Lease Renewal: A Complete Guide
Whether you are a tenant or a landlord, when it comes to renewing a lease, it’s important to start the lease renewal process early and thoroughly consider all your options.
For landlords, renewing leases with great tenants is a no-brainer. In other cases, taking the time to find a new tenant may be worth the effort. As a tenant, it’s easy to find other spaces that look enticing and overlook the money you could save with the convenience of renewing your existing lease.
Understanding how a lease renewal works is essential before entering into an agreement. In this complete guide, we will cover what a lease renewal is, the components of a lease renewal agreement, how to negotiate, and common questions regarding the process.
Covered in this article:
- What is a Lease Renewal Agreement?
- When Do You Need a Lease Renewal Agreement?
- Lease Renewal vs. Lease Extension
- What are the Components of a Lease Renewal Agreement?
- How to Negotiate
- How to Know if You Should Renew Your Lease
- Other Common Questions
What is a Lease Renewal Agreement?
Many commercial leases have renewal options written into the terms of the agreement. Typically, renewal options must be exercised within a certain window of time that can range from a few months up to a year before the expiration of the lease itself.
Lease renewal agreements allow commercial tenants to renegotiate lease terms to best benefit their changing business needs or changing market conditions. The ability of tenants to negotiate favorable lease renewal terms depends on multiple factors:
- Property vacancy rates
- The property size
- Square footage of your current leased space
- Current economic conditions
Once the terms are agreed upon, the landlord or property management company will send a lease renewal agreement to the tenant.
When Do You Need a Lease Renewal Agreement?
Tenants are encouraged to reach out to their landlord or property management company anytime they are ready to begin the lease renewal process. Landlords can reach out to tenants as early as 9-12 months in advance before a current lease expiration to start the process. This outreach may come in the form of a phone call, email, or hard copy letter. The minimum notice required to renew a lease will vary by local laws. In some cases, landlords offer incentives to tenants that renew their lease early or by a certain date. Incentives may include free rent, no monthly rate increases, or similar financial incentives.
Landlords prioritize existing tenants over finding new businesses and are typically willing to negotiate to keep a tenant as their customer.
Lease Renewal vs. Lease Extension
There is a different protocol for setting up a lease renewal versus a lease extension. It’s essential to clarify what you are entering into with your renewing agent. Although lease extensions and renewals are similar in that they allow tenants to remain in their rented space after their original lease expires, they are very different concepts.
Depending on the terms stipulated by the landlord, a lease will contain either a lease agreement clause or an extension clause, each with some key differences.
A lease renewal means the landlord lets the tenant stay on the property but needs them to sign a new lease agreement for another term. A lease extension means the tenant would keep their current lease agreement, but the lease term would be extended, typically by a few months to a year.
The critical difference is that a lease renewal may require creating an entirely new lease with updated clauses, including new rental rates. In contrast, a lease extension is completed with a lease amendment to the original lease.
What are the Components of a Lease Renewal Agreement?
The following are key components in any lease renewal agreement.
- Rental rate–while many landlords plan to increase the rental rate at lease renewal time, tenants may be hoping for the opposite. Landlords need to consider several factors before choosing to increase the rental rate to avoid an unexpected vacancy. Consider the current average rental prices for similar properties in the area, consider how easy it would be to replace current tenants, and consider if maintaining the current price is affordable as an incentive for tenant retention. If a landlord intends to increase the rent, a written notice of rent increase should be sent along with the renewal offer. This should be done at least 90 days before the lease’s expiration to allow tenants to renew or find alternate lease options.
- Duration of lease–be sure to clearly stipulate the duration of the lease renewal. If a tenant wants to sign a month-to-month lease, landlords should agree to the terms or terminate the lease before it expires.
- Provisions for early termination by tenant or landlord–in some places, parties are required to give 30 days prior written notice if they plan to terminate the lease, even a month-to-month lease. The requirement can be 90 days’ notice or more in other areas. Be sure to consult a local attorney if you are unsure.
- Occupancy limits–if there are space occupancy limits, this should be stated in a lease renewal agreement, just as it would be in an original lease.
- Property use/restrictions–any property use or restrictions listed in the original lease should be clearly stated again in the agreement. Even if a current tenant is staying in the same space. At anytime a company’s business operations may change and landlords need to stipulate the intended use of the space in the lease renewal.
How to Negotiate
Ultimately, it’s up to the landlord to decide whether they want to allow a tenant to renegotiate or renew a lease. If a landlord allows you to stay as a current tenant, it is wise to consider their renewal terms as you work towards a new agreement. Common things that may change but are up for negotiation are:
- Rental rate
- Security deposit
- How monthly payments are made
- Policies or rules
- The duration of the lease
Negotiating can take anywhere from one day to multiple months as both parties come to an agreement. Successfully negotiated commercial leases come down to aligning expectations, the willingness of both parties to cooperate, reviewing comps and market averages, and other types of data such as current market conditions.
How to Know if You Should Renew Your Lease
In most cases, a lease renewal has many benefits for both landlord and tenant. As a tenant, it’s important to weigh the pros and cons of renewing a lease. Consider the following questions:
- Do you like the building you are in and its amenities?
- A good idea would be to look at other market comps and consider whether you could acquire the same amenities at a new building for a comparable rental rate.
- Is the location conducive to your business, your employees, and its customers?
- It’s important to consider if moving locations will negatively impact your customers, clients, and employees. For example, If your business features a storefront that your current clients visit regularly, will they be happy having to navigate to a new location? Will your employees be willing to make a longer commute to work?
- Do you feel safe in the surrounding area and building?
- Is your landlord meeting its promises?
- Relevant promises might include consistent building maintenance, landscape maintenance, managing noise from other tenants, and keeping up common areas.
- Can you continue to afford your rental rate for another one year or more?
- If your current rental rate is disproportionately high for your business income, consider asking your landlord for a rental rate adjustment. Many landlords will consider adjusting rent before losing a great tenant.
- If you were to move locations, could you afford the moving expense?
- Moving locations has significant costs. From hiring movers to business downtime, it’s essential to factor in these costs if you are considering a move over a lease renewal. Will a lower rental rate account for the cost and headache of moving locations?
Other Common Questions
From understanding what a lease renewal agreement is and the components it should include to knowing if you should renew and how to negotiate a renewal, renewing your lease can come with many questions.