It is not uncommon for a commercial lease to contain a lease renewal option. Indeed, the inclusion of a lease renewal option, and the terms thereof, may be a key aspect of preliminary lease negotiations between a commercial landlord and tenant. On occasion, however, Courts have found lease renewal options to be invalid and unenforceable because they lack essential terms. Therefore, it is important that both commercial landlords and tenants know at the onset what key terms are needed to consummate an enforceable and valid lease renewal option.

An option to renew a lease is a separate and distinct contract from the lease to which the option pertains. An option to renew a lease should not be confused with an option to extend a lease. An option to renew a lease calls for the execution of a new lease usually under different terms than the original lease. On the other hand, an option to extend a lease usually calls for the tenant to simply give notice to the landlord that the tenant elects to extend the lease, thereby continuing the original lease under the original lease terms. The focus of this article is lease renewal options.

A tenant has no right to renew a lease absent a valid lease renewal option. Although a lease renewal option is usually contained as a separate clause in the original lease, a lease renewal option may be made as a separate agreement subsequent to the execution of the original lease. Under either scenario, however, there must be sufficient consideration for the lease renewal option. There also must be a “meeting of the minds” on the essential terms of the lease renewal option.

In order for the lease renewal option to be enforceable, it must contain an express agreement by the parties regarding the amount of rent due under the new lease. For example, a provision in a lease renewal option that calls for the rent for the renewal period to be “renegotiated between the parties” is generally unenforceable due to lack of definiteness. The reasoning for this conclusion is that a mere agreement to agree, in which a material term is left for future negotiations, is unenforceable because there was no “meeting of the minds” on an essential term of the contract.

A lease renewal option, however, that contains a specific method or guideline for fixing rent, rather than listing an exact rental figure, may be enforceable. The key to the enforceability of such a rent provision is that the formula for the computation of the rent for the renewal period must be capable of being reduced to a fixed sum. For example, rent renewal provision based, in whole or in part, on a percentage tenant’s gross sales is likely to be enforceable if the computation or formula results in a sum certain.

Another critical provision that is needed to establish a valid and enforceable lease renewal option is the specific period of duration of the renewal lease. If the lease renewal option is silent as to the term or length of time of the renewal, the renewal option is generally unenforceable. Although in some cases, Courts may find sufficient certainty from the renewal option and the lease that the term of the renewal may be interpreted to be the same term as the original lease, it is more prudent for the parties to expressly state the duration of the renewal period in the lease renewal option to ensure that there is no question as to the parties’ intent for the length of time for the renewal.

Additionally, enforceable lease renewal options should also contain some definite language in the lease renewal option that clearly sets out the procedure for the tenant to exercise the renewal option. This language should include (1) a time period for exercising the option, (2) the form of notice from the tenant to the landlord regarding tenant’s intent to exercise the option, and (3) the means of executing the option. Without such language, the enforceability of a lease renewal option is suspect due to indefiniteness.

In sum, lease renewal options may be an important bargaining chip in lease negotiations. Regardless of whether you are a commercial landlord or a commercial tenant, it is wise to closely scrutinize any lease renewal option to ensure that it is valid and enforceable.