Lease Renewal Provisions: Why a Few Words Can Make a Difference

Lease Renewal Provisions: Why a Few Words Can Make a Difference

When two parties enter into a lease agreement, they will often agree upon an initial term of the lease, such as a one-year lease, and they may also agree that, prior to the end of the initial term of the lease, the tenant will have the right to renew or extend the term of the lease, for example for another year.

Lease renewal provisions like this are very common and are generally legally binding, if they are worded properly. Unfortunately, such provisions are often not worded properly, which can result in a Court ruling that they are not legally binding. To make matters worse, very slight differences in the wording of lease renewal provisions can make the difference between a legally binding provision and one that has no legal effect.

For example, a simple lease renewal provision, which Florida Courts have held to be legally binding is as follows, “If tenant is not in default under the terms of this lease agreement, then tenant shall have the right to renew this lease agreement for one additional year, at a rental rate of 110% of the rental rate due during the initial term of this lease.” In this scenario, the tenant has the right to renew the lease for a second year, and the tenant’s rent will go up by 10% in the second year.

However, the following small change to the wording of this lease renewal provision would render it not legally binding, if instead it were to read as follows: “If tenant is not in default under the terms of this lease agreement, then tenant shall have the right to renew this lease agreement for one additional year, at a rental rate of 110% of the then current market rate of rent for comparable properties.” Florida Courts have decided that this provision is not legally binding because the amount of rent to be paid is an essential element of a lease, and this provision fails to specify the amount of rent to be paid during the renewal period, or a definite procedure to be followed to establish the amount of rent to be paid during the renewal period. Essentially, the Courts have explained that the phrases “current market rate” and “comparable properties” are too indefinite to be enforceable, because they are not easily and mechanically ascertainable, such as by simply multiplying the original rental rate by 100% as in the prior example.

Based upon the foregoing rationale it would make sense to think that the following lease renewal provision would also be unenforceable, for the same reason: “If tenant is not in default under the terms of this lease agreement, then tenant shall have the right to renew this lease agreement for one additional year.” Notice that this provision does not even mention the amount of rent to be paid during the renewal period. So, it would seem that this provision would also be unenforceable because it fails to specify the amount of rent to be paid during the renewal period, or a definite procedure to be followed to establish the amount of rent to be paid during the renewal period. However, Florida Courts have decided that where the lease renewal provision gives the tenant the right to renew for a specific period of time, but is silent as to all other terms, the lease renewal provision will be deemed to incorporate the same terms and rental amount as set forth in the original lease agreement. So, this lease renewal provision is enforceable and the amount of rent to be paid during the renewal term is the same as was due during the original term, even though this provision does not even mention the amount of rent to be paid during the renewal term.

Another similar provision that Florida Courts have held to not be legally binding, and which parties to leases often attempt to utilize, is as follows: “If tenant is not in default under the terms of this lease agreement, then tenant shall have the right to renew this lease agreement for one additional year, at a rental rate to be negotiated at the time of renewal.” It makes sense why the parties to a lease might want to use language such as this, in order to retain a certain level of flexibility, to be able to agree at the time of renewal on what the rental rate will be. However, a provision like this is often described as “an agreement to agree” because the parties are essentially agreeing that they will agree at some future time on the amount of rent to be paid during the renewal term, and an “agreement to agree” is not enforceable in Florida.

As you can see, figuring out what language to use in a lease renewal term is not as easy or straightforward as it might appear. And, this is only one of many lease provisions that can either be worded properly or improperly, with the change of only a few words, and as a result either accomplish the parties’ goals perfectly or have no legal effect at all.

If a potential landlord or tenant intends to enter into a lease of real property in Florida, they want to be able to rely upon, and to enforce, each of the provisions of their lease agreement. In order to do so, landlords and tenants should consult a knowledgeable real estate attorney before entering into a lease agreement. Unfortunately, if the parties wait until after the lease agreement has been signed and a conflict has arisen, then they may find themselves facing expensive and time-consuming litigation over an issue that might have been avoided through some simple rewording of some of the provisions of the lease agreement.

If you have any questions or concerns about what is required for a legally enforceable lease agreement or specific lease provision, please contact our office to schedule an appointment to discuss your unique situation.

This article is for general information only and is not intended as and does not constitute legal advice or solicitation of a prospective client. It should not be relied on for legal advice in any particular factual circumstance.

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