Many commercial tenants have a clause in their lease that allows them to renew or extend their current lease. Every lease is unique and should be reviewed carefully to understand the specific requirements to effectively exercise the option to renew or extend as outlined in the lease.
The benefit to tenants is that, if they are occupying a space that they have invested in or absolutely do not want to lose, they can prevent the Landlord from leasing the space to another prospective tenant.
The specific language of the lease is important to review; however, it is typical that an Option to Renew/Extend has the terms similar to the following:
- The tenant must provide written notice to the Landlord within a specific time frame, often 6 – 9 months prior to the expiry of the current lease term;
- The manner of providing notice is usually a defined in the lease and must be provided accordingly;
- The tenant must not be in default of their lease or the option may be void;
- The extended lease term will be at market net rental rates, and sometimes not less than the net rent paid by the tenant in the final year of the current lease;
- If the landlord and tenant can’t reach agreement on the market net rent, it may be decided by arbitration;
- There will be no leasing incentives such as an improvement allowance, landlord’s work or free rent. Rather, the space is provided “as is”.
While for some tenants it is imperative that they retain their space, exercising an Option to Renew/Extend is fraught with risk.
Firstly, once a tenant exercises the option they commit themselves to the new lease. Not only do they give up every other opportunity on the market, they lose their negotiating leverage with their current landlord. Moreover, unless there has been agreement in advance between the landlord and tenant as to what “current market net rent” is, it is possible that the tenant will commit themselves to a rent that is more expensive than they expected, with obvious downstream effects (less money for reinvestment in the business, less cash flow, etc.)
Secondly, as there will be no leasing incentives, any changes to the space required by the tenant will be at the tenant’s sole expense and on top of the rent going forward. Construction costs have risen sharply in recent years and many tenants suffer significant sticker-shock when exploring the cost of renovating a space. Often, it proves to be cheaper to relocate to another building (where the space is improved as needed, or the landlord will do so to secure the tenant) rather than renovating an existing space. Naturally, renovating a space while also occupying can be very disruptive.
Most tenants do not occupy space so unique that they could not replicate it or even improve upon it elsewhere. Therefore, most tenants are better served by not exercising an Option to Renew and considering their options in the market (including “new” negotiations with their current landlord).
In the office sector there is an abundance of vacant office space available, plus a supply of fully improved sublease spaces. Tenants have a plethora of options with landlords, and sublandlords, eager to secure their tenancy. Moreover, one’s current landlord is likely willing to negotiate a new lease with an existing tenant even if an Option to Renew/Extend has lapsed. After all, landlords are not looking to increase their vacancy and the current tenant is one with whom the landlord already has a relationship and who, presumably, has paid rent on time thus far.
Of course, there are situations where a tenant has a prime location in a building, has invested heavily in tenant specific improvements, or that specific location is critical to their business.. In such cases exercising the Option to Renew/Extend might be prudent. But, generally, tenants should exercise an Option to Renew/Extend only when it is imperative not to lose their space. Ideally a tenant can pre-negotiate their renewal terms without prejudicing their rights to renew or extend. Thus, if they cannot secure reasonable terms from their Landlord in advance, they can exercise their option and rely on the arbitration process outlined in their lease.
Notice Requirements
The specific terms of one’s lease will govern the notice requirements. However, while it is prudent to have discussions with one’s landlord about market net rent, those discussions likely do not satisfy the notice requirements described in the lease.
Legal opinions on this issue are that the terms of the Option to Renew/Extend will be strictly construed and must be clear and unequivocal. It is also common that a lease will have a clause stipulating that time is of the essence, which also supports the position that strict compliance with notice provisions is required.
In other words, the court is likely to see a clear distinction between a tenant looking to negotiate the rent as a condition of renewal, versus a clear and unequivocal exercise of an Option to Renew/Extend.
As stated in 2324702 Ontario Inc. v. 1305 Dundas W Inc., 2020 ONCA 355 (1305 Dundas] at paragraph 20: The [tenant] wanted the [landlord] to agree on a rental figure before it committed itself to the renewal…. In adopting this posture, the [tenant] effectively sought to deny the [landlord] the certainty that a lease renewal option of this kind is meant to provide.
Therefore, if a tenant wishes to exercise an Option to Renew/Extend, it is prudent for the tenant to reference the specific clause in their lease, use the specified words such as “exercise the option”, and follow the prescribed notice provisions specific to their lease. Of course, this must be done within the window of opportunity and any other requirements of the option must be met.
Summary
Exercising an Option to Renew/Expand is rarely the most economical choice for a tenant. While a tenant can prevent any competition for their space, they forego all other opportunities, lose their negotiating leverage, and commit themselves to a “market rent” without any market leasing incentives.
However, if one chooses to do so, it is recommended that they:
- Read or have their lease reviewed by a professional as it is the document that governs their relationship with the landlord, paying particular attention to deadlines and specific notice requirements. Notice provisions are very specific and are often not correctly followed. Tenants and their lawyers ought to review the procedures carefully and challenge anyone who suggests providing notice in any fashion other than what is specifically provided for in the lease.
- Seek professional advice about the legal implications of relevant lease clauses.
If you have any questions regarding your lease reach out to a commercial leasing expert at NAI Commercial. We can provide complementary advice after a review of your lease.
The information provided in this article is not intended as professional, legal advice. Please contact your solicitor for legal advice as needed.
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Roy Gibbs, LL.B.
Personal Real Estate Corporation
Commercial Sales and Leasing
604 691 6686 | 778 834 4050
[email protected]
