A renewal option is a clause that provides two parties the opportunity to enter into a new legal agreement for a new term. These clauses are commonly found in rental lease agreements, providing specific conditions and timelines for both the landlord and tenant on how to renew a lease.
Learn more about how renewal options work, what they entail, and how they can impact both landlords and tenants.
Definition and Examples of Renewal Option
A renewal option is a contract clause, found in a lease, that specifies the conditions needed to renew the original agreement. It typically includes if and when the tenant and/or landlord must notify the other party if they wish to renew (or not renew), as well as actions that may void the renewal option.
A renewal option allows a lease to be extended for a new term as agreed on by both the tenant and landlord.
- Alternate name: Lease renewal
When someone first leases an apartment, they might sign a two-year lease with a renewal option. A renewal option does not have to repeat the same terms as the original contract. For example, the landlord may decide to only offer a month-to-month or one-year lease moving forward, or they may decide to restructure the rent pricing. In other words, a renewal option simply provides for a period to negotiate a new lease when your original term is up.
The landlord could refuse to renew for various reasons, however, such as if the tenant has defaulted on payments.
How a Renewal Option Works
A renewal option works by dictating the terms of renewing an agreement. For example, a renewal option in a lease may read: “The tenant's option to renew must be requested in writing to the landlord no less than 60 days before the expiration of this lease.”
In this example, if the tenant’s lease ended May 1, they would have to tell the landlord by about March 1 that they want to renew. If the tenant does not plan to stay, however, they are usually not required to give notice.
The new lease can extend the same terms as the original lease, or the two parties can agree to changes in terms on the new lease.
Also worth noting is that some leases may have an automatic renewal option. In these cases, the onus is on the landlord to notify the renter within a specified time frame that the auto renewal is coming up, so the tenant can report back if they do not wish to continue leasing.
Some leases that auto-renew may do so for a full year, while others may change to month-to-month.
Types of Renewal Options
Aside from lease agreements, renewal options can also be included in other types of contracts.
For example, with commercial leases, businesses leasing office or retail space–especially those just starting up–may choose to enter into a shorter-term agreement with a renewal option rather than make a long-term commitment.
Other types of legal contracts with renewal clauses include service contracts with businesses and contract employment agreements.
Do You Need a Renewal Option?
For tenants, a renewal option is usually good to have in place because otherwise, the landlord is under no obligation to let them remain past the lease expiration date. This is especially important for commercial tenants who depend on the continuity of their business and want the option of continuing to rent the property.
Renewal options can also benefit landlords. A renewal option can dictate that a tenant notify a landlord about their intention of staying or leaving, which can help a landlord plan. Renewal options can help landlords minimize the risk of property sitting vacant or forcing them to find new tenants on short notice.
Leases aren’t always required to have a renewal option. If a lease does have a renewal option, it does not necessarily have to be exercised. In some cases with no renewal option, the lease may convert to a month-to-month tenancy if the tenant remains after the lease is up and the tenant continues paying rent.
In some cities, including New York City, landlords of rent-stabilized apartments are legally obligated to offer a renewal option.
Alternatives to a Renewal Option
Although some people use the terms interchangeably, a renewal option is not the same as a lease extension. Lease extensions simply continue the original lease as is, just with a later expiration date; renewal options have the parties entering into a whole new lease agreement.
What a Renewal Option Means for Landlords and Tenants
Having lease options for renewals generally benefits both parties involved. Both landlords (lessors) and tenants can benefit from knowing that when the lease is up, and they can work together to agree to new lease terms that can benefit both parties.
- A renewal option is a common clause in lease agreements that allow both parties to enter into a new lease when the term is up.
- Renewal option clauses will outline the timeline and notification requirements for both the tenant and landlord.
- A renewal option is different from a lease extension, the latter of which extends the time frame of the original agreement.
- Both landlords and tenants, including those dealing in commercial real estate, can benefit from having a renewal option.