When you're negotiating lease terms, one of the most important clauses is your lease extension clause. It's one of the few parts of the lease that put you in the driver's seat and give you a degree of control over the landlord. Written correctly, it helps you mitigate the two biggest risks of leasing space -- losing the space at the end of the lease and uncapped rent increases. Written incorrectly, it can become worthless.
Lease Extension Basics
Sometimes called a renewal option, a lease extension clause lets you renew your lease upon its expiration. Lease extensions are usually written for set periods of time, and you may have multiples. For instance, a seven-year lease may come with two five-year options, letting you stay for as long as 17 years.
Extension clauses are usually one of two lease terms dealing with lease-end. You may also have a holdover clause that covers staying past the expiration of your lease outside of the extension. Holdovers typically specify a month-to-month rent and can be expensive, so using your extension is usually best.
Setting the Rent
Lease extension clauses usually use two systems for setting the rent. Some will simply continue current rent and increase a system that is in place, perhaps subject to a one-time adjustment. Other extension clauses reset the rent to some percentage of the fair market value of the space, usually between 90 and 100 percent. While the latter format may seem reasonable, it can be unnecessarily complicated for the tenant.
When negotiating your lease extension clause, try to stay on your original system, especially if you have reasonable increases in place. If rents skyrocket, you'll be protected against the increase since your rent is pre-determined. If they drop, which is much less likely, you can renegotiate. Using "fair market value" lease terms, you're protected if rents drop, but unprotected if they increase. You can also end up arguing with your landlord over how to define the fair market value of the space.
Executing The Extension
Lease extension clauses come in two forms. One renews your space if you notify the owner that you want to, while others are written to automatically renew unless you let the owner know that you're moving out. In either case, there will be clear dates by which you need to let your landlord know of your intentions. Choosing lease terms that require you to give notice to stay is more tenant-friendly. It eliminates the risk of being stuck in the space, but it also carries the risk of losing the space if you don't make your notification in time. As such, it's crucial to make your date.
Weak Lease Extension Language
Landlords love options when they like you as a tenant and when it's hard to find a replacement tenant. However, if neither condition applies, they'll do what they can to get out of the option. As with all lease terms, if the lease extension clause isn't clearly worded, there may be room for your landlord to wiggle out of giving you a renewal. Having an attorney and experienced tenant representative review the lease can help protect against this.
It's also important to have the extension clause written so that it can't be cancelled. If you can't cancel your obligation to pay your rent, your landlord shouldn't be able to cancel your option for a minor infraction. Your lease extension clause may be the most powerful tool to mitigate your landlord's long-term advantage over you. Understanding the clause and fastidiously following its requirements will not just help keep it in place, but also help you get more out of your tenancy. Given its importance, it's always wise to enlist the help of a tenant representative to help you negotiate the best possible lease terms.
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