For example, a start-up can rent an office for three years. A renewal option would allow the company to extend or renew the lease in order to remain in the offices beyond the three-year lease term. This can be beneficial for the company if it is doing well on the site, as it allows the company to stay for an additional period of time. In the absence of an extension option, the transaction could be ousted and another principle, which could offer more money, could be recovered. Many commercial leases with renewal clauses contain explicit terms that the tenant must meet if they intend to exercise their option. In particular, renewal options typically require the tenant to notify the landlord in writing of their intention to renew, usually 6-12 months before the rental agreement is terminated. To Jeffrey Kavin, Inc. Frye, a 2012 California Court of Appeals case, required tenants to be required to send written notice to the landlord within six months of the expiration date of the original term. Otherwise, the option would be automatic. In this case, the tenants notified in writing their intention to extend two weeks after the end of the initial term and remained in the premises a few months after the expiry of the initial term of the lease. Ensure that an extension option is included and compliance with its conditions is important for stable and consistent living or working conditions. The option typically describes the date of notification of the extension, the amount of rent as part of the extension or how it will be negotiated, the number of renewals allowed, the duration of each renewal and, if applicable, the initial terms of the lease that will be excluded from the extension. 6.
Significant change in financial position. As a prerequisite for exercising an option, landlords may consider requiring a tenant to submit updated accounts. The objective is to determine whether, since the beginning of the lease, there has been a significant financial change that could be a leading indicator of future default. However, parties must be cautious in defining what constitutes a material change in financial position, as a lack of clarity can invalidate an option. At a least, the parties should determine who has the burden of proving either a substantial change (landlord) or the absence of (tenant). John moves into a new apartment and signs a lease that includes a renewal option. The lease is valid for one year and if John wishes to extend the lease for another year, he must inform his landlord two months before the end of the lease. `The rent for the extension period(s) shall be the market-consistent rent that is expected to come into force at the beginning of the extension period(s) for areas of comparable size, quality and location, as agreed between the lessor and the lessee. In Mapleview-Veterans Drive Investments Inc.
v. Papa Kerollus VI Inc., 2015 ONSC 3833, the landlord filed an application for an injunction that the tenant had breached the lease agreement and a statement that the renewal option was void for reasons of uncertainty. The lessor considered that the extension clause was only an agreement to try to reach an agreement, especially since there is no arbitration clause or other mechanism for determining the rental claim for the renewal period and the renewal option would not be applicable without guidelines for the calculation of rent or an arbitration clause. The court found that the term “current rates” in the extension clause makes it clear that the parties expect an extension and is a starting point for negotiating a new lease price. Although there was no arbitration clause, the parties were free to negotiate the applicable rates, failing which the parties could refer the decision to arbitration or the courts. The Court found that, for reasons of uncertainty, the extension clause was also unfounded. This particular finding was confirmed in 2016 by the Ontario Court of Appeal ONCA 93. Typically, renewal options include the same terms as the original lease, with the exception of rent, financial incentives, and the renewal clause itself.
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