These clauses say the lease will renew for some additional term unless the landowner or the tenant gives written notice it will not be renewed. The renewal may be for the same term as the original lease, or for a different term.
These clauses are the opposite of options. An option gives one side the right to extend the lease, usually the tenant. If the tenant does not exercise the option, the lease expires with its original term. With an automatic-renewal clause, either the tenant or the landowner must give notice to prevent the lease from renewing.
What’s the Effect of an Automatic-Renewal Clause?
If neither the landowner nor the tenant gives notice of non-renewal, the lease extends. Often the lease is for the same term, which could be five, ten or twenty years. Other automatic-renewal clauses will extend the lease from year-to-year.
Usually, the rent will continue at the same rate. Sometimes, the rent will be adjusted by some formula, such as a change in the Consumer Price Index. This is one of the terms that the landowner and tenant should negotiate.
What are Holdover Clauses?
A “holdover” clause is a type of automatic-renewal. By law, if a tenant remains on the property with the landowner’s consent, it creates a tenancy, usually from month-to-month. The landowner may change the terms of this type of tenancy, usually upon thirty days’ or sixty days’ notice. Either the landowner or the tenant may terminate this type of tenancy on the same notice.
Are Automatic-Renewal Clauses Enforceable?
In general, yes! Often these clauses catch both landowners and tenants unaware. Tenants may find themselves with unexpected lease obligations. Landlords may find themselves locked into a lease with below-market rent.
Failure to read or understand this clause is not a defense, especially in a commercial situation. (For residential leases, a statute requires a notice of automatic-renewal clauses to be displayed prominently just before the tenant’s signature.)
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