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Lease Renewal vs. Lease Extension: Understanding the Difference
If you’re a tenant or owner of commercial property, it's important to understand the differences between a lease renewal and a lease extension.
Both options allow you to extend your lease, however there are distinct legal and practical implications that can impact your rental rate, lease duration, and legal obligations.
A right of renewal is an option given to the tenant to enter into a new lease with the landlord, which the landlord must grant if certain conditions are met. While an extension of lease is simply a continuation of the original lease without any interruption.
In this article, we'll define lease renewals and extensions and set out the key differences between them, so you can make an informed decision that suits your specific needs and goals.
1. What is a Lease Renewal?
A right of renewal means that, at the end of the current term of the lease, the tenant can renew the lease for a specified period of time. The right is included in the lease and is normally drafted as a covenant in which the landlord agrees to renew the lease if the tenant requests it.
When a lease is renewed pursuant to a right of renewal, it is considered a new lease, rather than an extension of the existing lease. Accordingly, the landlord may require any guarantor of the existing lease to also guarantee the new lease.
If the tenant exercises the right to renewal, the landlord must grant a new lease to the tenant, subject to any pre-conditions in the lease, such as the tenant not being in breach of any existing lease covenants.
The Lease Renewal Process
The process of renewing a lease typically involves the following steps:
- Notice: If the tenant wishes to exercise the right to renewal, it must provide written notice to the landlord at least three months before the expiry date to express their intention to renew the lease. The landlord will often notify the tenant when the lease is up for renewal.
- Negotiation: The tenant may then negotiate with the landlord on the terms of the new lease including on provisions such as requirements for security or guarantees.
- Agreement Documentation: Once the parties have agreed on the new terms, a new lease is entered into between the parties usually in the form of a Deed of Renewal of Lease or a Deed of Renewal of Lease and Rent Review.
2. What is a Lease Extension?
Another way to extend your lease, is by way of a lease extension. A lease extension is the continuation of the original lease without any interruption.
Typically an extension will be documented in what’s called a deed of variation and extension of lease. It is important to note that a lease extension does not change the terms of the lease or the guarantee provided.
When extending the expiry date of a lease, it is important to take into account how this change will impact rent review dates. It is recommended to review the lease and check whether the rent review dates should also be varied to match the new expiry date. This is particularly important when the rent reviews are expressed as occurring on specific dates.
The Extension Process
The process of extending a lease is more simple than a renewal and typically involves the following steps:
- Notice: The tenant will need to provide a written request to the landlord requesting an extension or variation of the lease.
- Negotiation: The parties may negotiate the terms of the lease extension.
- Agreement: Once the parties have agreed on the terms of the lease extension, a lease extension or variation is drafted and signed by both parties.
- Payment: The tenant may be required to pay a lease extension fee to the landlord, which can vary depending on the terms of the extension.
3. Key Differences between Lease Renewals and Extensions
Although lease renewals and extensions can have similar practical effects, there are legal differences between the two that are important to understand.
Some of the main legal differences include:
- Creation of a new lease: A lease renewal involves the creation of a new lease, while a lease extension involves an extension of the existing lease. This means that a lease renewal may require the parties to negotiate and agree on some of the terms of the new lease, while a lease extension typically involves extending the existing lease on the same terms and conditions.
- Covenants: When a lease is renewed it can potentially extinguish or limit personal covenants and rights that benefit both the landlord and the tenant (e.g. right of first refusal for additional space or rent free periods). In contrast, such covenants and rights will usually continue during a lease extension.
- Notice: In general, a right of renewal is not automatic, which means that tenants who wish to stay in their premises must provide written notice to the landlord typically at least three months before the expiry date to express their intention to renew the lease. If the tenant fails to give notice before the required notice period, the right to renew may lapse.
For an extension or variation of a lease, either party may provide notice to the other before the expiry of the lease indicating that it would like an extension and the terms proposed.
Tenants and landlords should carefully consider the legal differences between lease renewals and extensions before deciding which option is best for their situation. It is also important to seek professional advice to ensure that the lease renewal or extension complies with all legal requirements and protects the interests of both parties.
4. Failure to Renew
Where a tenant continues to occupy the premises after the expiration of the lease without renewing it, the lease will usually change from a fixed-term lease to a periodic tenancy. The periodic tenancy is typically on a month-to-month basis, and either party can terminate it by giving a specified period of notice (usually 20 working days).
If you're considering extending or renewing your lease, and you are unsure what option is best, get in touch with NZ Legal for customised advice by completing the form below.
