By Natalie Garton, Terra Law Corporation

Options to renew and options to extend are phrases often used interchangeably by landlords and tenants in commercial leases even though there are material legal differences.

The fundamental distinction is that a renewal creates a new lease and a new demise of the premises; whereas, an extension continues the original term unbroken. One of the main consequences of renewing a lease is that, absent express language to the contrary in the lease or renewal agreement, personal rights will cease to exist upon the expiry of the original term. Personal rights are contractual rights which are deemed personal to the tenant that signed the lease and do not run with the land. For example, a right of first refusal to purchase the premises has been found to be a right personal to the tenant; whereas, a right to renew or extend the term has been found not to be a personal right and, therefore, to run with the land. Consequently, where a renewal of the lease is contemplated, landlords and tenants should be careful to ensure that any personal rights that they intend to continue are expressly included in the renewal lease.

Another important distinction between a renewal and an extension arises where a tenant has assigned its interest in the lease. Where a lease is assigned and, following such assignment, the assignee exercises a right to extend the term, absent an express agreement by the parties to the contrary, the original tenant will remain bound to the landlord for the performance of the tenant’s covenants in the lease during the extension term. Conversely, where the assignee exercises a right to renew, the exercise of the renewal option by the assignee operates to create a new lease directly between the landlord and the assignee after the expiration of the original term. As a result, the original tenant will no longer be liable for the performance of the covenants of the tenant under the lease during the renewal term unless the parties have expressly agreed otherwise.

There are potential benefits and drawbacks for both landlords and tenants, whether a lease is drafted to include an option to renew or an option to extend. A right to extend the term may be desirable to a tenant because it operates to continue rights that are personal to the tenant; whereas, a landlord may benefit from the expiry of the tenant’s personal rights following a renewal of the lease. On the other hand, where a lease has been assigned, a landlord may prefer an extension of the term to ensure the assignor remains bound to perform the covenants of the tenant during the extension term.

It is important to keep in mind that, despite a renewal or extension option being exercised, the parties to a lease can defeat these principles by clearly reflecting their intentions in the lease. Express language with respect to whether personal rights, or the continued liability of the assignor, are to continue in a renewal or extension term is the best way to ensure the intentions of the parties will be enforceable in law.