What is a lease extension?
A lease extension refers to a legal agreement that extends the term of an existing lease or rental agreement. Extensions are not mandatory in a business relationship, but are often granted just before the original agreement expires. They are common in relationships between owners and tenants of commercial and residential properties, or between parties who lease vehicles, machinery, factories and equipment.
Key points to remember
- A lease extension refers to a legal agreement that extends the term of an existing lease or rental agreement.
- The extension of the lease should name the parties involved, the start and end dates of the extension and refer to the previous extended agreement.
- Lease extensions are common in landlord-tenant relationships, or for the use of vehicles, equipment, machinery and / or factories.
Operation of lease extensions
A lease is a contract which obliges the tenant or user to pay the lessor or the owner for the use of property for a specified period of time. Leases are common for rental properties or for the use of equipment, vehicles or machinery and factories. When the leased asset is tangible property, it can also be called a rental agreement.
At the end of a lease, the lessor and the tenant have a few options available. The tenant can leave or give up access to the property, or both parties can agree to a lease renewal. This option may require renegotiation of the terms of the new lease. The last option is to extend the lease. The conditions of the original lease are normally still in effect, but the extension period tends to be shorter. Thus, in the case of a residential rental property, the owner can keep some of the original rental conditions, such as the rental amount, but extend the rental period for the tenant.
The extension of the lease is an official document which must contain certain details. He must name all the parties involved in the agreement, as well as the start and end dates of the extension. The extension document should also refer to the previous agreement being extended. Certain lease extensions, particularly in real estate, are granted automatically. They can specify a certain duration for the extension or can allow the use of the property on a monthly basis.
Lease extensions are an important part of the lessor-tenant relationship because they reduce the risk for each party. For example, a landlord who accepts a lease extension may keep the terms of the original lease intact, including any provisions regarding release notices. This means that the tenant must provide written notice before leaving the property. The owner can be assured that there are no surprises and that he will not have to risk an empty unit. Similarly, a lease extension can give tenants some stability. With an appropriate extension in place, tenants will not have to abandon their units after the lease expires.
Although not a requirement, lease extensions reduce the risk to the lessor and the tenant.
Companies enter into rental contracts and agree to extend rental contracts for a variety of reasons. The main reason for renting an asset rather than buying it is risk management. A company can decide to rent a plot of land so that it is protected from the risk of fluctuations in land prices. This allows the business to focus on its core competence rather than on real estate.
Another reason for renting is to simplify disposal. A construction company, for example, may decide to rent a piece of heavy equipment, rather than buying it, so that it does not have to worry about selling the equipment once it is no longer necessary. A tenant may pay more per hour to use the equipment, but it may be worth it if they save time and the cost of selling the equipment at a later date.
Examples of lease extensions
A lease extension can be executed between a landlord and a tenant. In this case, if both parties choose to continue the rental, the owner can issue an extension of the lease when the original lease expires.
Lease extensions can also be granted to tenants by car dealerships. Suppose a consumer rents a car for four years. After this period, the tenant can decide to buy or start another lease for a new car. The dealer may extend the original lease if the new replacement vehicle is not yet available.