What Is a Lease Renewal?
A lease renewal agreement is a contract that extends the length of time that a lessee is able to occupy a property. This agreement must be signed by both the landlord and the tenant. It is one of three options – including a lease extension agreement and a new lease agreement – that a landlord has in relation to a lease renewal. A new lease agreement offers a probationary period for a tenant, so that while they technically sign a new lease, there is no presumption to renewing the lease after it expires. A lease extension agreement, meanwhile, simply extends the current terms of the lease agreement. A lease renewal agreement, however, enforces the tenancy for an additional term based on the same terms and conditions (and a renewal fee) as the original lease agreement. It is typically for a set length of time, such as another year. Most importantly , it is the simplest option of the three for landlords to enforce, and it does not change the terms and conditions of the original lease. For the tenant, signing a lease renewal agreement represents some level of commitment from the landlord in extending the original tenancy. As such it should only be signed by both parties if the landlord has made the decision to allow the tenant to continue occupying the property. A lease renewal agreement should only be made in writing. Tenancy agreements hold more significance than the typical contract thanks to the provisions of Section 1, part 2 of the Landlord and Tenant Act 1985, which allow for the creation of a tenancy agreement in both written form and oral form. Although it is possible to come to a verbal agreement, it is not considered wise as doing so would require proof in any future legal dispute over the tenancy.
What Laws Govern Lease Renewals in California?
California rental laws and lease renewal with updated rent control rules further regulate the implementation of lease renewal agreements. Lease renewal provisions consistent with California law filter down to the operation of rent control ordinances and state law protections against excessive rent increases.
Written lease renewal agreements are not mandatory under California law, just as a tenant is not required to renew his or her lease. Property owners should be careful to balance expectations when it comes to the renewal of a lease agreement. Lease renewal clauses that let a tenant extend the tenancy for an indefinite term must comply with the Civil Code section 1943. This requires that the tenant provide a notice between 30 and 60 days of the expiration of the lease agreement if he or she intends to stay. While the tenant must give a 30-day notice to the landlord of his or her intent to exercise the renewal term, the landlord has no obligation to accept the renewal. Recent amendments to the Civil Code provide a narrower window for the landlord to accept the renewal. Before the changes, landlords could accept renewal by continuing to operate on the same terms as the expired contract. Now, the landlord must act within 60 days after he or she knew or should have known of the renewal. California law further grants the tenant a right of possession, quiet enjoyment and to exclusive use of the property even after the lease expires.
State rent control laws limit the amount that landlords can increase rent on residential properties to 5% of the most recent rent plus the percentage change in the cost of living for the area within a maximum of 10% of the most recent rent. Local rent control ordinances will limit the amount for rent controlled properties to the amount allowed under the city’s ordinance. California property owners must keep this regulation in mind when building an annual renewal price into a lease renewal agreement. It is also important to note that if the tenant signs a lease renewal document that incorporates the new renewal amount, it is considered a new tenancy governed by the rental agreement provisions and current rent control limits, similar to a new lease agreement.
To comply with rent control ordinances, property owners should make sure that the lease renewal language complies with appropriate amounts for rent increase set by the applicable ordinance. The property owner may also want to consider whether their particular rent control ordinance allows lease renewal terms to be set at 10% above the previous year’s rent. The property owner also needs to be aware of which date is the proper date to implement the renewal increase. Depending on the particulars of the lease and of the appropriate ordinance, the renewal increase may be effective the day after the prior lease expired or may be effective on the first of the month after the renewal date. In any case, the tenant should not be charged the renewal amount until the appropriate date.
New amendments to the state rent control law, AB 1482, impose a state-wide rent control on most residential units (with the exception of owner-occupied units and single-family homes where the owner is not a corporate entity) and prohibits landlords from increasing rent by more than the lower of 5% plus the local rate of inflation, or 10%. In addition, the law places a cap on the frequency of rent increases to once every 12 months, although the rent board may allow landlords to have two increases within a 12 month period if the total increase isn’t greater than the maximum limit. However, there are no caps or restrictions on the frequency of rent increases for commercial leases.
How to Renew a Lease Agreement in California
The renewal of a lease agreement in California is considered a new lease under California law. Thus, it follows that the steps in renewing a lease are similar to drafting a new lease. The process generally involves the following: Typically, rather than drafting and negotiating a completely new lease agreement, the parties produce an Addendum to Lease Agreement at the end of the initial term which simply extends the remaining terms of the lease, such as consideration and covenants, of the original lease. The parties can then negotiate the terms of the new lease, if there is any provision to change terms therein. After the terms to the renewal have been agreed upon, each party should sign the Addendum to Lease Agreement. It is recommended that the parties exchange a fully executed copy of the Addendum to Lease Agreement for their records.
Lease Renewal Troubleshooting
A lease renewal agreement in California often gives landlords and tenants alike the opportunity to revisit the terms of their agreement. One or both parties may want to make changes to improve certain aspects of their mutual relationship or to fit new plans or circumstances. However, some of those potential changes may be met with resistance, and lease renewal negotiations may involve the most difficult interactions in the life of a tenancy.
Disagreements over the amount of any rent increase on renewal frequently arise in commercial leases. Tenants want to pay as little as possible, while landlords have budgeted for additional income in the coming term. For residential leases, landlords sometimes prefer to force a tenant into vacating the premises by substantially increasing the rent, in order to justify finding a new tenant who will pay a higher market rate. For their part, most renters are at the mercy of rising rents in an ever more expensive housing market and may be unable to afford to renew under even a modest increase. Depending on where the lease is located, however, a landlord may not be able to evict a tenant in order to charge more for the unit. These factors can influence the outcome of rent renewal negotiations.
Even if the renewing parties are amenable to remaining in their roles, other issues can lead to extended negotiations in order to settle on renewal terms. A common point of contention is whether the landlord will still be responsible for any interior or exterior maintenance of the premises. Some landlords seek to renegotiate language in commercial leases that has permitted them to avoid maintaining certain areas of their facilities. On the other side , some commercial tenants seek to renegotiate language that makes them responsible for maintaining areas not directly under their control.
Renewal provisions in a lease may also be the cause of problems in the renewal stage. For example, a lease may include language which calls for renewal with a same term, such as one year, and a reasonable increase in base rent. In certain market conditions, such a term may reduce the renewal rental rate by substantially less than the market rate, thereby making it awkward for the landlord to avoid losing rental income.
Lease preparation may be required to address changes in business operations or renewal term requirements. For example, a certain renewal term may simply be too short or too long. A tenant may want to avoid a long-term commitment in case he is forced to relocate his business to a different region or cannot meet demand in the current such that a larger facility will be needed. Meanwhile, some landlords and institutional investors may not want to commit only to a short term. Revisions to renewal agreements may be complicated by lease provisions which state that certain changes must be made in writing, although the parties may still proceed with oral agreement to alter the renewal provisions.
Poor and inadequate communication between landlord and tenant varies from renewal to renewal, as either party may be more accustomed to dealing in good faith efforts in order to find optimum terms.
Tips for Leasing Success
Communicate early and openly with the other party about lease renewal terms. Engaging in conversation earlier on can prevent confusion, missed deadlines, and last-minute negotiations that could alter initial intentions.
Remain organized and document all lease renewal activity. An organized paper trail helps establish terms agreed upon through correspondence as well as document progress. A good habit is to document all communications, including dates, times, and any terms that were discussed and agreed to.
Remember and understand your rights under the lease. New negotiations can lead to the temptation to stray from what’s originally set out in the lease agreement. Both landlords and tenants should be mindful of their respective rights to renew a lease, as well as the process for opening negotiations, such as whether a notice must be sent and what that notice must contain.
Formulate a plan to make the transition smoother. Renewal terms are intended to make things easier on both parties. However, they can also lead to issues if not properly planned for and executed. For example, if you’re a landlord that plans to improve the property as part of a renewal, consider scheduling the improvements at a time when they will least disrupt the tenant’s lifestyle or operations. The same is true if you’re a tenant that plans to make changes to the property.
When Not to Renew: Making a Change
There are occasions where entering into a new lease agreement for an additional term is not the best choice for the landlord or tenant. Whether it’s out of financial necessity, an unexpected relocation, or an opportunity that cannot be passed up, the lease renewal process does not always mean a new lease. Landlords and tenants alike have alternatives to whether to renew.
Month-to-Month Agreements
Should the landlord or tenant choose to not re-enter into a new lease, the lease will continue on a month-to-month basis. Without a new lease, the minimum rent increase and notice period requirements of the old lease do not apply. However, depending upon the length of the lease agreement, the statutory notice periods for a month-to-month tenancy may apply. For example, California Civil Code section 1946(a) provides that when a tenancy of one year or less exists, either party may terminate the lease by providing written notice at least thirty (30) days before the expiration of the term. When the tenancy is for more than one year but less than two years, either party may terminate the lease by providing written notice at least sixty (60) days before the end of the term. As a result, when the lease period expires, or when notice is provided, the leasing party should consider transitioning into a month-to-month agreement instead of negotiating a new lease. Although not considered a lease renewal, your rights and responsibilities (such as rent increases during the notice period and property maintenance obligations) would not change. Instead, the terms of the lease would continue on a month-to-month basis until you decided to terminate the term.
Renegotiating Terms
Not every renewal is bottom-line driven. Rather , it could be just the opposite. The landlord and tenant could desire to renegotiate the terms of the agreement without entering into a new lease agreement. For example, the tenant may desire certain repairs or upgrades to the premises, and the landlord may want an additional month of rent or a higher base rent in exchange. This dynamic could also be beneficial for the landlord if the rental market rates drop and the tenant was set to get a good rate in their current lease. Or, the tenant’s financial situation may no longer require the need for a lower rent and the tenant can afford to pay a higher rental amount in exchange for various upgrades and/or improvements to the property or the tenant’s space. Both of these negotiations could come with longer notice periods and/or buy-out packages to terminate the agreement. If such a situation arises, it is in the best interest of both parties to weigh this option.
Moving Forward: Other Rental Opportunities
When the terms of a lease renewal are not agreeable, the tenant may simply choose to move on and relocate. Many times, moving has been the catalyst for many landlords to enter a new lease agreement. Nevertheless, the expiration of a lease can be an opportunity for a tenant to seek other opportunities. Instead of remaining in the same location, a tenant may find a space that meets its needs and is more desirable elsewhere. For example, a tenant may want to expand its business and needs more space. A rent increase that is unaffordable or too close to market rates and/or impending rent control legislation may also be a reason to seek a new location. Whatever the case, if both parties are unable to renew an existing lease agreement, renewal options are not exhausted. In fact, alternative opportunities may be better suited for the circumstances.