Lease Term Extensions (Renewals) – You Snooze; You Lose

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We’ll begin with some controversial thoughts about a tenant’s right to renew its lease or, as we prefer, to extend the lease term. They are all grounded in the position that the right of a tenant to extend the term of its lease is not a gift from the landlord. It is bought and paid for, much as is any other right in the lease. It is part and parcel of the deal. “How much is the rent if I lease the space for five years and get the right to extend the lease term for another five years?”

We’ve tread on some of this ground before. To see what is in the Ruminations archives, click HERE and HERE.

Let’s make it clear, Ruminations is neither a poll follower nor a flip-flopper. We still abide by the principle that the terms of a lease (or any other agreement for that matter) are the result of negotiation and that the outcome of such negotiation is heavily influenced by the relative bargaining powers of the parties. But, we also think that the marketplace has norms or starting points and (also) if you don’t ask, you don’t get. [Why some attribute this axiom to Stevie Wonder, we don’t know. But, we didn’t ask, so we didn’t get.]

With that in mind, here goes: We don’t think there is a difference between the right to extend a lease’s term beyond its initial (or earlier extension) term and the right to “kick-out” (terminate) a lease at the end of its initial (or subsequent extended) term. In each case, the landlord only can expect that its tenant will stay for each successive segment, one at a time. Lenders underwrite each approach in the same way, as if the lease’s term will not be extended or continue. Brokers can be paid as each extension term begins. The business outcome is the same.

Wait, you say, isn’t a lease with a “kick-out” provision the equivalent of an automatic renewal, with the tenant taking the risk of being stuck for another five or whatever years when it forgets to kick-out? Yes, it is. But, which scenario is more likely – a fat, dumb, and happy tenant forgetting to renew its lease OR a troubled tenant, looking to end its misery, forgetting to exercise its right to terminate the lease? To us, it’s simple. So, simple, that we won’t even answer our question, deeming it to be rhetorical.

Well, if the notion of the kick-out right seems somewhat pinko commie liberal (now, when did you last hear that!), how about an automatic lease term extension that can be voided by a notice from the tenant? Does that sound better? For some strange reason, actual experience has taught us that landlords favor this option approach by better than 3 to 1 over the usual “tenant sends notice of its option exercise” (our made-up research informs us). What we are saying is that it seems landlords prefer to see automatic lease renewal (extension) provisions. Yes, that’s been our experience.

On the other hand, tenants seem to accept “tenant must send renewal (extension) notices” as the norm. Obviously, we must be reading the tea leaves incorrectly.

Whatever our experience teaches us or what your experience teaches you, we think a tenant should prefer a lease whose term is automatically extended UNLESS the tenant sends notice to the contrary. That’s because we think the greater risk (and likelihood) for a tenant is that it forgets to send an extension notice not that it forgets that it wants to get out of the lease. If a tenant’s business isn’t strong enough to sustain itself at a particular notion, it will independently be looking for ways to cut its losses and if “canceling an automatic extension term” is an available option, it will do so. If the tenant’s business is so strong that it wants to relocate, it will (again) look at its lease and find the extension-cancellation option. On the other hand, if the tenant’s business is good and the tenant is fat, dumb, and happy (blissfully and rather bovinely contented), forgetting to extend is a more likely outcome. “Automated” tenants rely on (sometimes flawed automation or personnel) to trigger the sending of renewal (extension) notices, and failures are rare, but are well-known to happen. There is, however, no automation for triggering a search as to how to get out of a lease. That decision is made by managers, not administrators. And, when it happens, extension-cancellation provisions in a lease will be found.

Getting down to “The Bottom line” (15 West 4th Street between Mercer Street and Greene Street in the Greenwich Village neighborhood of Manhattan, New York City), the real risk to a tenant is that it forgets to exercise an extension option and its landlord serendipitously gets the opportunity to have a tenant who very much wants to remain in the space, a tenant who is now willing to pay more than almost any other prospective tenant for that right. After all, the existing tenant (with a now, soon-to-expire lease term) has made improvements to the space, trained a staff for the space, and built good will in the location. Such a tenant is “motivated” to make a deal, usually one that will be more expensive than the deal it made when it bargained for the now-lost extension option.

The prophylactic for such a possibility is a “landlord must remind tenant” clause. Yes, landlords (even those that would welcome an automatic lease extension provision in the lease) are uncomfortable with taking on such an obligation/burden/responsibility. But, really, what’s the big deal? OK, we know what the big deal is – landlords welcome the possibility that their tenants really, really want or need to stay in the location and are forced to “renegotiate” the price to do so. They have “seller’s remorse” after signing a lease with a whole package of rights and duties for each party. If a landlord doesn’t want to give a tenant a lease extension right, then find a tenant who will make a deal without one.

Ruminations believes that the basic assumption at the time a lease is signed is that the lease term will be extended, and not that the parties hope it will not be extended. Landlords know when lease terms are near their end. They don’t want to start looking for a new tenant only when their property managers call to say that there are moving trucks at the property. Basically, landlords want 6 or 9 or whatever number of months to get the ball rolling. So, they don’t want to forget that the lease’s term is going to expire. Why not, then, shouldn’t a landlord send a reminder notice?

What is a “reminder notice”? We won’t explain. We’ll just show you and perhaps write about the sample notice next week (or maybe not). You’ll just need to “tune in” next week to see what we decided).

Provided that this Lease is in full force at the time, Tenant will have the right to extend the otherwise expiring Lease Term for up to 3 additional, successive 5 year periods (each, a “Renewal Term”). If Tenant wishes to extend the Lease Term for a given Renewal Term, it may do so by giving Landlord notice of such election (“Renewal Notice”) not later than 9 months before the date upon which the Lease Term would otherwise end (assuming no intervening, earlier termination) [“Renewal Notice Date”]. Notwithstanding the foregoing, if Tenant does not send a Renewal Notice on or before the Renewal Notice Date or, before the Renewal Notice Date, did not send Landlord unequivocal notice that Tenant was going to send a Renewal Notice, Tenant’s right to send a Renewal Notice will not be extinguished unless it fails to send a Renewal Notice within thirty (30) days after its receipt of a written notice (“Reminder Notice”) from Landlord notifying Tenant of Tenant’s failure to send a Renewal Notice. Landlord will have the right to send a Reminder Notice not earlier than five (5) months before the Renewal Notice Date. Tenant may send a Renewal Notice by the later of: (a) 30 days after Tenant receives the Reminder Notice; or (b) the Renewal Notice Date. If Tenant receives the Reminder Notice but does not send a Renewal Notice by the later of the date set forth in subsection (a) or (b) of the immediately preceding sentence, then this Lease will terminate (assuming no intervening, earlier termination) on the later of: (x) the date upon which the Lease Term would otherwise have ended; or (y) at the very end of the last day of the 6th full calendar month after Tenant received the Reminder Notice. If Landlord fails to send a Reminder Notice by the date upon which the Lease Term would otherwise have ended, then this Lease will continue in full force and effect until: (m) the date which is 6 months after Landlord sent the Reminder Notice (if Tenant fails to send the Renewal Notice as set forth above); or (n) the date which is 6 months after Tenant sends notice to Landlord that Tenant desires to terminate the Lease (if Landlord fails to send the Reminder Notice). In addition, if Tenant had not previously exercised its right to extend the Term for a particular Renewal Term and sends Landlord an unequivocal notice that it will not be exercising such right (“No Exercise Notice”), the Term will end at the very end of the day that is the later of: (i) the last day of the then expiring Term; or (ii) 9 moths after Tenant sends the No Exercise Notice. Regardless of whether a Reminder Notice has been sent by Landlord, in the event that the Lease Term continues after the Expiration Date, Fixed Rent payable for the period after the date upon which the Lease Term would otherwise have ended will be at the rate that would have been payable for the corresponding Renewal Term. If, however, Tenant occupies the Premises after this Lease terminates, then Tenant will be deemed a holdover tenant, and the Provisions of Article X will apply.

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Comments

  1. In NY, if a lease provides for automatic renewal unless the tenant sends a notice to the contrary, that clause is not “operative” (I guess that means it’s unenforceable) … unless the landlord sends the tenant a reminder notice shortly before the tenant’s deadline to give a nonrenewal notice. NY General Obligations Law Section 5-905. This is not limited to residential leases. What if no one gives any notice and the tenant just stays? There are a few cases interpreting this rather old statute and the results seem to be a bit unpredictable. The moral of the story is probably that a landlord should make sure to remember to give the reminder notice.

  2. Jim Henegan says:

    I like your language on the Wake up call, but it has the one problem that I have not been able to draft around.

    What happens if (1) the Tenant has the right to extend the term by notice to the Landlord; (2) Tenant is entitled to a wake up call; (3) the Tenant just wants the Lease to expire; and (4) the Landlord does not send the wake up call notice?

    Under your language the Lease does not terminate until 6 months after the Tenant sends a termination notice to the Landlord.

    “If Landlord fails to send a Reminder Notice by the date upon which the Lease Term would otherwise have ended, then this Lease will continue in full force and effect until: (m) the date which is 6 months after Landlord sent the Reminder Notice (if Tenant fails to send the Renewal Notice as set forth above); or (n) the date which is 6 months after Tenant sends notice to Landlord that Tenant desires to terminate the Lease (if Landlord fails to send the Reminder Notice).”

    It is a tough position that the Landlord can extend the term of the Lease by failing to send the reminder notice that it is supposed to send. It puts the Tenant in a position where it has to notify the Landlord of its intent to not exercise its option.

    Some language which just says that the Tenant gets 30 days after receipt of eth reminder notice don’t address whether this right extends after the Tenant has vacated the Premises and assumes that its Lease term has expired.

    Here are some tenant oriented clauses I collected that are shorter than yours.

    Renewal Terms. Tenant shall have the right to renew this Lease for __________ (___) additional periods of up to ________ (___) years each (each of which is referred to herein as a “Renewal Term”), upon the same terms and conditions as the Original Term except that the number of renewal options shall be reduced by the renewal option then being exercised and any renewal options previously exercised. Tenant shall exercise its right to renew the Lease on or before the date that is twelve (12) months prior to the end of the Original Term or the applicable Renewal Term. In the event Tenant does not notify Landlord of its intention to renew within the time specified, Landlord shall notify Tenant of such failure, and Tenant shall have an additional fifteen (15) calendar days from receipt of such notice to exercise its right to renew. If Tenant fails to timely deliver written notice of its intent to renew this Lease after receipt of Landlord’s notice, Tenant’s right to renew shall terminate, and this Lease shall expire as of the end of the Original Term or the applicable Renewal Term, as the case may be.

    1.1 Tenant’s Option to Extend. Tenant is granted the option to extend the Term of this Lease (the “Renewal Option(s)”) upon and subject to all of the provisions contained herein, for eleven (11) consecutive five (5) year periods (the “Extended Term(s)”) following expiration of the Initial Term. The Renewal Options may be exercised only by Tenant giving notice of the exercise of the Renewal Option (“Option Notice”) to Landlord at least six (6) months before the expiration of the Term then in effect. Notwithstanding the above, should Tenant neglect to exercise a Renewal Option on or before the applicable date, Tenant’s right to exercise its option shall not expire until fifteen (15) days after receipt by Tenant of a written notice from Landlord of Tenant’s failure to exercise the applicable option as specified above. If Tenant is in material default beyond the period of notice and opportunity to cure provided for herein on the date that Tenant gives Landlord an Option Notice, said Option Notice shall be totally ineffective.

    A. Option To Renew. Landlord grants to Tenant, five (5) consecutive options (“Renewal Option(s)”) to extend this Lease for periods of five (5) years each (“Renewal Term(s)”). Each Renewal Option may be exercised by Tenant giving Landlord written notice of the exercise thereof at least three hundred sixty-five (365) days prior to the expiration of the then existing Term; provided, however, that if Tenant shall fail to give any such notice within such 365-day time limit, Tenant’s right to exercise its Renewal Option shall nevertheless continue until thirty (30) days after Landlord shall have given Tenant notice of Landlord’s election to terminate such Renewal Option, and Tenant may exercise such Renewal Option at any time until the expiration of said thirty (30) day period. It is the intention of the parties to avoid forfeiture of Tenant’s rights to extend the Term of this Lease under the Renewal Options set forth in this Section 3 through inadvertent failure to give notice thereof within the time limits prescribed. Notwithstanding anything herein to the contrary, Tenant’s right to exercise any Renewal Option is conditioned on Tenant not being in default hereunder beyond any applicable notice and cure period at the time that tenant exercises such Renewal Option. During any Renewal Term, all Sections of this Lease will be effective, and references to Term will incorporate the extensions.

    (d) Tenant shall have the right and option, at Tenant’s election, to terminate this Lease effective as of the last day of the three hundredth (300th) full calendar month of the Term, effective as of the last day of the three hundred sixtieth (360th) full calendar month of the Term, effective as of the last day of the four hundred twentieth (420th) full calendar month of the Term, effective as of the last day of the four hundred eightieth (480th) full calendar month of the Term, effective as of the last day of the five hundred fortieth (540th) full calendar month of the Term, effective as of the last day of the six hundredth (600th) full calendar month of the Term, effective as of the last day of the six hundred sixtieth (660th) full calendar month of the Term, effective as of the last day of the seven hundred twentieth (720th) full calendar month of the Term, effective as of the last day of the seven hundred eightieth (780th) full calendar month of the Term, and effective as of the last day of the eight hundred fortieth (840th) full calendar month of the Term. If Tenant shall elect to exercise any such option, Tenant shall send written notice thereof to Landlord, at least twelve (12) months prior to the date this Lease shall so terminate, but no notice shall be required to terminate this Lease upon the expiration of the Term.

    Section 3.2 Option To Extend Term. Tenant shall have the right and, subject to the “Termination Notice,” the term hereof shall automatically extend for the successive Extension Periods specified in Section 1.1, provided that (a) this Lease shall not have been previously terminated, (b) Tenant shall not be in monetary default or material non-monetary default (after the appropriate notice and cure provisions provided herein) in the observance or performance of any of the terms, conditions, or covenants of this Lease on the Expiration Date, and (c) Tenant has not timely given the Termination Notice. If Tenant does not desire to extend the Term by an Extension Period, Tenant must deliver the Termination Notice to Landlord, not less than one hundred eighty (180) days prior to the expiration of the Term. In the event that the term shall be extended as provided hereunder, the Extension Periods shall be upon the same terms and conditions as are in effect under this Lease immediately preceding the commencement of such Extended Term, except that the Annual Basic Rental due from Tenant shall be increased as provided in Section 1.1 of this Lease. The initial term and any Extension Periods are hereinafter sometimes collectively referred to as the “term” or “Term”.

    (b) Tenant may extend the Term of this Lease on the same terms and conditions contained herein for _______ (______) additional periods of ______ (______) years each, by giving Landlord Notice, not less than ________ (_______) months prior to the end of the Term; provided, however, that if Tenant shall fail to give any such Notice within such ___________-month time limit, Tenant’s right to exercise its option shall nevertheless continue until thirty (30) days after Landlord shall have given Tenant Notice of Landlord’s election to terminate such option, and Tenant may exercise such option at any time until the expiration of said 30-day period. It is the intention of the parties to avoid forfeiture of Tenant’s rights to extend the Term of this Lease under any of the options set forth in this Section 1.4(b) through inadvertent failure to give Notice thereof within the time limits prescribed. During any extension period, all Sections of this Lease shall be effective, and references to Term will incorporate the extensions.

    4. OPTION TO EXTEND.

    Tenant is hereby given the right to extend the Lease Term for four (4) additional periods of five (5) years per period, upon the same terms and conditions as provided in the original term of this Lease. Tenant shall exercise the right granted in the foregoing sentence by notifying Landlord in writing of its intention to extend at least one hundred eighty (180) days prior to the date of commencement of each such extension term, and thereupon this Lease shall be so extended without any further document or act. If Tenant fails to notify Landlord of its exercise of any extension option hereunder as hereinabove provided, its options to extend shall nevertheless remain in full force and effect for a period of thirty (30) days after Tenant’s receipt of subsequent written notice from Landlord setting forth the expiration date of this Lease and advising Tenant that notice of extension has not been received. In the event the Lease Term is extended pursuant to this Section 4, the definition of “Lease Term” as used in this Lease shall include any and all such extension terms.

    Landlord grants to Tenant ______ (___) consecutive _____ (___) year options to extend the Term, which options shall be exercisable on written notice by Tenant to Landlord no later than one hundred eighty (180) days prior to the expiration of the Term (as extended by the previous option period if more than one extension option); provided, however, that if Tenant shall fail to give any such notice within such 180-day time limit, Tenant’s right to exercise its option shall nevertheless continue until thirty (30) days after Landlord shall have given Tenant notice of Landlord’s election to terminate such option, and Tenant may exercise such option at any time until the expiration of said thirty (30) day period. It is the intention of the parties to avoid forfeiture of Tenant’s rights to extend the Term of this Lease under any of the options set forth in this Section 3 through inadvertent failure to give notice thereof within the time limits prescribed. During any extension of the Term, all Sections of this Lease will be effective, and references to Term will incorporate the extensions.

    Tenant has _________ (____) successive options to extend the term of this Lease for additional periods of ________ (_____) years each (individually an “Option Period,” and collectively “Option Periods”), each such Option Period to begin respectively upon the expiration of the term of this Lease as it may have been extended, and the same terms and conditions as set forth in this Lease will apply to each such Option Period, except for the Annual Rent (defined in Article 6), which shall be adjusted as set forth on Exhibit C. If Tenant elects to exercise an Option Period, then Tenant shall do so by giving notice to Landlord not less than six (6) months before the Expiration Date.

    It is the intention of the parties hereto to avoid the forfeiture of Tenant’s rights to extend the term of this Lease through the inadvertent failure of Tenant to give notice of exercise of any Option Period. Accordingly, if Tenant fails to give Landlord timely notice exercising an Option Period, then Tenant’s right to exercise its then applicable Option Period shall nevertheless continue until the date that is thirty (30) days following the date on which Tenant receives a notice (the “Reminder Notice”) from Landlord advising Tenant of Tenant’s failure to deliver such notice of exercise (the “Reminder Period”). If Tenant notifies Landlord within the Reminder Period that Tenant is exercising the Option Period in question, then Tenant shall be deemed to have timely exercised the Option Period, and all of the provisions relating thereto shall be deemed to be in effect from and after the day that the applicable extended portion of the term would have begun as if Tenant had timely exercised the Option Period to extend the term of this Lease. Landlord may deliver the Reminder Notice to Tenant any time after the first day on which Tenant, pursuant to the applicable provisions of this Article 4, could no longer have timely exercised an Option Period (if not for the provisions of this Article 4(b)).

    (A) It is the intention of the parties to avoid a forfeiture of Tenant’s options to extend the Term through the inadvertent failure of Tenant to give the Exercise Notice to Landlord within the time limits prescribed. Accordingly, if Tenant shall fail to give the Exercise Notice to Landlord within the time limits prescribed, Tenant’s right to exercise its option shall nevertheless continue until thirty (30) days after Landlord shall have given Tenant written notice (the “Option Termination Notice”) of Landlord’s election to terminate such option, in which event the option shall expire unless Tenant shall give the Exercise Notice to Landlord prior to the expiration of said thirty (30) day period.

    (B) If upon the expiration of the Term or the expiration of the then current Extended Term, as the case may be, (i) Tenant shall have failed to give the Exercise Notice to Landlord, (ii) Landlord shall have failed to give the Option Termination Notice to Tenant, and (iii) Tenant shall have failed to surrender possession of the Building to Landlord pursuant to Section 17.1, then and so often as such event shall occur, the Term shall be automatically extended for a period of one (1) Lease Year upon all of the terms and conditions then in effect, subject to the right of Tenant to exercise its option to extend the Term for the remainder of the Extended Term covered by such option by giving the Exercise Notice to Landlord and the right of Landlord to place the thirty (30) day limit on such option by giving the Option Termination Notice to Landlord.

    (C) If Landlord shall give an Option Termination Notice to Tenant within sixty (60) days prior to the end of a Lease Year and Tenant shall not elect to exercise the option covered thereby, then Tenant shall be entitled to remain in possession of the Building for at least sixty (60) days following the effective date of the Option Termination Notice before being deemed to be a holdover tenant under this Lease.

  3. MichaelMatheney says:

    So in short its the responsibility of the landlord to send a reminder notice to tenant.
    And I want to ask one question why this not limited to residential leases?
    I have read a article over this at http://www.legisocial.fr/.

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