Don't Fail to Specify Renewal Rent Amount or Process

Not stating the specifics is likely to lead to two results, both of them negative.

Giving tenants a lease renewal option can be a good way to boost retention and rental income, particularly if the renewal provides for a higher rent. But it may be difficult to reach agreement on a specific future rent amount. After all, who knows what the rental market is going to look like three or more years from now? There are ways you can work around the lack of agreement with a current tenant on a future renewal rent. But the one thing you don’t want to do is deliberately ignore the issue. Failure to specify the renewal rent in a renewal option is likely to lead to two results, both of them negative. Specifically, a court is likely to find that the omission either:

• Renders the renewal option unenforceable; or
• Constitutes an agreement to renew at the original rental amount, which based on normal economic patterns is likely to be less than its current market value.

Florida Landlord Gets Saddled with Below-Market Renewal

A Florida landlord recently learned this lesson the hard way. The case involved a car repair operator that leased property for five years at $5,000 per month, which was well below the market rate. The lease included the following renewal option:

Tenant can exercise an option for an additional 5[-]year period if given in writing to the owner 90 days before the term expiration.

The key thing is what the lease didn’t say—namely, how much in rent the tenant would have to pay if it exercised the option.

The landlord ended up selling the property to a new owner that hated not just the below-market rent but also the entire arrangement with the tenant. It was a tough go for both parties with constant disputes. The light at the end of the tunnel, at least for the landlord, was that the original five-year term was coming to an end. So, when the tenant exercised the renewal option, the landlord was appalled and asked the court to declare that the option was unenforceable.

The landlord seemed to have a solid case. As with any other contract, an option to renew a lease isn’t enforceable unless it contains clear agreement on all of the essential terms. Of course, no lease term is more essential than how much rent a tenant has to pay. Because the renewal option was silent on this issue, it couldn’t be enforceable, the landlord argued. The court agreed and awarded the landlord summary judgment—that is, judgment without a trial.

But the landlord’s victory proved short-lived. The court acknowledged that the renewal option stipulated neither a renewal amount nor a process for establishing one. That would be game/set/match in many states. The landlord’s problem is that Florida isn’t one of those states. The court cited other Florida cases finding that “where the contract clause provides that the tenant shall have an option to renew for a specific period of time, but is silent as to all other terms, the clause has generally been held sufficiently definite to enforce and be construed as encompassing the same terms and rent as the original lease.” Under the Florida formula, the failure to stipulate a renewal rent amount (or determination process) is tantamount to an agreement to let the tenant renew at the original rental rate. Result: The car repair operator could renew for five more years at $5,000 per month [Certified Motors, LLC v. Aventine Hill, LLC, 2023 Fla. App. LEXIS 6214].  

Takeaway

Silence is not golden when it comes to renewal rent. Renewal options aren’t enforceable unless they include either a specific renewal rental amount or a clear, fair, and reasonable process for determining it, such as via arbitration or a mutually agreed to formula. It’s well established that simply “agreeing to agree” later is deemed to be no agreement at all because it’s too vague. So, including such language in your renewal option is like a poison pill because it renders the option unenforceable.

The irony is that the landlord in the Certified Motors case would have actually been better served with such an agreement to agree since it wanted the court to declare the option unenforceable. But because the clause didn’t include agree-to-agree language, the court interpreted it as an agreement to renew at the original rent. And in most cases, letting tenants renew without paying any kind of rent increase is a losing proposition for the landlord.