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Don’t let your Lease Renewal Option Lapse!

By November 10, 2020September 21st, 2021Leases

You know you about lease renewals and extensions – of course. But, did you know that you have to give your landlord notice that you want to renew within a certain timeframe? If you miss this window, you could be putting your entire practice at risk.

How many times have you congratulated yourself for being prepared for a rainy day by bringing an umbrella with you when you leave your house only to forget it on the train/in the car/at your office and not have it when you really need it? I can’t guess how many times I’ve left an umbrella in various places and then been forced to buy an overpriced one wherever I happen to be or just deal with a downpour. This situation tends to happen with things that we need to think about very infrequently, even if they are important to us.

Your office lease is like your umbrella that you think about initially but then forget about at a critical time. You enter into a new lease and negotiate all the vital terms, making sure to secure renewal options so that you can easily extend your lease when the initial term ends. Ten or fifteen years later, though, that initial term is coming to an end, and your lease is now the furthest thing from your mind. But if you don’t remember to exercise your renewal option according to your lease terms, you may jeopardize your entire practice.

How do Lease Renewals Work?

As a starting point, we need to deal with terminology. There are two ways to continue your commercial lease: by RENEWAL or by EXTENSION. The difference between these is necessary to keep in mind when negotiating your initial lease, but today we’ll use the two terms interchangeably as they both refer to adding more time to your lease.

A renewal option is only available in most commercial leases if the tenant is not currently in default (and sometimes only if the tenant has never been in default). Defaults typically include things like failure to pay rent or failure to maintain the premises. This is one reason to make sure to avoid defaulting or to take action quickly to cure any default if notified by your landlord.

Generally, a tenant has a specific period to notify their landlord that they want to exercise their renewal right. This is often between 3-12 months before the end of the initial lease term. It is crucial to give the notification within this specified time to protect your renewal right. Once you’ve given notice of your intention to renew, you will then have time to negotiate your new rental rate if necessary and any changes you may want to make to other terms of your lease.

What Happens if I Don’t Exercise my Renewal Option?

If you realize you’ve missed the deadline to notify your landlord of your intention to exercise your renewal option, unfortunately, you’ve now given all the negotiating power to your landlord. Everything will now depend on your existing relationship, their plans for the property, and the current market for commercial rentals. Here are some steps you can take to try to get things back on track.

  1. Understand your new status as an “overholding tenant.”

Once the term of your lease expires, you will be considered an “overholding tenant” if you remain on the premises. Most leases have a clause setting out specific rights and obligations of overholding tenants.

Typically, overholding clauses specify that all other terms of the lease continue to apply, but the tenancy will continue on a month-to-month basis. This means that your landlord only needs to give you 30 days’ notice to terminate your lease. Overholding clauses may also set out a new rental rate, usually between 100-200% of the most recent year’s monthly base rent (and most often between 150-200%).

Overholding tenants no longer have the security of a long-term lease and usually have to pay much higher rent, so you’ll likely want to avoid being in this position if possible.

  1. Open the dialogue with your landlord.

Advise your landlord of your desire to extend your lease term. Perhaps they will consider granting you a renewal according to the terms of the option in your lease, although they no longer have any obligation to do so. But if not, then…

  1. Prepare to negotiate a new lease.

Your landlord is no longer required to offer you a new rental rate according to any terms and conditions indicated in your lease’s renewal option. If market rates have gone up significantly since your initial term began, you may now face a steep increase.

Your landlord is also not obligated to offer you terms as good as in your initial lease. They may have incorporated new and most likely unfavourable terms to their standard lease (for example, a demolition clause), which you may now be forced to accept.

Since you may need to negotiate an entirely new lease rather than the one or two points of a renewal, you may want a lawyer to guide you through this process. You’ve already missed out on your opportunity to extend your term easily – don’t compound the problem by agreeing to a new lease with clauses that haven’t been carefully reviewed.

What Can I Do Now?

Your next steps depend on your lease timeline. Take a moment to review your lease. Has the initial term already ended? If not, when is it set to expire, and when is the renewal notification deadline?

Is your initial term or a renewal going to expire in the next 0-2 years?

If so, you need to start dealing with your renewal (or at least thinking about it) now. Make sure to give your landlord notice according to the terms of your renewal option so that you don’t inadvertently fail to exercise it. Start the conversation with your landlord early so that they may be able to accommodate changes you’d like to make to the terms of your lease.

Is your initial or renewal term going to expire in 2+ years?

If you still have a few years, make yourself a reminder to contact your landlord at the appropriate time to initiate the renewal process and safeguard your lease. The earlier you start the renewal process, the better. With more time, you will have a better chance of removing bad lease terms or incorporating beneficial new terms into your renewal.

Has your lease term already expired?

Make sure you know your short-and long-term goals for your practice. Are you considering a move? If so, you may benefit from being an overholding month-to-month tenant and may not want to enter into a new lease or renew your existing one.

If you don’t have plans to move, you’ll need to make the best deal you can with your landlord to either extend the term of your existing lease or enter into a new lease agreement.

Bottom Line

If you are a commercial tenant, whether your lease is nearing the end of its term or that’s still a few years off, you will be well-served to make a note of important dates to protect your renewal rights:

  1. the current term end date
  2. the date by which you must advise the landlord of your intention to renew
  3. the date by which you must have entered into an extension agreement

Once you know these key dates, you can start the renewal process as early as possible (within the timeline indicated in your lease). No time to review pages and pages of lease details? No problem, we can help. We are happy to review your lease documents to find out this information and help you avoid being stuck in the rain without an umbrella. And when you’re ready to negotiate that renewal, we’re here. Negotiating with a landlord takes attention to detail and knowledge of what is standard or reasonable. We negotiate lease terms for dentists every day and are happy to handle this for you to ensure your business is protected. Send DMC an email or give me a call directly at 416-443-9280 extension 208.