A tenant in a commercial premises signed up for a lease for a term of two years, with a right of renewal of a further two years.  Three years passed and the landlord then gave notice to terminate the lease, arguing that the right of renewal hadn’t been exercised in the time period provided by the lease, and that they and the tenant had impliedly agreed to simply have a periodic/month by month lease.

The tenant took legal advice about their rights.

What is a Right of Renewal?

Many tenants that seek to enter into commercial leases will negotiate for a right of renewal. This right of renewal is an option that is granted to the tenant to enter into a new lease with the landlord after the initial term comes to an end. It is not an extension of the existing lease.

When a commercial lease includes a right of renewal clause, the landlord does not have a choice whether or not to grant the renewal of the lease when requested by the tenant, provided that certain conditions are met. For tenants, a right of renewal ensures that a business has security in its location for that period of time.

Right of Renewal vs Extension of Lease

A renewed lease term under a right of renewal is treated as a new lease.  This is to be distinguished from an extension to the lease, which sometimes parties will negotiate to extend the current term of a lease.

If you are a tenant entering into a lease, it is vital to consider the potential outcome you would like to achieve. 

What is typically Included in a Right of Renewal?

Most right of renewal clauses will provide a procedure for a tenant to abide by. These typically include:

1. Preconditions: Any preconditions that must be met for the tenant to maintain the right of renewal. For example, the contract may state that the tenant cannot have breached any covenants under its lease.

2. Time Frame:  A minimum time frame for giving notice that the tenant will exercise their right of renewal. Generally, landlords will require three calendar months’ notice of your intention to renew the lease; and

3. Writing: The landlord may require that you provide notice of renewal in writing.

What if my Landlord Refuses My Right of Renewal?

If you have abided by the procedure and the conditions that have been specified in your lease, then your landlord cannot refuse your notice of the right of renewal.

If the landlord unjustifiably refuses to grant a new lease when the renewal has been exercised properly, the tenant can apply to the Court for relief under the Property Law Act 2007 to order a renewal of the lease.

The tenant in the example above had not adhered to the requirement to give notice, so would be unlikely to be able to challenge the landlord’s position.

In deciding what option is best for you, it is important to ensure that the lease reflects the true nature of the agreement to avoid any unintended consequences. If you have any concerns about what you are signing then we recommend obtaining legal advice before finalising a lease.

 

Leading law firms committed to helping clients cost-effectively will have a range of fixed-price Initial Consultations to suit most people’s needs in quickly learning what their options are.  At Rainey Collins we have an experienced team who can answer your questions and put you on the right track.

Claire Tyler and Charlotte Cameron