How to Make Your Lease Renew Automatically

If you're leasing to a desirable tenant, you'll want to keep it in its space as long as possible—especially in a softening real estate market. One way to do this is to include an automatic renewal provision in your lease. This provision is unlike a renewal option because it doesn't require the tenant to notify you if it wants to renew the lease. Rather, the lease renews automatically, unless the tenant sends you a nonrenewal notice saying that it doesn't want to renew.

But if your automatic renewal provision is drafted badly, you and the tenant may end up battling in court over whether the lease was actually renewed. And if you lose the battle, you'll lose the tenant.

That's why CLLI, with the help of New York City attorney Neil E. Botwinoff, will give you some tips on drafting a provision that will renew a lease automatically, but shouldn't give you any headaches. There's also Model Lease Language that you can adapt and use in your lease.

Alabama Owner's Automatic Renewal Provision Fails

An Alabama owner found out how a badly drafted automatic renewal provision can backfire. The lease had an automatic renewal clause that required the tenant to give the owner 120 days’ notice if it didn't plan to renew the lease. It also said that “with the mutual consent of the parties,” the lease “may be renewed for an additional five (5) year period” (italics added for emphasis). At the end of the initial term, the owner notified the tenant that because the tenant failed to send a nonrenewal notice and was staying in the space, the lease had renewed automatically. The tenant argued that it hadn't agreed to a renewal, and that it was only a holdover tenant.

Alabama's top court ruled that the lease wasn't renewed. The lease said only that it “may” be renewed with the parties’ mutual consent, the court noted. Because the tenant didn't consent to the renewal, the lease expired at the end of the initial term. And although the lease said that the tenant must give written notice to the owner if it didn't want the lease to renew, it didn't say that the renewal was automatic if the tenant didn't give notice, added the court. The renewal provision was only an “agreement to agree,” said the court, so it was unenforceable [Mobile Eye Center, PC v. Van Buren Ptrshp.].

FOUR TIPS ON DRAFTING AUTOMATIC RENEWAL PROVISION

To help you avoid the same fate as the Alabama owner, follow the four tips below when drafting your automatic renewal provision:

Use Mandatory Language

Make the automatic renewal mandatory, not permissive, says Botwinoff. For instance, don't say that the lease “may” renew, but that it “shall” renew, he explains.

Don't Require Tenant's Consent

Don't require the tenant's consent for the automatic renewal to take effect, says Botwinoff. Otherwise, a court will dismiss your provision as nothing but an agreement to agree, he warns.

Get Right to Cancel Automatic Renewal

If you give the tenant the right to stop the lease renewal by sending you a nonrenewal notice, make sure you get the right to stop the lease renewal by sending the tenant a nonrenewal notice, too, says Botwinoff. A more desirable prospective tenant might be waiting in the wings, or an existing tenant might want to expand into that space, he says. So you, too, may want a way to get out of the renewal, he says.

Set Requirements for Nonrenewal Notice

Say that any nonrenewal notice—from either you or the tenant—must be:

• In writing;

• Sent by registered or certified mail (so that the recipient will be forced to sign a receipt and be alerted to its contents); and

• Sent well before—say, at least 12 months before—the lease is set to expire (so you can find a replacement tenant or the tenant can find alternate space if the lease won't be renewed), says Botwinoff.

Practical Pointer: Don't forget to list the lease terms that will change when the lease renews, says Botwinoff. Otherwise, all of the lease's then-current terms will carry over to the renewal period, and you could have to keep terms that you don't want, he warns. So, for example, if you want the amount of minimum rent to increase during the renewal period, note the amount of the increase in the automatic renewal provision, he says.

Add Lease Language

Ask your lawyer about replacing your automatic lease renewal provision with the following language, says Botwinoff. It conforms to all four tips.

Model Lease Language

This Lease shall automatically renew for an additional term of [insert #] years commencing on [insert date], under the same terms and conditions of the initial term hereof, except that [insert list of changed lease terms], unless either party has notified the other, by registered or certified mail, return receipt requested, at least [insert #, e.g., 12] months prior to the expiration of the initial term hereof, of its intention not to renew this Lease.

Check Your State Law

Certain states have special requirements for automatic renewal provisions, says Botwinoff. For example, New York State law requires an owner to send the tenant a notice reminding it that the lease will automatically renew unless the tenant notifies the owner otherwise, he says. And California law requires that an automatic renewal provision in a lease be typed large enough so that a tenant won't overlook it, he adds. So check with your attorney about any changes needed to conform your automatic renewal provision to your state's laws, he says.

CLLI Source

Neil E. Botwinoff, Esq.: Partner, Tannenbaum Helpern Syracuse & Hirschtritt LLP, 900 Third Ave., New York, NY 10022; (212) 508-6700.