Renewal Options in Commercial Real Estate Leases

By Louis Pashman, Esq.
lpashman@pashmanstein.com

Let’s assume you own a building.  You have a tenant with a written lease.  That lease contains an unambiguous clause that gives the tenant an option to renew the lease on terms set forth.  In order to exercise the option, the tenant must notify you in writing during a specified time period that he intends to exercise the option.  The tenant does notify you in writing but a bit outside the specified time period.

The general rule is that the exercise of an option is a “time of the essence” provision.  There are two cases, however, which have held that, when it comes to renewal options in a landlord-tenant relationship, that general rule is modified.

In the first case, thirty-nine days after the deadline for exercise, the tenant had not notified the landlord.  Landlord wrote to tenant informing him that he had to vacate because he, the landlord, was planning to expand into the tenant’s space.  Within a day or two of receiving that notice, the tenant wrote to landlord notifying him that he intended to exercise the option.  Tenant had been there for ten years and argues it would be unjust and inequitable to forfeit his lease.

The court agreed.  Finding that the tenant would suffer substantial harm if forced to relocate and that the landlord had not changed his position based on the non-exercise of the option, the court held that this “special circumstance” justified renewal of the option.

A decade later, another court reached the same conclusion in a case where the tenant had exercised the option prematurely.

From these two cases we know that a technically non-compliant exercise of the option will not work forfeiture when:

  1. Substantial harm would result to the tenant if forced to relocate;
  2. The landlord did not change his position in reliance on the delay;
  3. The failure by the tenant to give notice was based on an “honest mistake of fact;”
  4. The delay was “slight;”
  5. The loss to the landlord, if any, was “insignificant;”

Clearly, courts will not allow landlords to use “tactics” to avoid the option.  A landlord can, however, diminish the equitable argument a tenant might otherwise have if he reminds the tenant in advance of the approaching deadline or, if no notice is received, he takes significant action in reliance on his belief that he has no tenant.  From a tenant’s point of view, don’t rely on this exception to the general rule.  Be sure to comply completely with all requirements of the option clause.

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