it’s necessary, specify the adjustment formula to avoid future disagreements over allowable rent increases.
- Base Year Provision: Most leases contain a base year provision that defines the initial operating expenses and a new defined base year for each renewal period to which the base year is compared. After the specified base year, the tenant pays its proportionate share of the expenses in excess of the defined base year.
- Tax Escalation: Like the base year provision, tax escalation is defined in the original lease if the landlord pays the taxes. The tenant would pay its proportionate share of the taxes assessed on the subject property in excess of the defined base year. The renewal should state that the proportionate share remains the same at renewal unless there has been a change in the space’s usable square footage.
- Additional Contingencies: Additional contingencies may also be included such as coordination of tenant finish work, insurance, landlord repairs, subordination, estoppel rights, and other miscellaneous changes.
Ways to Renew a Lease
Lease renewal can be carried out in writing, orally or in some cases electronically. In order to effectively do this, you must be able to recognize the pros and cons that each option presents.
Written Lease Agreements
The most common form of lease renewal is a fresh written agreement. It is possible to enter a fresh agreement with a new term that will take effect when the previous term comes to an end. Although the new term will supersede the previous one, it is still a contract and should have all the essential aspects of a contract. A written lease agreement is enforceable by law, however a verbal agreement is legally binding only if there are witnesses.
Informal Lease Renewal
If a tenant pays rent and the landlord accepts the payment, the lease can be renewed informally under the same terms as the previous one. Informal agreements should not be agreed upon unless the original lease has an authorizing clause. Formal action is necessary if either party has violated any term of the original lease. This can be accomplished through another written agreement with the same terms as the previous lease. The landlord and tenant sign the new lease which will be the legal document.
Electronically Executed Lease Agreements
There can be situations when it is impossible to make a physical signature on a legal document. If necessary, an electronic signature can be used to legally agree to a contract or lease renewal. An electronic signature can be carried out online and has the same legal authority as a physical signature. Although there is little distinction between a written contract and an electronically executed one, the tenant will have to use a password, fingerprint or an email address to confirm identity.
How to Write a Lease Renewal Agreement
Whether you are a self-managing landlord or a tenant lawyer, there are several steps to take to draft a comprehensive and enforceable lease renewal agreement. The following checklist is designed to assist you in the process of drafting a lease renewal agreement:
- Review the Existing Lease. The decision to renew the lease agreement is normally made in conjunction with a review of the terms of the existing lease agreement. Items to consider include whether the space will be altered to suit the needs of the tenant, the impact of any work on the parties’ obligations under the existing lease agreement, and whether any existing rights expand or reduce as a result of the new term of the lease agreement. The renewal letter can take the form of a comprehensive rider to the existing lease agreement or, if the changes are minimal, a simple amendment to key provisions should be sufficient.
- Determine Terms for Renewal. Based on your review of the current lease agreement and negotiations with respect to the renewal, draw up a list of the key items that you would like to address in the lease renewal. Typically, these items include the expiration date; base rent; any scheduled increases in rent; tenant obligations; definitions of the leased premises; and improvements to the leased premises. While it is often tempting to renew the lease with as few changes as possible, there are advantages to taking the opportunity to negotiate some changes to the lease as it can provide an incentive for the parties to renegotiate key terms that might not otherwise have been discussed.
- Consider Any Landlord Improvements. If the landlord will be making any improvements to the property, it is important to consider how the timeline for such work will dovetail with the tenant’s right to possession under the lease renewal agreement. It is important to coordinate the timing of any work with the expiration of the current term in order to avoid undue disruptions to the tenant’s business operations.
- Prepare Necessary Lease Renewal Language. Once you have created a list of the key items to be addressed in the lease renewal, draft language addressing these items. As previously mentioned, you may use such language as a rider to the existing lease agreement or a simple amendment document. In drafting any rider or amendment, be sure to reference the specific sections of the existing lease agreement in order to avoid making a contrary statement to that of the existing agreement.
- Review Language with Parties. With the language drafted, take the time to review the lease renewal language with the tenant to ensure that any ambiguities are resolved before the renewal document is executed. Be sure to be available to answer any questions and make any clarifications necessary to assist the tenant in its understanding of the renewal document.
- Execute Renewal Document. Once the lease renewal has been reviewed and any outstanding issues resolved, schedule a time to execute the document. Completed lease renewals are typically executed before a notary public in order to mitigate any questions that may arise as to the authenticity of the signatures on the lease renewal.
Common Lease Renewal Mistakes
Mistake #1: Not Understanding the Terms of the Original Lease
Imagine the scenario – your lease is about to expire, and the tenant asks for a renewal. OK, great! you say. You are happy with your tenant, and they are paying on time. What can go wrong? Well the issue you may not be aware of is the expiration of the original lease and the "holdover" of the lease in terms of rent. If you don’t examine the terms when the lease is up for renewal, you could find yourself with a monthly rent that has more than doubled at the end of your new lease.
Mistake #2: Renewing with the Same Conditions as in the Original Lease
If you are happy with how the original lease has gone, there is nothing wrong with renewing with the same conditions as the original lease. However, now is a good time to make sure there is nothing you want to change in the renewal. Whether it be the length of the lease, the initial rental amount, or perhaps the utilities – this is your time to get what you want negotiated into the agreement.
Mistake #3: Purchasing the Wrong Contract
There are dozens of different lease agreement formats out there. Make sure that the agreement you are purchasing covers all of the requirements you have based on the location of your property. For example, California law requires a number of different disclosures to be listed. Failure to do so can become costly in the form of fines . Check to make sure that the package of documentation that you are purchasing is exactly what you need. In addition, make sure that you understand the different types of leases. There are net leases, gross leases, ground leases and modified gross leases. Make sure that you are purchasing a Customer Lease Agreement that will stand up under scrutiny. If you are not certain about what type you need, get help.
Mistake #4: Not Having a Real Estate Attorney Review Your Lease Agreement
Whether you are an apartment landlord, commercial landlord, a business owner, or have a strip mall, you need to know the ins and outs of leasing/property law. As a busy business owner, you probably do not have the time to dedicate to learning all the in’s and out’s of real estate law, and what is covered by fair housing regulations. If you are relying on someone else’s generic, cookie cutter lease form, you could be opening yourself up to a lawsuit.
Mistake #5: Assuming Your State’s Rental Laws Have Not Changed
Each state has its own specific rental and real estate laws. For example, some states require an attorney to write the lease agreement, while others do not. In addition, some states have rent control laws or rent stabilization laws that work with some military programs. As a landlord, it is up to you to know if there has been a change in the law.
Legal Tips and Considerations
In many jurisdictions, there are specific legal requirements to follow when renewing a residential lease agreement. The law varies from city to city and state to state. Neither the landlord nor the tenant can make alterations to these requirements simply because they have agreed to renew their existing lease agreement. While drafting a complete, accurate rental agreement is important, it is equally important to ensure that any renewal of said agreement conforms to statutory requirements set forth by the applicable governmental entities.
The first thing both the landlord and the tenant must do is read through their rental agreement and check which provisions apply for the renewal. If your state legally defines a renewal as a full restatement of the lease with a corresponding new effective date, it is important to determine whether or not this definition also supersedes any alternate definitions for renewal that might have been outlined in your rental agreement. One common example of this statutory definition of renewal can be found in paragraph (a) of Section 1945 of the Code of Civil Procedure of the State of California, excerpted below for illustration:
(a) A lease or license of residential or mixed-use property for a term of one year or more, or any rental or lease of space in a mobilehome park, as defined in Section 798.3 of the Civil Code, shall be automatically renewed for another term equal to the previous term, unless either party notifies the other in writing that it does not wish to renew at least 30 days prior to the expiration of the term…
Most states also impose additional requirements for notifying a tenant that his or her residential lease has been automatically renewed. Even if the rental agreement is considered restated or made anew, the tenant might still be eligible for the same notice requirements that applied to their previous rental agreement.
Landlords should be aware that even though parties can negotiate a rental agreement’s terms at will during a lease renewal, they cannot violate any statutes or court decisions related to the warranty of habitability if they make alterations to these terms. For example, a landlord cannot insist that a tenant reduce their housing expenses by accepting a unit without working hot water. The warranty of habitability exists regardless of the fact that the tenant has agreed to a renewal of this rental agreement.
Another common example of a legal consideration when renewing a lease agreement is the possibility of rent control. While some jurisdictions may not regulate how often landlords can raise their rents, others do. Again, the statutory requirements for notifying tenants of rent increases and how much rent can increase is established on a state and sometimes city level.
Tenants who wish to renew their residential lease should be familiar with all of their rights regarding automatic renewal. Some states do not require automatic renewal notices to be written, so the act of remaining in the residence for a pre-determined amount of time is sufficient to establish a renewal. In other states, however, a written lease renewal agreement is required to modify certain terms of the original rental agreement.
Tenants should also take notice of whether or not the rental agreement specifies that the landlord can deny extensions or modify the terms for evicting them under any circumstance. While some tenants may find themselves in a position where they must negotiate with the landlord to renew a lease that technically expired, others may be in an advantageous position where they have various rights established under their original rental agreement. Even though states and cities attempt to ensure all tenants have equal rights when negotiating renewals, the order in which a tenant signed a rental agreement can affect their legal standing during a renewal.
Negotiating a Renewal
Typically, there are numerous provisions that can be negotiated in any lease renewal. These provisions include the following:
Rent. The amount of rent and how it will be increased – e.g., a set dollar amount, percentage increase or tie to the Consumer Price Index – generally are negotiated along with the term of the lease. If the tenant experienced the benefit of a lower early "sweetheart rate," however, the tenant may want an increase that ties to the favorable market rate.
Term. While tenants may prefer a term of three to five years or more (perhaps because they are making substantial improvements that they would want to recover through rent over a longer period), landlords may want a shorter lease term to match any anticipated changes in the property.
Giveback Provision. Because landlords typically want tenants to take back their space upon expiration of the lease term or upon termination prior to the expiration of the term , any "giveback" provision requiring the tenant to deliver the premises back to the landlord in "broom-clean" condition may be heavily negotiated.
Options to Renew. Because the exercise of an option to renewal eliminates the risk to a landlord that market rates could be lower than what is being paid by the tenant, landlords generally want a longer lease term (perhaps with renewal options) rather than a shorter lease term. Under the tenant’s perspective, the decision on whether to renew should be made well in advance of the expiration of the lease so the tenant has enough advance notice to make certain improvements to the space before the expiration of the term. In addition, more money may need to be spent on a lease extension or renewal than on the initial lease because tenants often want a lower rate on an extended lease term. Any funds for those improvements may need to be obtained by selling other assets or cutting other expenses. Tenants therefore should provide landlords with evidence that they are in a position to renew. This gives landlords confidence that the tenants will not default on the current term of the lease if they can’t afford to renew.