What Is a Renewal Option?

Definition and Examples of Renewal Option

A renewal option is a contract clause, found in a lease, that specifies the conditions needed to renew the original agreement. It typically includes if and when the tenant and/or landlord must notify the other party if they wish to renew (or not renew), as well as actions that may void the renewal option.

A renewal option allows a lease to be extended for a new term as agreed on by both the tenant and landlord.

• Alternate name: Lease renewal

When someone first leases an apartment, they might sign a two-year lease with a renewal option. A renewal option does not have to repeat the same terms as the original contract. For example, the landlord may decide to only offer a month-to-month or one-year lease moving forward, or they may decide to restructure the rent pricing. In other words, a renewal option simply provides for a period to negotiate a new lease when your original term is up.

The landlord could refuse to renew for various reasons, however, such as if the tenant has defaulted on payments.

How a Renewal Option Works 

A renewal option works by dictating the terms of renewing an agreement. For example, a renewal option in a lease may read: “The tenant's option to renew must be requested in writing to the landlord no less than 60 days before the expiration of this lease.”

In this example, if the tenant’s lease ended May 1, they would have to tell the landlord by about March 1 that they want to renew. If the tenant does not plan to stay, however, they are usually not required to give notice.

Also worth noting is that some leases may have an automatic renewal option. In these cases, the onus is on the landlord to notify the renter within a specified time frame that the auto renewal is coming up, so the tenant can report back if they do not wish to continue leasing.

Some leases that auto-renew may do so for a full year, while others may change to month-to-month.

Types of Renewal Options

Aside from lease agreements, renewal options can also be included in other types of contracts.

For example, with commercial leases, businesses leasing office or retail space–especially those just starting up–may choose to enter into a shorter-term agreement with a renewal option rather than make a long-term commitment.

Do You Need a Renewal Option?

For tenants, a renewal option is usually good to have in place because otherwise, the landlord is under no obligation to let them remain past the lease expiration date. This is especially important for commercial tenants who depend on the continuity of their business and want the option of continuing to rent the property.

Renewal options can also benefit landlords. A renewal option can dictate that a tenant notify a landlord about their intention of staying or leaving, which can help a landlord plan. Renewal options can help landlords minimize the risk of property sitting vacant or forcing them to find new tenants on short notice.

Leases aren’t always required to have a renewal option. If a lease does have a renewal option, it does not necessarily have to be exercised. In some cases with no renewal option, the lease may convert to a month-to-month tenancy if the tenant remains after the lease is up and the tenant continues paying rent.

Alternatives to a Renewal Option

Although some people use the terms interchangeably, a renewal option is not the same as a lease extension. Lease extensions simply continue the original lease as is, just with a later expiration date; renewal options have the parties entering into a whole new lease agreement.

What a Renewal Option Means for Landlords and Tenants

Having lease options for renewals generally benefits both parties involved. Both landlords (lessors) and tenants can benefit from knowing that when the lease is up, and they can work together to agree to new lease terms that can benefit both parties.