What is a Renewal Option
A renewal option is a clause in a financial agreement that outlines the terms for renewing or extending an original agreement. The renewal option appears as a covenant in the original agreement and provides specifications under which the entities can renew or extend the original terms for an additional, specified time.
BREAKING DOWN Renewal Option
Renewal options are most often found in rental lease agreements however they may be included in any type of financial agreement in which it is beneficial for an entity to extend the agreement for a longer term.
A renewal option in a leasing agreement provides the leaseholder the option, but not the obligation, to renew or extend a lease agreement beyond its initial terms. Lease agreements can apply to both residential and commercial units.
A start-up business may, for example, rent an office space for five years. A renewal option would allow the business to renew or extend the lease to remain in the office space beyond the five-year lease term. This can be beneficial to the business if it is doing well in the location, it allows the business to remain for an additional term. If the business has been struggling, it can also allow them to close shop at the end of the initial term without defaulting on the lease and without pressure to renew or extend it.
Generally, the same principles apply for a residential leaseholder. Their term lengths are usually for approximately one year. With a renewal option a residential leaseholder can choose to renew or not based on their individual circumstances.
For both residential and commercial leaseholders, it is important to understand the terms of a renewal option and to negotiate for one if it is not originally included in a lease. In some cases, renewal options may have specific terms that must be followed for renewal. Many leases require the leaseholder to provide notification of renewal in writing by a specified time. Ensuring that a renewal option is included and abiding by its terms can be very important for steady and consistent living or working conditions.
Business Renewal Options
Renewal options may also be important to negotiate in business agreements as well. Companies providing goods or services on a regular basis through a third-party agreement may want to include a renewal option in their business agreements to help support long-term work.
Employment and insurance agreements are also cases where a renewal agreement may be important. Some employers may contract with an employee for a specified amount of time with a review and renewal option agreed on in the initial hiring terms. Employments terms may also include the renewal of insurance plans which give the employee the option to renew or change plan terms at specified times. Most all individual insurance plans also have renewal options as well.