Hidden Pitfalls of Renewal Clauses in Commercial Leases

Commercial Real Estate by Ashlee D. Gonzales, Esq.

One of the most overlooked clauses in commercial leases is the option to renew. Essentially, an option to renew is merely an offer by which the lessor binds himself in advance to make a contact if the lessee accepts on the terms and within the time designated (Cicinelli v. IwasakiI (1959) 170 Cal. App. 2d 58). Landlords have a tendency to use form or template language in their leases without paying too much attention to renewal clauses. Relying on boiler plate language and not negotiating lease terms can lead to a costly dispute at the expiration of the initial lease term. Tenants and landlords should fully apprise themselves of the terms and conditions of their renewal clause, if any, prior to executing the lease.

Many commercial leases with renewal clauses contain explicit terms for the tenant to comply with if they intend to exercise their option.  Notably, options to renew typically require the tenant to give the landlord notice in writing of their intent to renew, usually 6-12 months prior to termination of the lease. In Jeffrey Kavin, Inc. v. Frye, a 2012 California Court of Appeals case, the lease required tenants to deliver written notice to the landlord within six months before the end of the initial term; otherwise the option would automatically expire. The tenants in this case provided written notice of their intent to renew two weeks after termination of the initial term, and remained in the premises for a few months after the initial lease term ended.

Upon their move-out, landlord sued the tenants for breach of contract, claiming that they had validly exercised their option to renew. The court ruled otherwise, stating that since the tenants did not strictly comply with the terms of the option, the option to renew automatically expired. The court further stated that the landlord was not permitted to waive the renewal notice requirements, citing that a party cannot waive a contract provision when the provision benefits both parties (Jeffrey Kavin, Inc. v. Frye (2012) 204 CA4th 35).  Given that the renewal clause gives exclusive power to the commercial tenants to accept or reject, the landlord cannot waive the provisions surrounding that option.

In a surprisingly large amount of commercial leases, the lease provides the tenant with the option to renew, but fails to make any mention of what notice the tenant must give the landlord of their intent to renew. California courts have held that when the option to renew requires no particular form of notice, the tenant’s acts or course of conduct dictate whether or not the option has been validly exercised. In a California Court of Appeals case involving a commercial lease for a food market, the option to renew did not contain any notice requirements, but contained an increased rent amount for the renewal period. When the option to renew is not clear on its face, the court will consider evidence outside of the lease to determine whether the option was exercised. In the instant case, after the conclusion of the initial lease term, the tenant remained in possession of the premises and paid the increased rent amount, which the court ruled as being sufficient conduct constituting an exercise of the option (Cicinelli v. Iwasaki (1959) 170 Cal. App. 2d 58).

A lease containing a renewal option that is silent as to notice requirements can be detrimental to landlords. Without specific notice requirements, the landlord is left in the dark and unable to prepare for the tenant’s acceptance or rejection of the additional lease term(s). Absent the tenant voluntarily telling the landlord, the landlord will not know if the tenant plans to vacate or remain in possession of the premises until after expiration of the initial lease term. Landlords should implement a specific timeframe for the tenant to notify the landlord in writing of their intent to renew. This will provide sufficient notice to landlords to find a replacement tenant should their current tenant not wish to exercise their option to renew.

Alternatively, options to renew can be extremely beneficial to tenants, giving them security and peace of mind that they will not have to relocate their business every three to five years. The option to renew gives tenants exclusive power over the decision to continue the lease for additional term(s).  With that power, comes significant risk, especially when the option to renew lacks specific notice requirements. If the initial lease term ends and the lease lacks any notice requirements, the tenant’s continued possession of the premises and tender of rent payment could subject them to rent for the renewal period (Adv. Corp. v. Wikman (1986) 178 Cal. App. 3d 61). Given that most renewal periods range from three to five years, tenants should be mindful of termination dates to avoid any unwanted lease renewals.

There are several other potential issues that can arise from renewal options, and we will discuss those in our upcoming commercial leasing articles. As noted, options to renew in commercial leases are oftentimes bitter-sweet. Landlords and tenants should adequately address and negotiate renewal clauses at the inception of the lease agreement, clearing up any misunderstandings or missing terms. Additionally, seeking the advice of an experienced real estate attorney can make renewal options more predictable and useful.

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