What is a Lease Renewal Agreement?
A Lease renewal or Extension is an agreement by which both parties continue the prior relationship. The original contract (Lease) continues and the new date identifies the new expiration date of the amended Lease. So, there is no new contract. It’s simply an amendment (change) to the original Lease that states the old Lease will continue for three more years. The Lease becomes extended (amended) and the parties continue in like fashion. For example, if the original term was August 31, 2012 and you extended the Lease, it would continue to be in effect until August 31, 2015 . All the terms remain the same. The rent may increase or decrease. Utilities and other fees may adjust as well. It is very important in Texas that the Lease extension be in writing and signed for any period of time to be enforced. The Statute of Frauds requires that leases for a period longer than one year must be in writing. Even a month-to-month extension must be a written document. If the Lease is extended for a period of less than one year, such as a month or three month extension, the Statute of Frauds generally doesn’t apply.
Essential Elements of a Texas Lease Renewal Agreement
The key elements of a lease renewal agreement in Texas include: the names of the parties to the original lease, the property address, the current term of the lease, the term of the renewal, and any changes in the terms or conditions of the lease during the renewal period.
Including these key elements creates a seamless renewal of your lease, with no gaps in the term. Failure to complete a seamless renewal with the appropriate parties can create real headaches for landlords, particularly in jurisdictions that have strict lead paint disclosure requirements (in certain multi-family housing) that require landlords to present specific lead paint notices and disclosures to tenants. In those jurisdictions, it is not enough simply to present the required notices and disclosures whenever a tenant moves into a unit. Rather, the notices and disclosures must be revised and given to tenants whenever there is a change in tenancy. This includes, of course, a new lease or a renewal of an existing lease.
Legal Requirements of Lease Renewal Agreements in Texas
In Texas, while a landlord does not need a lease renewal agreement to renew a lease, the relationship between landlords and tenants is governed by the statute. A landlord can provide a written notice offering a renewal, and if the tenant intends to reject the offer, they must provide their response within a certain time in order to escape liability. If the tenant fails to respond, the lease operates as if it were renewed for the next applicable lease term. The statute also provides certain timeframes and procedures for providing notice if the landlord and tenant have agreed to a lease renewal. Note that if a tenant has the right of first refusal or has, for example, an option to extend a lease, it may be subject to different requirements.
If a landlord fails to provide the notice and the tenant vacates early, the tenant can avoid liability for future rent due under the lease. However, if the tenant has an obligation to pay for repairs or other charges, they still may have liability for those charges and may be liable for actions that occurred prior to the termination. Both the landlord and the tenant cannot have any obligations outstanding at the termination of termination of the term, including taxes, damages, and physical damage to surrounding premises.
Advantages of Renewing a Lease Agreement
For tenants, the most important advantage is that a lease agreement renewal offers continuity and stability. Tenants can remain in the same location for an extended period of time, without having to worry about the potential costs that would be associated with relocating the business or embarking on a protracted search for additional space. An extension could also minimize costs in the future as well, if the market becomes more competitive, and rental rates subsequently rise. At the same time, a lease agreement renewal allows landlords to secure their operating income for a longer period, with minimal interruptions. Requiring commercial tenants to move could be costly and time-consuming, and could lead to unnecessary vacancy issues. A lease agreement renewal allows landlords a break from dealing with the costs and inconvenience of tenant turnover.
Potential Issues with Lease Renewal
As with any contractual obligation, there are challenges facing both landlords and tenants in the context of lease renewal. Again, the law is more protective of tenants, who may be tricked or coerced into signing a new document they do not fully understand. In this regard, some of the more common challenges in renewing a lease extension in Texas include:
Arriving at a fair rental price and negotiating terms. The expanded opportunity for negotiation during a renewal can be a double-edged sword, giving each party the chance to lock in favorable terms or risk losing them entirely. When negotiating rent, the more information both sides can provide about the local rental market, the better. Landlords can benefit from researching current rental listings in neighborhood or nearby areas . Tenants may be able to benefit from a presentation of a comparable breakdown of costs for the property it is renting. The more advance notice provided by the tenant for renewal, the better. The same can be true of the notice provided by landlords when they wish to raise rental rates or adjust other terms. Notice protects the party providing it, as well as the other party, allowing them adequate time to prepare for the potential new agreement.
Dealing with increases in rent, changes in terms. If the tenant has been paying below market-value rent for several years, the landlord may want to charge this as a reward for long-term tenancy. By notifying the tenant before the deadline for renewal, the landlord has room to negotiate and possibly compromise on some points.
Negotiating Lease Renewal Terms
Consider the following tips for negotiating your next lease renewal:
Situation A. You are a landlord and the tenants’ lease is about to expire in a couple months, and you are confused why they haven’t submitted a request to renew.
Solution
Situation B. You are a tenant and your landlord has approached you about renewing your lease, but they are asking for 10% more rent.
Solution
With the current supply and demand of rentals in Texas, rental properties have been on the market for a long time. Tenants are somewhat hesitant to sign longer leases, given the current climate. Many tenants are aware that lease renewal agreements are subject to negotiation – and negotiation is an important part of a landlord’s right to enjoy fair value for the property.
The next time you are approaching a renewal with a tenant – think strategically. Consider the primary objectives of the renewal: length of the lease and increase in monthly rate – oftentimes, the landlord wants both. But, if you are a smart landlord, you won’t prioritize your objectives in that order. You’ll keep the length of lease as priority one, and will only agree to a higher rent if your tenant will likewise agree to a longer term – because if you cannot reach an agreement, you may have to reproach the situation with no tenant in the house.
Takeaways:
Tip for Tenants: Negotiation is the key to securing your best deal, and it’s a two-part dance. As they may say "yes" to a longer lease, it is now time for you to say "yes" to a higher rent. It’s all in your cadence.
Tip for Landlords: Negotiation is the best way to keep your revenue high. If you slow down the cadence with your tenant and break the process into stages, it becomes much harder for the tenant to walk away from the process without concessions. And by the time your tenant discovers your cadence, you’ve likely signed them up for another year.
Drafting a Lease Renewal Agreement in Texas
The language of the lease renewal agreement should be tailored to your particular needs and it is generally not a good idea to use a form and modify. Further, if you have a form that you have been using for years it is often difficult to determine if the form is still appropriate, in whole or in part. A document that was drafted years ago may still contain terms or conditions that you no longer intend to abide by. Further, the state of the law is always changing and a document drafted a long time ago may no longer be up to date with best practices, or even the law.
A better solution is to draft the document yourself (in a few paragraphs or a few pages) or hire a qualified lawyer to do so for you. In either case you need to be clear as to the renewal options under the lease. For a tenant who wants to remain in the space and an owner or landlord who wants to keep a good tenant you want the simplest renewal provision which requires that the tenant notify the landlord of intent to renew by a certain date (not too far in advance, not too short of a time, for example notice to renew by the last day of the second month prior to expiration of the lease term). After notice by the tenant the parties would execute a renewal document providing for the same rent (in most cases developers do not want to be forced to raise the rental rate).
If renewal is conditioned on other things, such as additional construction or a decision about moving from one space to another, the parties should get together early enough to discuss these issues and work them out, prior to the date that the tenant must notify the owner of its intent to renew. If agreed upon, the owner should prepare a renewal document for execution and the tenant should be obligated to sign a renewal at that time. If the parties are unable to come to a resolution, the tenant’s option to renew should become void.
In drafting a lease renewal you must also make sure that provisions state that excluding the right to rent premises for a specific period does not preclude the parties from entering into a new lease for some other or all of the premises. Pages and pages of renewal language and rights to future extensions usually causes more problems than it solves, with disputes between the parties as to what rights they thought they had. Simple is better in these circumstances.
As noted above, the specific facts of your situation are in important consideration in making any business decisions – whether to use a form and modify and/or draft the lease renewal agreement. The assistance of a qualified real estate attorney is the best way to ensure that your contract is legally sound, protect your rights, and further your business objectives.
Common Errors in Lease Renewal Agreements
Landlords and tenants sometimes enter into relationships that rely on oral or hand-shake agreements. The relationship is sustained by the obligations set out in the original lease. Failure to renew a lease in writing may be overlooked where the relationship is going smoothly. However, when disputes arise, the oral agreements concerning renewal become lost among the very real disagreements and can serve to complicate the dispute or give rise to a whole new cause of action.
Even a written lease is sometimes unclear about when the lease term begins. For example, wherein a lease simply states that the lease commences on "March 15" or "January 1," it is often unclear whether 11:59 p.m. on that date is the beginning of the lease term, or simply the end of the prior term (in the case of a renewal). Additionally, leases sometimes state that rent is due "in advance," but do not otherwise specify a day on which rent is due each month. If rent becomes past-due, and the landlord’s notice of termination permits payment at any time before 11:59 p.m. of the termination date to cure the default , the tenant can save the lease even at the last possible moment.
A similar problem arises with renewal options. Many renewal options require that notice be given by a date certain; others are less clear. A renewal option may simply state that if "the lease has not previously terminates" the tenant has the right to give reasonable notice of renewal. Such language, coupled with a lease providing that lease payments must be made "in advance," can often lead the parties to dispute over whether payment of rent on the first of the month in which a renewal would have to occur would suffice to keep the lease in place (and thus permit the timely renewal notice).
An additional problem may arise where one party has a legal right to declare the lease terminated, but does not do so, and then later claims that the lease was never in effect for the period between the declaration of termination and the date on which rent was paid to bring the rental default current, or where that period was used to negotiate revised terms. Where the lease does not specify a date on which the right to terminate arises, or does not otherwise provide that election of the right to terminate is all-or-nothing, a court may have little basis upon which to conclude that the lease was ever validly terminated.