Commercial lease cases sometimes involve disputes about lease renewal provisions and/or the lessee’s (tenant’s) right to renew the lease for an additional period of time. There are some general rules which Tennessee courts follow in resolving lease cases where there are disputes about renewal.
First, if someone leases property and obtains, in the lease agreement, the right to renew the lease for an additional term after the original lease term expires, that right cannot be taken away by the lessor of the property (the landlord) unless there is also a contract provision allowing the lessor to do just that (which, typically, there would not be). Second, if the lessor (landlord) assigns a lease to another party or sells the property which is leased, the successor to the lessor will be subject to the obligation to honor the lessee’s (tenant’s) right to renew. (If the lease agreement states that, if the property is assigned or sold, the lessee (tenant) loses its right to renew, then, in that event, the general rule will not apply, and the lessee (tenant) will not have the right to renew).
Where a lease contains specific terms about the manner and time period by which the lessee (tenant) must give notice of its intent to renew the lease, then, absent a waiver of those provisions by the lessor (landlord), the lessee must give the renewal notice in the manner and within the time period set forth in the lease. There have been cases in Tennessee where tenants (lessees) have not complied with terms related to renewal, yet have been successful in having a court decide that the renewal was effective.
In one Tennessee case involving a renewal provision, the lessee (tenant) was required to give its lessor (landlord) written notice of its intent to renew the lease at least 30 days prior to the expiration of the lease. The lessee missed the thirty day deadline by two days. The lessor, after receiving the late notice of the lessee’s intent to renew, accepted monthly rent payments from the lessee, and did not inform the lessee that it had not effectively exercised the renewal option until over two months after the original lease term had expired. In that case, the court found that the lessor had waived the notice requirements in the lease, and that the lessee had renewed the lease.
What if the lease gives the lessee (tenant) the right to renew, but does not specify any deadline by which the lessee must give notice of its intent to renew the lease? In Tennessee, under such a lease, the lessee will generally be held to have exercised the right to renew if he or she continues in possession of the premises after the initial lease term; pays the rent; and the lessor (landlord) accepts the rent payment.
There is a twist to the general rule set forth immediately above. If the lease states that the rent during the renewal period is to be more than the rent during the original term of the lease, the lessee (tenant) will generally not be held to have renewed the lease for the additional term unless he or she pays the increased rent.
A renewal provision in a lease may provide that the lessee has the right to renew the lease for an additional term, but leave open, for further negotiation, the amount of the rent to be paid during the renewal term. For example, the lease may state that the rental amount during the renewal term is to be “agreed to by the parties” or it is to be “market rent.” In leases with such open ended provisions, what happens if the parties cannot agree on the rent to be paid during the renewal term? Is the right to renew lost because it is too indefinite to be enforced? (In Tennessee, a contract which has terms which are too indefinite to permit the court to enforce is generally invalid). The answers to the above questions are that, in such a situation, the right to renew generally will not be lost, and the amount of the rent will be established by the court based on what is “reasonable.”
Renewal provisions in leases (not to mention option to purchase provisions) can create thorny problems which can be expensive to unwind in court. It is well worthwhile for parties to lease agreements to be as specific and as detailed as reasonably possible regarding the terms related to lease renewal. (In fact, it is well worthwhile for the parties to be as specific and detailed as possible as to all terms of a lease.)