Many commercial leases contain either an option to renew or an option to extend the term of the lease. However, what many landlords and tenants do not know is that renewing a lease and extending a lease is not the same thing.
A lease that is renewed comes to an end for an instant at the end of the original term, prior to the renewal term beginning. In other words, the renewal option creates a new lease. One consequence of this is that clauses that apply on the expiration of the term (such as, for example, removal of improvements or personal belongings) would become effective, although practically speaking the parties to the lease will typically not require compliance with these provisions. A second more important consequence of an option to renew is that any clauses in the lease that are personal to the tenant, such as rights of first refusal or guarantees (i.e., clauses that are not an interest in land), do not flow through the renewal option. Landlords and tenants can, if they wish, mitigate this by explicitly setting out these clauses in the renewal option.
A lease that is extended does not bring the original lease to an end: the lease is extended for the additional term without any interruption or modification.
Tenants typically prefer lease extensions (as the tenant continues to enjoy the full benefits of the lease) whereas landlords typically prefer lease renewals (as the landlord is given the opportunity to remove or renegotiate any undesired personal clauses in favour of the tenant).
Commercial landlords and their tenants should keep these principles in mind when negotiating a lease.
References to Harvey M. Haber, Q.C., The Commercial Lease: A Practical Guide, 2nd ed (Aurora: Canada Law Book Inc., 1994).
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