Form-of-the-week: Option, and Exercise of Option to Renew/Extend Lease – Form 565 and 566
Grant of an option to renew/extend a lease
Tenants frequently negotiate lease agreements with provisions or addendums which, on proper notice, allow the tenant to continue in lawful possession of the unit after the initial lease term expires. A prior agreement allowing continued occupancy of a rented premises is called an option to renew/extend a lease. [See RPI Form 565]
For a commercial or residential tenant, a lease renewal/extension option is a financial imperative. The option gives the tenant time to determine whether:
- the economic and financial conditions of their trade or business (or residency) at this location favor continued possession, and thus they are to exercise the option and remain; or
- the premises is not what they need for the future and, being under no obligation to exercise the option, they are to vacate the premises on expiration of the lease.
Thus, the well-informed tenant at the instruction of their agent will consider negotiating an option for one or more consecutive renewal/extension periods when entering into a lease agreement rather than agreeing to a singular long-term lease. The tenant is under no obligation to exercise the option, and benefits greatly from the added flexibility. [See RPI Form 565]
The landlord also benefits from an option to renew/extend. A renewal option encourages a tenant to enter into the lease since it affords the tenant has the right to continue in possession if the property proves beneficial to their business. Additionally, the renewal/extension option encourages improvements and promotion of the location by the tenant in anticipation of being able to remain in possession. Thus, the option is both an inducement to let and an inducement to stay.