Beware of uncertainty in option to renew clauses

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In Bermuda, there is no automatic right for a tenant to renew a lease at the end of the lease period. Instead, an option to renew is often written into a lease in order to compensate for the lack of an automatic renewal right.

An option to renew is the right to require a new lease, on expiry of an existing lease. Either a landlord, or a landlord and a tenant mutually - or usually a tenant alone due to the language in most leases - has an option to renew.

Options to renew in commercial leases are usually explicitly written to favour a tenant. In today’s market, a would-be tenant usually has stronger bargaining power than a landlord, so typically the commercial tenant is given the opportunity to renew as an inducement to sign a lease.

A commercial would-be tenant usually takes legal advice about constructing the option to renew and so the option is clearly and unambiguously written. For example, the tenant has the right to renew:

n provided that the tenant gives the landlord a fixed period of notice (so the landlord has some time to market the property if the tenant does not exercise the option to renew)

n for a set renewal period

n at a particular rent (with a method of calculating the rent), and

n otherwise on the same terms and conditions as the existing lease (but often without a further right of renewal, to give the landlord some flexibility with the property later).

Often, especially in today’s market with so many properties available to tenants, it is advantageous for a landlord to offer a tenant an option to renew.

If a tenant does serve notice to renew, the landlord is certain the property need not be marketed, and terms need not be negotiated, thereby providing certainty and saving expense.

If the tenant does not exercise the option to renew, the landlord has time to either persuade (possibly with new terms) the tenant to stay, or to market the property and negotiate terms with a new tenant, hopefully without a void period between tenants.

Options to renew should specifically make certain how rent and service charges (if appropriate) are to be ascertained. Is rent to remain the same, or increased by the Consumer Price Index (CPI), or be at the then-market rent? Is the service charge to remain the same, or increase by CPI, or by the actual cost of providing the services?

An option to renew represents a contract between landlord and tenant, for which rent is a crucial term. If rent is unascertainable, the option to renew may be void for uncertainty. Similarly, an option to renew, with a rent to be mutually agreed, can be void for uncertainty. A contractual term that is void for uncertainty is unenforceable, by either landlord or tenant.

A void option to renew, results in the termination of contractual arrangements between landlord and tenant. There is no renewal and the tenant is entitled to leave and the landlord is entitled to compensation for the tenant’s occupation after termination; this is known as “hold-over”. Compensation is usually rent and service charge (if applicable) at the previous rates. Additionally, after termination, a landlord may apply to court for possession of the property (ie tenant eviction) and for compensation from the tenant (usually rent and service charge, if applicable, at the previous rate).

Hold-over can be advantageous to a landlord in a falling rental market, whereas in a rising rental market, hold-over can be advantageous to a tenant. However, hold-over makes planning for the future uncertain for both parties, with a tenant able to leave at any time and a landlord entitled to apply (albeit after serving notice on the tenant) to court for possession at any time.

If a landlord with a hold-over tenant requires possession, court proceedings introduce an unwelcome time lag and some degree of uncertainty over the outcome.

Uncertainty is not good for business and so landlords and tenants should obtain legal advice, prior to signing lease terms, to be sure they fully appreciate all contractual implications.

Attorney Neil Molyneux is a member of the Property Practice Group at Appleby (Bermuda) Limited. A copy of this column is available on the firm’s web site at www.applebyglobal.com.

This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer.

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