Contract Glossary
Option to Renew
Definition
A contractual right (not obligation) that allows one party to extend the agreement for an additional term under specified conditions. Unlike automatic renewal, an option to renew requires the holder to actively exercise the option, typically by providing written notice before a deadline. The renewal terms (price, duration, conditions) are usually predetermined in the original contract.
In Practice
You sign a three-year office lease at $40/sq ft with two one-year renewal options. Near the end of year three, you must decide: exercise the option and lock in year four at the pre-agreed rate ($42/sq ft with the built-in escalation), or let it lapse and either negotiate a new lease or move. The option gives you predictability, you know your future rate, and leverage, since the landlord can't replace you without warning. But you must exercise it by the deadline (usually 90-180 days before the current term expires) or lose it.
Example Clause
Tenant shall have the option to renew this Lease for two (2) additional periods of one (1) year each (each a 'Renewal Term') upon the same terms and conditions as set forth herein, except that the Base Rent during each Renewal Term shall increase by three percent (3%) over the immediately preceding term. Tenant must exercise each renewal option by delivering written notice to Landlord no later than one hundred eighty (180) days prior to the expiration of the then-current term.
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