Time to start a new chapter… the right to renew renaissance?

The post-pandemic trend for commercial tenants to push for shorter leases incorporating options to renew is clear evidence that flexibility remains at the top of a savvy tenant’s wish-list. 

In contrast with yesteryear’s longer-term leases, tenants now want a space that will adapt with the needs of their business and can be handed back if it is no longer fit for purpose. From a cashflow perspective, a shorter-term lease containing an option to renew is more favourable to a tenant than a longer-term lease containing a break clause as the amount of stamp duty land tax payable is based on the (shorter) contractual term of the initial lease (with a further stamp charge only falling due if the renewal lease is granted).

What’s more, if a tenant isn’t sure whether a space will be future proof – perhaps it is likely that they may outgrow the space or they are testing out a new location – then they may feel more comfortable  “kicking the can down the road” and delaying the decision as to the length of their lease term until a later date without tying themselves to the onerous and sometimes intimidating task of complying with the technical provisions of a break clause.

Although an option to renew may sound appealing, tenants should tread carefully as a poorly drafted clause may not work as the parties intended. When considering whether an option to renew is suitable, attention should be paid to the following:

• Timing is everything. Most options to renew require the tenant to exercise the option (in other words, to notify the landlord of its intention to take a new lease) within a prescribed time-period commonly known as the ‘option period’. If the tenant fails to exercise the option within the option period, the tenant’s right to a renewal lease will lapse. Tenants should diarise the option period and instruct lawyers to serve the necessary notice in good time.
• Conditions apply. Often, an option to renew will be subject to conditions which must be complied with for the renewal lease to be granted. This means that just because a tenant chooses to renew, simply serving a notice on the landlord may not be sufficient to ensure that the renewal lease will be granted. Close attention should be paid to the drafting of the conditional elements of an option clause to make sure that there is no room for debate between the landlord and the tenant on the question of whether conditions have been complied with.
• One-time option. Once a tenant notifies the landlord that it wishes to renew, the notice is likely to be irrevocable – i.e. the tenant will be unable to change its mind. Tenants should therefore think carefully before serving notice.
• Repeat lease terms. Typically, a renewal lease will be granted on the same terms as the existing lease. It may be possible to agree in advance that specific lease clauses can be modified or removed if the option to renew is exercised, however, if the terms of the existing lease do not allow for modifications, the tenant should reach out to the landlord to explain that it is considering a renewal lease but will require some of the existing lease terms to be revisited.
• Contracting out complexities. If the renewal lease will exclude security of tenure, the statutory contracting out process must be complied with before the renewal lease is granted. A poorly drafted option to renew clause will make the grant of the new lease conditional on the landlord complying with the statutory procedure which means that, should the landlord fail to comply, the tenant’s option to renew is thwarted. The wording of the clause should therefore make sure that the renewal lease is still capable of taking effect if the landlord fails to comply with the statutory procedure.

 Provided that a tenant is aware of the above, then an option to renew can really help to deliver the flexibility that a modern-day tenant demands.

Callum Hassall is a partner at McGuireWoods London