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What is a lease extension agreement?

March 5, 2020 | by Jo Cipolla
Reviewed by real estate expert Jonathan Wasserstrum

A lease is a legal rental agreement between a landlord and a tenant. When the original period of the lease agreement has ended (or is about to end), and both parties have been satisfied with the agreement, they may want to agree to a lease extension agreement to continue the terms of the lease further.

Renewal of the lease agreement

Lease extension agreements are widespread with residential apartment rentals. A residential lease is typically for just a one or two year term, so residential tenants are often interested in a lease extension agreement so that they may continue living in their home.

If the property owner is pleased with the tenant and has not had any problems with them living in the space, they are usually happy to have them extend the length of the agreement for another year or longer. If that is the case, the landlord will often send the lease extension agreement to the lessee so that they can sign the document.

Why sign a lease extension agreement?

There are several reasons why both lessor and the lessee may want a lease extension agreement. For the renter, it can mean avoiding an expensive and difficult move to a new property. Extending the current lease agreement saves them from having to search and find a new space and then having to hassle with making a move.

In the case of the owner, it is usually worthwhile to keep a good tenant who pays the rent on time and doesn’t cause any issues. It also saves the landlord the cost of finding a new tenant (which might include the cost of employing a real estate broker) and any additional expenses associated with renovating the space and putting in new appliances.

Do the terms remain the same in a lease extension agreement?

The whole idea of getting a lease extension agreement is that the landlord and tenant have been pleased with the terms and conditions of the original lease, and both parties want a renewal of that same rental relationship. That said, lease extension agreements can include some changes to the original lease document. In many cases, the property owner may ask for an increase in monthly rent payments, and there could be some updates to the conditions (for instance, a change to the pet policy).

Lease extension agreements in commercial real estate

Rental agreement extensions can also happen with commercial property leases. When a company’s office lease expires (5 and 10-year leases are standard for office space), the business may want to stay in the same space if the size, location, building, and other features are still meeting their needs. But even if each party is open to renewing the lease, the lessor and lessee will likely need to negotiate on terms.

For instance, the owner might want to introduce a new increase in the amount of rent due, while the tenant could be hoping for a rent reduction. The tenant could wish to renew the lease for a shorter length of time, while the owner may be hoping for a longer-term.

Therefore, agreeing may require some give and take between both parties. In exchange for a lower monthly rent, the renter might agree to a change in other financial responsibilities like handling maintenance costs. To get the tenant to agree to a more extended leasing period, the property owner might be willing to pay a certain amount for a contractor to make some improvements to the office space.

What if I don’t sign a lease extension agreement before the lease expires?

With lease extensions for residential properties, the landlord is usually expected to provide a notice of a renewal lease (and any requested change in terms) a few months in advance. The tenant is then often expected to have signed or declined the renewal 30-60 days before the original lease ends, to give the landlord time to seek out a new tenant if necessary. If a lease extension agreement is not signed by the end of the lease term, then the lessee may have a legal requirement to move out right away. However, some landlords will allow a tenant to continue on a month-to-month basis until a new rental agreement is reached or until the tenant finds a new apartment.

As for commercial properties, it is wise for the lessee to start thinking about the next steps long before the lease expiration. Because the search for suitable office space can be challenging and time-consuming, tenants will often begin making decisions six to 12 months before the lease ends. One of the most important considerations for a business is whether or not it needs more (or less) office space. If the company has not been growing, the tenant could decide that it’s fine to stick with the same rental agreement. If it is growing, then it may be time to look for a new property that better meets their changing needs.

Contract negotiations

When considering signing a lease extension agreement on a commercial space, the tenant might figure that they can handle negotiating the updated lease on their own, given that there might not be many changes to the terms and conditions. However, it could still be a good idea to engage either a legal representative or a commercial real estate professional for assistance. If it has been several years since the initial lease agreement was signed, there may have been changes in the market that could affect the way the tenant wants to approach negotiations on the lease extension agreement. A real estate broker will have the most relevant and updated information about the market to help the tenant make the most informed choices.

Whether or not additional legal or professional assistance is brought in, a lease extension agreement has the potential to be a great “win-win” for both the property owner and the tenant alike. This allows both parties to continue enjoying the benefits of an excellent rental contract and relationship.

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