The Basics of Lease Extension Agreements in Texas

What is a Texas Lease Extension Agreement?

A Lease Extension Agreement is a document used to extend the term of a real property lease for a period of time beyond or after the original/primary term. A Lease Extension Agreement is not a new lease. The term of the original/primary lease has not expired. Instead, it simply extends the term of the original/primary lease. The primary reason to enter into a Lease Extension Agreement is to avoid the costs commonly associated with severing the tenancy under the original/primary residential or commercial lease. For example, a tenant may have an option to terminate the leasehold estate after an initial term of 5 years. Only 3 years have elapsed under the primary lease and the tenant has determined that it will exercise the option to terminate the leasehold estate. Instead of terminating the leasehold estate and renting a moving truck, the tenant offers to pay the landlord 6 months of rent. The tenant and landlord agree to a Lease Extension Agreement extending the leasehold estate for a period of 6 months in exchange for 6 months of rent. After the 6 month term has elapsed, the leasehold estate expires and the tenant can move out without violating the terms of the original/primary lease. Depending upon the parties , some may refer to a Lease Extension Agreement as a "Buy-Out Lease" Agreement. A Lease Extension Agreement creates a new term for the original/primary lease. It is a new contract—an extension. A Lease Extension Agreement is enforceable as a contract. Similar to entering into a lease, certain elements must be present in order for the Lease Extension Agreement to be enforceable. In Texas, an enforceable contract must set forth the following: (a) an offer; (b) acceptance; (c) a meeting of the minds on the subject matter (e.g. the new term/extension); and (d) execution or performance of the contract according to its terms. As with most contracts, the existence of consideration is also required. In Texas, residential leases are created for a definite period of time (i.e. one year, four months, etc. ..). There is no need to enter into a Lease Extension Agreement if the term of the lease is still in effect. Commercial leases may be entered into for a definite period or an indefinite period of time. In Texas, it is common for commercial leases entered into for an indefinite term to create a month-to-month lease. In the absence of a specific term, the parties can orally agree to or agree in writing to extend the term of the lease. In a month-to-month lease, the parties may enter into a Lease Extension Agreement that establishes a new term. A Lease Extension Agreement may also be entered into if the lease is only for a few days or weeks.

Requirements for Lease Extensions in Texas

In Texas, the extension of a lease agreement before its expiration is permissible but requires that certain legal requirements be adhered to by both the landlord and the tenant. The extension may occur automatically or by mutual agreement between the parties. Lease extensions are only binding and enforceable if certain conditions are met:
A lease extension may be in writing or implied, but implicit agreements are the least secure. Neither the landlord nor the tenant must execute additional documents to extend the lease for a specified period of time or continue the same terms and conditions as the prior agreement. In other words, if the tenant remains in possession of the leased premises after expiration, is not a trespasser and the landlord accepts rent, an extension is presumed to have occurred on the same terms and conditions as the original lease. In some cases, the rent accepted may be different than during the original lease. For example, in a long-term residential lease where the lease is terminated because the lease term has ended, the landlord may agree to permit the tenant to remain in possession and give notice that the rent will increase. If the landlord accepts the new rent, then a lease extension has occurred and new terms and conditions applied, such as the amount of rent. In such cases, the lease renewal has not required a new writing but a meeting of the minds has occurred to create the new terms and conditions.
The most common scenario in rent-controlled leases is that the rental amount will decrease over the term of the lease. So long as this is agreed to, the same outcome occurs as if the lease had continued on the same terms and conditions.
Like a new lease, the extension of an existing agreement should be in writing to avoid a dispute regarding exactly what the parties originally agreed to as to the length of the term and the rental amount. However, unlike other states, Texas does not require the execution of additional legal documents to be enforceable.

Benefits of a Lease Extension

Both landlords and tenants find benefits in pricing, continuity, stability, and the ability to avoid negotiations for terms of a new tenancy. These benefits can be more pronounced when compared to a new lease negotiation where a single point of discussion might become rent incidental to the entire process. It also provides continuity of occupancy. The cost savings can be significant when compared to a new lease and especially when compared to a new ground lease. The benefit can be multiplied to both sides if there is an abatement of rent on the payment of additional rent in the lease extension. This eliminates the need to negotiate for free rent concessions and provides an opportunity to move forward with the basic assumptions of the then current tenancy instead of reintroducing the need to agree upon new ones.
In addition, these agreements provide the option to renovate/expand/improve which provides the tenant a cost neutral agreement to make a move even if executed in the last months of the tenancy.

Key Terms in Texas Lease Extension Agreements

Generally speaking, a lease extension agreement is very similar to a lease beginning in the fact that it is a contract required by law to be followed by both parties. Consequently, it is standard that provisions will be in place regarding the following items:
• The extension period – How long will the tenant remain in the current space? With a renewal of at least 12 months, the tenant will not have to worry about informing all of its customers of a new mailing address, and they won’t have to find new office space and incur the costs associated with moving office furniture and equipment.
• Adjusted rents – In a lease extension agreement, it is common that you will be making a change to the rent amount. It is important that you clearly specify what the rent changes entail and how the rent will be paid.
• Rent selection – Landlords often give a 10- or 15-percent discount on their tenant’s corporate credit rating system so do not forget to build that in there.
• Maintenance – if you are living in an apartment , you probably will not have to worry about repairs. However, if you are leasing an office, you will want to make sure it is clearly specified who is responsible for any maintenance and repairs during the extension agreement.
• Terminating the agreement – The lease extension agreement should include both parties’ obligations should the tenant want to take advantage of the extension.
It is important to remember that a lease extension agreement should be written like a lease agreement with both parties being on the same page as to what the new terms and conditions are going to be. Since an extension agreement is basically a new lease keep in mind that your tenants associations will be keeping track of what type of extensions your apartment is offering.

Negotiating a Texas Lease Extension

Negotiating a lease extension with a commercial property owner can be a delicate task, but it is certainly not insurmountable. Whether you’re the tenant or the landlord you should enlist the services of and rely upon a qualified commercial real estate attorney to guide you through the process. A tenant’s bargaining leverage will depend upon the specific circumstances facing the parties to the lease.
Initially, a tenant should try to assess the landlord’s or owner’s motivations for wanting to extend the lease terms. This can be a crucial factor for your bargaining position. Open communication is vital in the process of extending the lease. Your first discussion with your landlord may be face to face. If you are able to discuss the issues with your landlord’s representative by phone or through email, be careful that your communications do not adversely affect your existing or long term working relationship with your landlord. We suggest that you use the information obtained from your discussions regarding the motivations of your landlord to build your case for any provisions that could swing the deal in your favor.
A tenant should be careful that they don’t come off as desperate to extend. Your landlord may also believe that time is on their side and be in no rush to extend your lease. If this is the case, a tenant may want to consider offering something that is more valuable for the landlord to extend, such as increasing the agreement’s advance deposits or securing financing in exchange for the chance to extend the lease.
Adding additional services may be another bargaining chip, such as maintenance, repairs, utilities, or janitorial services. Tenants should assess how much it would cost to outsource these services; if your landlord can save money or provide a service cheaper than any other service provider, then it will be easier and more natural to negotiate for an extension.
Keep in mind that tenant’s negotiating skills will be repeatedly tested during the process. Many external factors and obstacles may arise, including rents, financing, property worth, and market conditions.

Texas Lease Extension Mistakes

Common Mistakes in Lease Extension Agreements – Be Careful When You Negotiate and Execute a Lease Extension Agreement in Texas. These Pitfalls Could Cost You.
When negotiating your lease extension, exercise caution with the lease extension terms. Or you could end up in a legal fight over what happens when the lease expires…
Landlords and tenants frequently overlook some key terms in lease extension agreements, setting themselves up for disputes when the extension term ends. Here are some of these common pitfalls…
One of the most frequent mistakes is the use of separate agreements for the lease renewal and the remaining requirements of the tenants operation during the extended lease term. By way of example, I negotiated a lease extension for the tenant of an office project on behalf of the landlord. The tenant was resistant to signing a long-term extension and I agreed on behalf of the landlord that we would renew for three years and then negotiate a further extension of three years. The other key term of the extension was that the tenant had to maintain $100,000 in net worth for the extended lease term period and demonstrate such net worth each year in order to exercise the three-year extension.
The tenant did not like the requirement for demonstrating net worth and did not want the obligation to make disclosures each year. So, the tenant, landlord and real estate broker oral agreed that the tenant did not have to make the annual reporting required by the lease extension option. However, the lease extension option was silent on the requirement for the annual report about the tenant’s net worth.
The three year extension option expired and the tenant wanted to exercise the three year extension if its net worth was above $100,000. It was not. The landlord insisted and demanded that the tenant provide its annual financial statement from the prior year to show that it met the threshold net worth. The tenant refused. We relied on the fact that the tenant "agreed" to the terms that it did not have to provide the information each year , except at the extension term.
After a year of litigation, the court held that the lease extension option was an integral part of the lease. Therefore, even though the three year extension option was dealt with in a separate document, it was sufficient that the lease extension option was referenced in the lease and governed by the lease terms. Therefore, the tenant must provide its net worth each year and the three year extension was not available because the tenant did not meet the net worth requirement. The end result was estimated to be over $1,000,000 in legal fees and at least a $200,000 damages claim ruling for the landlord.
Another common mistake we see is a failure to verify whether the lease is a commercial lease, residential lease or an agricultural lease under Texas law. Depending on the type of leased property and the type of extension terms, there may be very strict requirements to extend the lease.
For example, an agricultural lease in Texas is automatically extended if the tenant pays the rent without change after the lease term expires. Therefore, if the tenant continues to operate under the lease and pays the rent, it technically has a year-to-year lease in place unless the landlord accepts the changed rental terms. Therefore, the tenant should pay the rent after the lease expires to extend the lease for another year and the payment continues until the landlord accepts a new rental term. The tenant will want a month-to-month lease and the landlord will want to know the new rental terms.
Be sure that you pay attention to your lease provisions which permits or requires the extension of the leased property. You want to make sure that you are adequately protected for your use of the property and any failure to notify the landlord of your intention to remain in the property could cost you a lot of money.