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Commercial Tenants Should Beware of Automatic Lease Renewals

March 2016 Newsletter Article Commercial Tenants Should Beware of Automatic Lease Renewals Every day in Texas, business owners are signing commercial leases. Although the subject property and the lease terms will differ from lease to lease, all commercial leases have a few basic features in common. Those common features include a specified starting date (generally referred to as the Commencement Date) and end date for the lease. First-time commercial tenants often assume that once the end date arrives, the lease automatically terminates unless the tenant has informed the landlord of a desire to renew. However, this is not always true. Commercial tenants should beware that their silence may cause an expiring lease to renew through a process called automatic lease renewal. While many leases include a renewal option that requires the tenant to exercise such option by providing a certain number of days of written notice (often anywhere from 90 to 180 days before the end of the lease term), some commercial leases include automatic renewal provisions that cause the lease agreement to renew for another period upon expiration of the current period unless the tenant gives proper prior notice to the landlord that the tenant does not wish to renew the lease. Commercial tenants are often caught off-guard by these silent renewal provisions. Failure to read or understand the lease is not a sufficient legal ground to void or escape the lease obligation. If the tenant does not follow the notice requirements exactly as indicated in the agreement, the tenant could be stuck with the obligation to pay rent for another lease period, which could be years, not months. Consequently, it is important for potential tenants to review their leases to determine what, if any, notice is required to the landlord if the tenant does not wish to renew the lease. Typically, leases will require a written notice delivered to the landlord at a specified address. A minimum notice period is typically specified, which may be 30 days or more prior to the day the lease expires. The best practice is to carefully review the lease at the beginning and note milestone dates, such as deadlines to notify the landlord of the tenant's intent, in a reliable calendar system so the tenant will not allow such deadlines to inadvertently pass. Tenants should carefully take note of any further requirements and follow them closely. But what if you have checked your lease and it does not contain any silent renewal or notice of intent to vacate requirements? In that case, are you free from any concerns that the lease might renew without your explicit consent? Not necessarily. In some situations, the lease could either be extended or renew if the tenant "holds over" by continuing to occupy the leased premises after the expiration of the written lease, or not returning the premises in the manner and condition agreed in the lease. Typically, a holdover will trigger a lease extension for a short period of time (i.e. 30 days), which is different from a lease renewal. In a renewal situation, as described above, the tenant becomes obligated for an entire new rent period equal to the length of the previous rent (or a different length if specified in the language of the lease agreement). This is the worst case scenario for a tenant that did not intend to continue on the lease; the tenant becomes financially liable for the full value of the renewed lease. On the other hand, when a tenant fails to deliver the premises in the agreed condition upon expiration of the lease, or the tenant fails to make necessary repairs, the tenant may become liable for holdover rent, which is typically drastically higher than the normal rent, for the intervening period between the lease expiration and when the tenant restores the property to an appropriate condition. In addition, the tenant may become liable for damages resulting from the holdover, including any penalties specified in the lease. In 2009, a Texas appeals court ordered tenants to pay their landlord pursuant to the holdover provision in their lease because the tenants failed to remove their property improvements and restore the premises to an agreed condition. This is one of many examples of holdover tenants incurring costs by failing to follow the lease terms. Thankfully, such litigation can be avoided through careful lease negotiation by an experienced commercial real estate broker and/or real estate attorney that knows to address such issues. Strict adherence to the requirements of the lease both during and at the end of the lease term also helps tenants to avoid such unintended consequences. Qualified counsel can help any business navigate the waters of commercial leases and avoid any lurking obstacles that might stand in the way of the success of the business.

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