Drafting and Protecting Renewal Rights 

publication 

November 16, 2007 - (Lang Michener LLP Real Estate Brief Summer 2007)

Lang Michener LLP Real Estate Brief Summer 2007

Many commercial leases contain at least one right in favour of the tenant to renew or extend the lease at the end of its initial term. While it may be five to 10 years down the road before this provision becomes operative, the actions then taken by the tenant to exercise that right and the conduct of the tenant during the lease term can have an impact on the availability of that right. Accordingly, when negotiating and drafting renewal rights, particular care should be paid to the wording used.

Notice of Exercise

In almost all cases, the tenant will be required to give a formal notice to the landlord in order to exercise a renewal right. It is likely that elsewhere in the lease the manner of giving notice will be prescribed (such as, for example, by registered mail). If that method of notice is mandatory, in order to properly exercise its renewal right, the tenant must follow it strictly. If, rather than being set out as the only allowed method of giving notice, the lease sets out only a permissible method of notice, then the tenant may use other methods so long as the method chosen by the tenant is not less advantageous to the landlord and the notice is actually communicated to the landlord. Since the onus would be on the tenant to show that an alternate method was contemplated by the terms of the lease, no less advantageous to the landlord and actually received by the landlord, it is obviously much safer to follow the particular method described in the lease.

The lease will also prescribe the time period by which the notice must be given. If the tenant does not exercise its renewal right, the landlord will obviously be taking the space to market and will need some time to do so prior to the end of the tenant's lease. Accordingly, landlords require a range of six- to 12-months' notice prior to the end of the term. Typically, the more unique the space, the longer the notice period (as a longer period will be required to lease the space). Landlords may also have an outside date before which the notice cannot be given for administrative purposes.

Since a renewal right is a benefit to one party only, the courts have generally required strict compliance by a tenant with the prerequisites to exercising such rights. Accordingly, if the tenant misses the notice period, courts will generally not grant any relief to the tenant, with the result that the renewal right is lost.

Other Prerequisites

It is very common for renewal provisions prepared by landlords to require other prerequisites to the exercise of the renewal right by the tenant.

One very common prerequisite deals with defaults by the tenant. A wide variety of language is seen in leases. You might see requirements such as "the tenant not then being in default and never having been in default," "the tenant not then being in material default," "the tenant not then being in default beyond any curative period," "the tenant not then being in default and not having been previously in persistent or continuing default," or a variation or combination of the foregoing.

Another common prerequisite insisted on by landlords is that the tenant at the time of exercising the renewal right be the original tenant. In the landlord's view, this right is being granted on the basis of the identity of the original tenant and, should the lease be assigned, the landlord will argue it should not be obligated to accept a renewal term with somebody it did not do the original deal with.

A related requirement might be that, at the time of the exercise of the renewal right, the tenant actually be in possession or occupation of the premises. In this situation, a sublease to another party would put the tenant off side. Also, having the premises unoccupied may result in the tenant being unable to exercise a renewal right. Of course, if the premises were not occupied, it is far less likely that the tenant would have any interest in renewing the lease. Landlords should note, however, that occupancy has been defined by the courts to mean either physical occupancy or legal occupancy, the latter being the right to have occupancy even though not physically in occupation.

Relief from Non-Compliance

Occasionally, tenants will not exercise their renewal rights in strict compliance with the terms and prerequisites of the lease and look to the courts to give them some relief.

As indicated above, the law regards an option to renew as a privilege given to one party only and in view of such being a privilege, generally tenants must strictly comply with the terms and conditions. However, there are exceptions.

Courts have a general right to grant relief from forfeiture in leasing situations. A common example is where a landlord re-enters the premises and/or terminates a lease for non-payment of rent. If the tenant brings the lease into good standing shortly thereafter, the courts will generally grant the tenant relief from forfeiture and put the lease back into place.

However, this right to relief from forfeiture is very unlikely to be successful to relieve the tenant from non-compliance with a prerequisite to a renewal right. The courts have distinguished between their jurisdiction to grant relief from forfeiture for the non-observance of terms and conditions in a lease as opposed to failure to comply with conditions precedent to the exercise of a renewal right.

Conclusion

The principles from the case law can be applied to the renewal provisions negotiated at the time the agreement to lease and lease are entered into. By paying attention to the terms and conditions at that time, the potential for subsequent disputes will be minimized. Specifically, the landlord can strive to limit the ability of the tenant to exercise the renewal option to those situations where the landlord feels it is appropriate. On the other hand, a tenant facing a landlord's standard renewal clause can negotiate for some protection, so that what it sees as minor variations from the strict terms do not have the drastic consequence of resulting in the renewal right being lost.

This article appeared in InBrief Winter 2007/2008.

Ed.: "Renewal" rights are more often referred to and structured as "extension" rights. Although there are some technical differences in law, the issues discussed in this article generally apply whether the tenant's right is labeled a renewal or extension and, accordingly, only the term "renewal" was used. The unabridged version of this article appeared in Real Estate Brief Summer 2007.