Lease extension agreement, also known as lease agreement addendum, is a legal document that extends the term of the existing lease agreement. The agreement has the names of the parties and the date on which the extension begins, as well as ends. It also makes reference to the earlier lease agreement.
The lease payment can change when you sign the new lease renewal agreement as also the terms and conditions. Also, the agreement is signed before the lease expires. While the lease extension is primarily associated with the property, it can also be used when leasing a vehicle from an auto dealership or leasing equipment.
Who Takes the Lease Extension Agreement: People Involved
A lease extension agreement is signed between the lessee, or the user, and the lessor, or the owner. The agreement involves renting a tangible property. The lessee and the lessor can be individuals or entities. Once the contract is signed, it is binding to both parties. Even if no changes are made to the agreement, it should stipulate that other terms and conditions mentioned in the original agreement stay the same.
Purpose of the Lease Extension Agreement
Why Do You Need It?
The purpose of the lease extension agreement is to ensure that the lessee still has access to the plant, property, and equipment even after the original lease expired. On the other hand, lease extensions ensure the owner does not have to worry about keeping the property vacant or not earning an income from the asset that they are renting out. So, it is a win-win situation for the lessee and lessor as they both benefit from extending the lease agreement.
How to Extend a Lease?
A leaseholder of a property can extend their lease under the Leasehold Reform, Housing and Urban Development Act, 1993. Or, they can negotiate in private with the landlord. It can be a complex process, and it is best to use the services of a qualified attorney and surveyor.
Begin the lease extension process with the following:
Notice to the Landlord: Begin the process of extension of lease agreement by sending a notice to the landlord. Let the landlord know the amount you intend to pay for the lease and state any other changes that you would like to the terms and conditions.
Counter Notice: Let the notice state by when the landlord should present their counter notice to you. This notice will let you know whether they accept the extension and your terms, or they reject it. If they reject, the landlord has to provide valid reasons for it.
Remember, if the lease agreement is due to expire in a few years, the landlord may state that they intend to demolish the structure and redevelop it. Under such circumstances, this will hold up in court, and you will not be able to fight it.
Negotiate: It is best to have a face-to-face meeting with the landlord to find out the reason for rejecting the renewal. You can work to allay their fears and come to a compromise that benefits you and the landlord.
It the other scenario, the landlord may accept the lease extension but not the terms. Here, you should work to come to a compromise so that you and the landlord are happy with the outcome.
A face-to-face meeting can often help save time and money rather than following the statutory path. You can use a template to create a draft lease extension agreement. However, get the contract vetted by an attorney before you sign it so that there is no scope for ambiguities and misunderstandings later on.
Contents of the Lease Extension Agreement: Inclusions
When drafting a lease extension agreement, it should include the new terms and conditions, if any, and other changes that the lessee and lessor want to include in the lease agreement. Typically, a lease renewal form contains the following information:
- Names of the lessee and lessor.
- Start date of the lease extension.
- End date of the lease extension.
- The amount the lessee has to pay the lessor each month.
- Reference to the original lease.
- Terms of renewal.
- Any modifications to the original terms and conditions.
- Signatures of the lessee and lessor.
- Date when the extension of lease agreement is signed.
Usually, the extension is a one-page lease agreement which is attached to the original lease. If the terms and conditions are vastly different from the original lease agreement, it is best for the lessor to consider a lease amendment to extend the term or make a completely new lease agreement.
How to Draft the Lease Extension Agreement
When drafting a lease extension agreement, you have the option to use a lease addendum template, or you can create your own extension agreement. Some of the things to consider while drafting is:
- Send the letter to the lessee to inform them that the lease is due to expire.
- Ask them if they are interested to extend the lease.
- Mention the date at the top.
- Write the lessor’s name.
- Pen down the lessee’s name.
- State the details of the property, equipment, plant, or automobile that is being leased.
- Mention the start and end of the lease extension.
- Put in the amount that the lessee should pay the lessor on a monthly basis.
- State any changes to the terms and conditions of the lease.
- Mention that the other terms and conditions stay the same as the original lease.
It is best to have a contract addendum template on hand when drafting the lease extension. That way, you can follow and customize the lease agreement based on your requirements and still retain the legal jargon.
Negotiation Strategy
If you are the lessee, make sure you write down the terms and conditions that you want to change in the lease extension agreement. Approach the lessor before the expiration of your lease. Write and submit a renewal of lease agreement letter to the lessor along with the changes you would like to the extension.
Have a face-to-face meeting with the lessor to discuss the changes you would like. Make sure you differentiate between must-haves and the things you can compromise. That way, you will stand a better chance of coming away with terms and conditions that you are happy with. Also, it is best to involve a surveyor to survey the market value of the property. This will enable you to decide the premium you should pay the landlord if you are leasing your property.
Benefits and Drawbacks of Lease Extension Agreement
Like any other agreement, lease extension agreements also have advantages and disadvantages that the lessee and lessor should know.
The lessee is already familiar with the terms of the lease, and hence, the lessor does not have to explain them at the time of signing a lease extension agreement. It is time-saving for the lessee and lessor to extend the lease, and the lessor does not have to worry about losing income or revenue.
However, there are a few cons of lease renewal addendum. The lessor may be bound by the law as to how much they can increase the rent. Also, the lessor may impose terms and conditions that are not up to the liking of the lessee. The lessor may offer to extend the lease for the short-term, and should this happen; the lease would be up for extension again after some time.
Hence, if you are looking to extend the lease, weigh the pros and cons before going ahead with it.
What Happens in Case of Violation
In case the lessee violates the terms of the lease extension agreement; the lessor has the right to take legal action against them. The court could ask the lessee to pay damages, legal costs, and /or ensure that any breach is rectified(1). Also, the lessor can cancel the lease extension if the terms and conditions are violated.
The lessee, too, can take the lessor to court in case of discrimination(2). You should be able to convince that the landlord or lessor discriminated against you by not extending the lease. Remember, the lease agreement should mention that the lessor will pay legal costs should the lessee win. It is only then that you will not have out-of-pocket expense if you win the lawsuit.
A lease extension agreement can benefit both the lessor and lessee. However, it should be drafted the right way. It is always beneficial for both the parties to have a close look at a lease extension form so that they know what to expect at the time of signing the extension.