Landlords must understand the differences between a lease renewal and a lease extension to manage their properties effectively. While these documents serve to continue a rental agreement, they are used in different scenarios and have distinct legal implications. While a renewal creates a new agreement for a new term, a lease extension extends the term of an existing lease.
To determine whether a lease can be renewed or extended, you should first examine the current lease agreement for specific clauses related to renewals or extensions. The original lease length also impacts a tenant’s negotiation power and potential stay duration, as longer leases often provide more leverage for negotiating favorable terms. In contrast, shorter leases may offer flexibility but typically afford less stability and bargaining power.
If you are a landlord wondering how to renew or extend a lease agreement when the expiration date is approaching, read on to learn how to use standard real estate documents.
Key Takeaways
- A lease renewal creates a new lease agreement, often with updated terms and a new rental period.
- A lease extension continues the existing lease for a short period without creating a new contract.
- Knowing when to use each can help landlords maintain positive tenant relationships and ensure legal compliance.
What Is a Lease Renewal?
A lease renewal creates a new agreement based on an expiring lease agreement. It often keeps all the existing lease terms; the only change is an updated rental period. But, sometimes, a renewal will modify some terms or clauses from the original lease.
TIP
If a landlord and tenant have a good relationship and are happy with the original lease, they can renew it and keep the contract the same except for the new one’s beginning and end dates. They can also make changes if they are generally happy but want to modify a few lease clauses or terms.
If landlords want to increase rent prices for renewed leases, they may send a notice of rent increase and clearly state the new increased rent on the lease renewal form.
When Should a Landlord Use a Lease Renewal?
Landlords should use a lease renewal form when they want to:
- Continue a residential tenancy under the same conditions for a new lease period.
- Keep the same tenant for another year (or a different period) and increase the rent amount.
- Update the terms of the rental agreement.
Can A Tenant Negotiate the Lease Renewal Terms?
Yes, tenants can negotiate lease renewal terms when the existing clauses infringe on their rights or local laws. However, if the new terms comply with local ordinances, the landlord controls what can be negotiated. To improve your chances of securing favorable changes, prepare your case and communicate your desired adjustments before signing the lease.
A Landlord Can Refuse to Renew a Lease
A landlord does not have to renew a lease. Landlords can refuse to renew at the end of a lease if:
- A tenant consistently fails to pay or pays the rent late.
- The tenants cause property damage or violate the lease policy.
- A landlord plans to sell the property.
- The landlord wants to move into the home.
- The property owner has other legal reasons to do so (check with your state).
It is illegal to refuse to renew a lease for discriminatory or retaliatory reasons (e.g., tenants are exercising their rights). Make sure you know your state’s laws to avoid potential issues.
Pros and Cons of Lease Renewals
Before committing to a lease renewal, both landlords and tenants should carefully consider the advantages and potential downsides of this option:
Pros of Lease Renewals
- Reduced Vacancy: Avoids the vacancy period and the associated costs of advertising and showing the property. Tenants benefit by avoiding the hassle and expense of moving.
- Stability: Tenants stay in a familiar environment, while landlords maintain reliable income from a trusted tenant.
- Simplified Process: Less paperwork compared to new leases. For landlords, this means fewer administrative tasks, while tenants enjoy a smoother continuation of their current lease terms.
- Potential for Negotiation: Tenants may leverage their good rental history to negotiate better terms or lock in a favorable rate. Landlords can keep dependable tenants and reduce turnover costs.
Cons of Lease Renewals
- Possible Rent Increase Limitations: Landlords might be constrained in adjusting rent if market rates rise. Tenants may face higher costs but may still benefit from a lower rate compared to new prices.
- Limited Flexibility: Tenants may miss out on better rental opportunities, while landlords might not be able to update terms to reflect current market conditions.
- Short-Term Fix: For tenants looking for a new environment or landlords planning significant property changes, a renewal might only provide a temporary solution.
- Negotiation Challenges: Tenants might struggle to get favorable terms, while landlords might face demands that are difficult to meet.
What Is a Lease Extension?
A lease extension continues or extends the existing lease for a set period rather than creating a new contract. Landlords usually use an extension for a short term (for example, three months).
A property owner might agree to an extension to give tenants a little more time in the rental unit as they look for a new apartment, particularly if tenants are moving to a new city and need to coordinate travel.
Often, a landlord extends a lease to benefit from keeping the property occupied for a bit longer, such as during a slow rental period like the holiday season.
Important
Lease extensions typically provide the landlord and tenant short-term flexibility rather than obligating to a new agreement over a lengthy time frame.
The original agreement usually stays the same in a lease extension, but a landlord can modify specific terms and clauses, such as changing the rent amount. Of course, the tenant must agree to any new terms, and both parties must sign the extension to signify their acceptance.
When Should a Landlord Use a Lease Extension?
Landlords should use an extension form when they prefer to extend the current lease for a short time rather than renew it for a longer term.
Lease extensions are helpful when:
- The tenant wants a short time to find a new place to live, and you agree.
- You want to find a new tenant but want to keep your property occupied for now.
- You want more time to decide whether to renovate or sell the property.
Pros and Cons of Lease Extensions
A lease extension can benefit both landlords and tenants. The key pros and cons to help you decide if it’s the right choice include the following:
Pros of Lease Extensions
- Extended Transition Period: Tenants can continue searching for a new home or finalize a purchase, while landlords have time to find a replacement tenant and reduce vacancy.
- Simplified Documentation: Instead of drafting a new lease agreement, landlords only need to prepare a lease amendment, which is generally less complex and easier to execute.
- Avoid Immediate Vacancy: By extending the lease, landlords can avoid the immediate need to fill the rental unit, which can be particularly advantageous during slower rental periods.
- Temporary Solution: Provides a flexible, short-term solution for both parties without committing to a long-term agreement, allowing more time to plan for future changes.
Cons of Lease Extensions
- Limited Rent Increase Potential: Rent cannot be increased during the extension period since the original terms remain in effect. This limits potential revenue for landlords until a new lease is negotiated.
- Short-Term Nature: Extensions are temporary solutions, which means both parties will need to prepare for future changes, such as moving or re-filling the unit.
- Less Security: Both parties face uncertainty about future arrangements. Unlike a new long-term lease, an extension doesn’t offer the same level of stability and predictability.
- Administrative Overhead: While creating an amendment is simpler than drafting a new lease, it still requires administrative effort and attention to detail to ensure that all terms are accurately updated.
Lease Renewal vs Extension: How to Decide
When deciding between a lease renewal and a lease extension, consider the following factors:
- Financial: Evaluate the potential rent changes and the financial stability of the tenant.
- Legal: Ensure compliance with state laws and understand the legal implications of each document.
- Personal: Consider the relationship with the tenant and the property’s future.
For example, a landlord and tenant who have built a good relationship over a year may opt for a lease renewal with a slight rent increase, benefiting both parties with continued stability.
In another scenario, a landlord facing uncertainty about selling their property may choose a lease extension, allowing them more time to decide without losing rental income.
Considering the pros and cons of each option, you can make a more informed decision about whether a lease renewal or extension aligns better with your current needs and long-term goals.
Summary
While these documents are similar in many ways, landlords often use lease extensions to keep a tenant in a property for just a few months after the original lease expires. Lease renewals help landlords secure tenants for another full rental term, even when a rent increase becomes part of the new lease. You do not have to create your lease renewal and extension agreements from scratch.
Understanding the differences between these two documents is crucial. Each option has its pros and cons, and with the right approach, landlords can effectively manage their rental properties and maintain positive relationships with their tenants.
