Lease Agreements: Beware of the Lease Renewal Language

Many leases contain renewal language, allowing the lessee to renew the lease term after the original lease term expires.  These provisions sometimes contain notice requirements and fulfillment of certain conditions precedent.  In some instances, the leases may automatically renew.  In any case, the terms of the lease renewal require certainty and specificity.

Lease Renewal Language Requires Certainty

 As with any contract, the lease terms must be definite and there must be a meeting of the minds between lessor and lessee as to all essential terms.  In the case of leases for real property, one of those essential terms is the amount of rent to be paid, including the amount to be paid in the event of renewal of the lease.  Jahangiri v. 1830 North Bayshore, LLC, 253 So. 3d 699 (Fla. 3d DCA 2018).

In Jahangiri, the lessee and landlord entered into a five year lease, which spelled out the initial lease payment for the first two years, and an additional rate for the following three.  The lease also provided that the lessor could renew the lease.  However, the renewal language in the lease did not contain a fixed amount to be paid, but, instead, provided:

[U]pon six months notice and provided [lessee] is not in default of any provision of this Lease, LESSOR agrees that [lessee] may renew this Lease for two five-year renewal options, each renewal at the then prevailing market rate for comparable commercial office properties.

When the lessee informed the landlord that it wanted to renew the lease, the landlord refused.  The lessee then filed a lawsuit to invoke the renewal clause in the lease and sued for an injunction, prohibiting the landlord from evicting the lessee from the property.

The trial court and appellate court agreed that the above-referenced lease renewal provision was unenforceable because it failed to include an essential term, which was the amount of rent to be paid during the renewal term.  Specifically, the trial court found that renewal provision to be “too indefinite” and “legally unenforceable.”  Indeed, the “prevailing market rate for comparable commercial office properties” lease renewal language lacked the requisite certainty and specificity.

 The Florida appellate court in Jahangiri stated that “where the lease does not provide for the amount of renewal rent, the procedure for determining rent has to be definite enough, without further negotiation or litigation on the methodology used, to fix the rent with certainty.”  As an example of an enforceable lease renewal provision, that court cited the case of Ludal Development Company v. Farm Stores, Inc., 458 So. 2d 781 (Fla. 3d DCA 1984).

In Ludal, the court found the lease renewal provision enforceable because it allowed for negotiation and agreement between the parties as to renewal lease rate, and, if they could not reach agreement, the lessee was given the right of first refusal of any bona fide offer received by the landlord.  In that circumstance, the lessee, landlord, and the court were not required to fill in any of the blanks when calculating the amount of rent to be paid during the renewal period. That rental amount would be easily determined, once a third-party offer was made on the property, since the third party offer was the new rent to be paid.

Unlike in Ludal, the lease renewal provision in Jahangiri still left room for the parties to decide the amount of rent and, therefore, the amount could not be fixed with any certainty.  According to the Jahangiri court, the lease renewal provision left “too many open questions about the method for determining rent.”

Conclusion

As the court in Jahangiri pointed out, parties must be specific in negotiating renewal terms and what the rent to be paid during the renewal period will be.  If the amount of renewal rent can only be determined after future negotiations or litigation, that provision is not definite enough for there to be a meeting of the minds, and an agreement on an essential term of the lease.

Therefore, the parties should include a dollar amount to be paid during the renewal period for rent or, alternatively, utilize some specific calculation that leaves no questions unanswered as to how the renewal rent will be calculated.  Failing to include such specificity may result in there being no binding lease renewal provision.  Whether you are a landlord or tenant, the results of such a finding could be disastrous.

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