Don't Include Automatic Renewal in Lease

In February 2007, a Florida owner lost a two-year court battle in which it tried to void a tenant's lease that contained an automatic renewal clause. The owner realized too late that the automatic renewal clause was a bad deal.

It's easy to understand how an owner could be tempted to add an automatic renewal clause to a lease; you may be negotiating with prospective tenants that are so desirable, you want to keep them in their spaces as long as possible. And if you are like some owners, you may contemplate adding an automatic renewal clause to those prospective tenants' leases.

An automatic renewal clause is unlike a renewal option because it doesn't require a tenant to notify an owner if the tenant wants to renew the lease. Rather, the lease renews automatically, unless the owner or tenant sends the other party a written nonrenewal notice by a set deadline, indicating that it doesn't want to renew.

However, you should stay away from automatic renewal clauses, warns Fort Lauderdale, Fla., attorney Eric D. Rapkin. Automatic renewal clauses can cause problems for both owners and tenants.

Problems with Automatic Renewal Clauses

Automatic renewal clauses can present several problems. For example:

They may result in a bad deal. An automatic renewal clause could tie up your property at possibly below-market rent, unless you or your property manager remembers to cancel the renewal by the deadline—and that is not a good way to run an asset, Rapkin says.

They can lead to disputes. If the automatic renewal clause is drafted badly, there is a good chance that you and the tenant will end up in court battling over whether the lease was actually renewed. And if you lose the battle, you will lose the tenant. Or, if you view the clause as resulting in a bad deal because, for example, it locks the tenant into below-market rent, you may have to run to court to get the clause or the lease voided, warns Rapkin.

Strong tenants don't like them. If the automatic renewal clause gives both parties the right to cancel the automatic renewal, it is not providing the tenant with what the tenant really wants—the right to renew the lease, says Rapkin. Therefore, don't expect a tenant with any negotiating strength to agree to it, he adds.

Florida Owner Gets Burned by Automatic Renewal

Here's what happened to the Florida owner mentioned above. The owner bought a building with a tenant that had an automatic renewal clause in its lease. The clause said that unless the tenant notified the owner before the expiration of the original term or any extended term, the lease would be extended automatically for an additional five-year period. The new owner viewed automatic renewals as a bad deal and tried to void the lease.

The new owner claimed that the automatic renewal clause was unreasonable because it would encumber the building forever—in legal terms, “in perpetuity.” The tenant, however, argued that the automatic renewal clause was not unreasonable and that it entitled the tenant to two five-year renewal periods.

A Florida appeals court refused to void the lease. The court ruled that the automatic renewal clause was not unreasonable and would not encumber the building forever. The clause didn't expressly limit the number of renewals, nor did it expressly state that the lease was renewable in perpetuity, noted the court. Therefore, because “the lease does not have any language that expressly grants perpetual renewal in unequivocal terms, the lease is not in perpetuity,” said the court.

However, the lease was ambiguous on whether the parties intended to provide more than one renewal period. Because the lease didn't “clearly exhibit an intent to provide for more than one renewal,” the court interpreted the lease as granting the tenant one renewal. Therefore, the new owner was stuck with the tenant for another five-year period. [Chessmasters, Inc. v. Chamoun]

Solution: Use Renewal Option or Negotiate Near Lease End

Rather than wasting time and money battling the tenant in court over the meaning of an automatic renewal clause or whether the clause should be voided because it hurts your interests, don't include an automatic renewal clause in your leases, says Rapkin. Strong tenants will require a typical renewal option anyway. And even without an option, you can negotiate for the renewal at the time the tenant's lease is set to expire, especially if the tenant wants to stay in its space.

• Chessmasters, Inc. v. Chamoun: 948 So.2d 985 (Fla. Ct. App. 2007).

CLLI Source

Eric D. Rapkin, Esq.: Shareholder, Akerman Senterfitt, 350 East Las Olas Blvd., Ste. 1600, Fort Lauderdale, FL 33301-2227; (954) 759-8962; Eric.Rapkin@akerman.com.