Can a Landlord Refuse to Renew a Commercial Lease?
Can a Landlord Refuse to Renew a Commercial Lease?
The quick answer is yes. Your commercial landlord has no default legal requirement to renew or extend an existing lease. However, the landlord may be required to renew the lease if the lease agreement allows you to continue to your occupancy beyond the expiry of the current lease term.
The landlord also may be required to renew the lease if they led you to expect a renewal and you reasonably relied on that promise to your detriment.
What is a Renewal?
If you have an option to renew and choose to renew, make sure you clearly and explicitly inform your landlord. Check your lease agreement to see if there is a prescribed method to notify your landlord and use that method.
The new lease, known as the “Lease Renewal Agreement,” will be identical to your original lease unless stated otherwise. There are two exceptions: personal covenants and rental rate.
First, any rights you have that do not affect the nature, quality, or value of the land, or how it is used are considered ‘personal rights’ and will not continue. For example, since parking and commercial competition restrictions affect the land, they generally continue.
However, if you were to assign or sublease to another person, that person could not enforce the renewal agreement because the landlord made the promise to you personally, not them.
The reason the renewed lease differs from the original lease is that, in law, renewals mean that the original lease expired, the property reverted to the landlord, and the land was then immediately leased back to you.
This theoretical reversion erases the ‘extra’ promises you and your landlord made to each other and begins fresh with the basic lease agreement.
Lease extensions differ because they enable the original lease to continue on the same terms without interruption.
Second, rental rates to be paid during the renewal term differ from the original lease. If a numerical value is not set, then the contract must dictate how you and the landlord will decide.
Often, the original lease will state the minimum rent for the renewal term will be the then fair market rent and that any failure to agree on the amount will be decided in binding arbitration.
Can a Commercial Lease Automatically Renew?
A commercial lease could automatically renew if the lease allowed it to. However, landlords should avoid agreeing to automatic renewals because doing so could trap them with a tenant who breached the lease or a new tenant from an assignment.
Moreover, landlords should avoid provisions that require them to inform their tenants of the timeframe within which the tenants must renew the lease.
If landlords want to include an automatic renewal, they should seek legal advice to ensure the renewal is canceled by the tenant breaching terms or assigning the lease.
Feel free to book a free consultation with us so that we can help you, as a tenant or landlord, make the best decision for you and your business.
