Lease Extension
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Lease extension - it is an action extending the agreement concluded at that time. It shall extend the lease agreement or rental agreement accordingly. It is most common in relations between landlords and professional entities that rent commercial properties. In addition, it is also used in vehicle, machine and equipment rental agreements. It happens that contracts concluded between the lessor and the lessee include a clause on automatic renewal of the contract in the event that none of the parties raises appropriate objections or gives notice of termination of the contract. Nevertheless, it should be borne in mind that the laws of different countries may provide for a limited scope for automatic renewal of contracts and, to some extent, condition their duration.
How lease extension works
In principle, a tenancy agreement requires the lessee or other user to pay the lessor a contractually agreed amount for the use of the object of the lessor for a specified period of time. Such a legal obligation is most often used in the case of rental of real estate, vehicles or equipment. With this in mind, landlords and landlords who want the agreement to be automatically renewed or extended by agreement should draw up a formal document that will include the following items:
- Period for which the contract is renewed;
- Time from which the extension takes effect;
- Decision on automatic renewal, if any, or obligation to conclude a further formal document.
However, this does not apply to lease agreements concluded with a public entity such as the state or the federal government. At that point in time, the enterprise that has entered into an agreement with the entity will be required to provide a report on its business activities. A public authority will be able to do so once it has verified that the activity has been carried out in accordance with all legal requirements [1]:
- Conclusion of a lease renewal agreement;
- Call on the entrepreneur to modify his business activity and give him a promise that if he meets the defined conditions, he will receive an extension of the lease agreement;
- Extend the lease.
ROI in lease extension
Like any other investment, lease extension is connected with appropriate forecasting of investment risk. This is due to the fact that in the case of long-term contracts, the rent rate may remain unchanged. Leaving the clause on automatic renewal of the lease agreement without proper valorization is very dangerous for investors, whose main sources of income are mainly real estate and passive income[2].
As empirical research conducted in the English home market has shown, the use of long-term leases, unlike short-term leases, is not so profitable. Therefore, it is important that those investors who invest in housing or residential property do not renew their tenancy without an appropriate adjustment or the possibility of changing their rent based on specific economic indicators (e. g. inflation or consumption indexes)[3].
Footnotes
References
- Bracke P., Pinchbeck E.W., Wyatt J. (2018), The Time Value of Housing: Historical Evidence on Discount Rates, "The Economic Journal", Volume 128, Issue 613
- Gitles J. A. (2013), Lease Extension Options - A Landlord’s Perspective, "Commercial Leasing - Law and Strategy", Volume 26, No. 2
- Pflueger B. (2007), Crop Cash Lease Agreements, "Extension Extra", No. 5063
- Wellmann D. (2012), Discussion Paper on The Legal Framework of State Land Leases and Concessions in the Lao PDR, GIZ NU-IRDP
- Yao H., Pretorius F. (2014),Demand Uncertainty, Development Timing and Leasehold Land Valuation: Empirical Testing of Real Options in Residential Real Estate Developmen, "Real Estate Economics", Volume 42
Author: Dominika Pałkowska
