Lease extension and renewal rights are very common lease options granted to a tenant
but clauses and situations vary depending on the facts and leverage of the parties. However, there are certain material points that should always form part of the clause or at least be considered carefully when drafting the clause.
At a minimum, a basic renewal/extension clause should take into account the following:
1. The Pre-Conditions:
a. No prior default, no current default, and consider whether an outstanding notice of default pending cure is sufficient to suspend the exercise right – as I wrote about in an earlier article in The Legal Corner.
b. Is it limited to the original named tenant or will it also apply to certain or all transferees?
c. Does the tenant need to be in possession of and carrying on business from all of the premises?
d. Does the exercise have to be for all the premises or can it be for less than all of the premises?
Be aware that when acting for a tenant, it is imperative that the tenant exercise the option to extend (and for that matter, every option or right it has under the lease), strictly in accordance with the terms of the option or right. Courts have consistently held that a failure to do so will result in most cases, in the loss of the option or right to the tenant. That means making sure that when the right is exercised, the tenant is not then in default under the lease and that all other preconditions to the exercise have been and are at the time of exercise being
2. The Window of Exercise: Is there a limited window of exercise e.g. no more than 12 months and no less than 9 months prior to expiry or is it open from the date the lease is signed until a fixed date prior to lease term expiry? My
preference acting for landlords is always for the former given that a tenant may omit to diarize the exercise date and if it misses that date, it will in most cases have lost the option or opened the option up to some negotiation, which may be
to the landlord’s benefit.
3. The Rent Parameters: In certain cases you will find wording that provides the parties have to agree on rent or the option is null and void. That is not necessarily good for both parties, and not that common either. On the other hand, we often see language like: “fair market rent” (“FMR”) used but what does that mean? Here are some guidelines::
a. Use: Should use restrictions in the lease be taken into account which can be a major factor in determining the FMR? Recent case law suggests that use restrictions imposed by a landlord should be considered in rent valuations unless the lease has language indicating intent that those restrictions should not apply e.g. “highest and best use“ or “any use permitted under the then current zoning by-law”. Address it in the clause so that there is no ambiguity.
b. Location: Try and stay away from the use of “in the vicinity” or “in the neighbourhood”. Rather use defined areas with streets as boundaries and the classification types of buildings e.g. Class B or AA etc. but remember than in a long-term lease situation, a property that is comparable to your building today may not be there in five years when the extension is exercised.
c. Timing of the FMR: Ideally it should be the “FMR” as close in time to the commencement date of the extension not the time of the exercise of the notice which may be a year in advance. We all know that rates can move very quickly in one direction or another.
d. Inducements: Make sure that your extension clause is clear that the FMR is to be net of all inducements such as tenant allowances, rent-free periods, lease commissions etc.
e. Leasehold improvements: Based on a 2007 B.C. Court of Appeal decision (on a lease that provided the tenant improvements become the landlord’s when they are affixed to the premises which is common) the Court said that
i. Absent language to the contrary, a tenant’s leasehold improvements are not to be considered in determining rent on a renewal. However, “fair market rent” is language to the contrary which means the improvements will be considered in the determination of the renewal rent;
ii. “market rent” is an objective determination i.e. the rent the premises would attract if exposed to the market at the time of the renewal (the Court said this results in the inclusion of tenant leaseholds in determining rent).
4. Arbitration: Frequently the “solution” relied on when the parties reach an impasse on FMR. However, there can be significant costs, timing, arbitration procedural matters and other issues that come into play when relied on as the
final means to settle FMR. As a result, it Ii often better in many cases to rely on accredited, reputable and experienced appraisers/brokers to assist in the process where the parties have equal leverage with any costs to be shared
equally. Where the Landlord has greater leverage in the negotiations, I often use wording that provides that until such time as a 3rd party arbitrator or expert renders the award for FMR, the landlord’s FMR shall apply for the extension.
Then, upon the award being rendered, the parties would adjust the rents retroactive to the commencement of the extension term with interest on any amounts owed by one party to the other.
The Lessons: Like any business point to be addressed, you should never rely on a precedent extension clause without considering the issues noted above with your client. A well drafted option will serve to keep the parties out of litigation at a later date, and really, that’s one of the main roles of legal counsel when drafting the offer/lease form.
Disclaimer: This article is for general information purposes only and not intended as or to be relied upon for legal advice. Consult with a lawyer for your unique situation.
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