By Liad Hadar – Director
This article first appeared in Asset Magazine’s July 2025 edition

In the world of leasing, an option to renew is often seen as a box to tick, a standard clause buried near the end of the lease agreement and only considered toward the end of a lease period.

In practice however, these clauses have serious future implications for landlords and tenants alike. Whether you’re a landlord trying to preserve asset flexibility and the future rental payable, or a tenant looking to secure long-term occupation at a known future rental, it’s worth understanding how these clauses really work — and how they often don’t.

Over the years, I’ve seen countless renewal clauses lead to disputes, unintended lease extensions at too low or too high rental amounts or general ill feeling between the parties — not because the parties disagreed on principle but because the legal mechanics of exercising the option weren’t properly drafted or understood.

What Is an Option to Renew Really?

A genuine option to renew is a right granted to a tenant to extend the lease for a further period, usually on the same or similar terms, at a pre-agreed rental, provided they give notice within a defined timeframe. Importantly, it is not an automatic extension and the tenant must exercise that right, usually in writing, and within the time window stipulated in the lease.

In South African law, options are interpreted strictly. If a tenant misses the notice period, even by a day, the option lapses and the landlord is under no obligation to honour it.

“Subject to terms to be agreed” – A Legal Trap

A common error we see in leases is the inclusion of vague or open-ended renewal clauses. For example:

“Tenant shall have the right to renew the lease for a further five years, subject to terms to be agreed”.

This might seem harmless or considered as an option, but it’s legally problematic and leads to disputes.

Our courts have consistently held that an agreement to agree in future is not binding. If key terms, particularly the renewal rental, are left open-ended, the so-called “option” may be unenforceable despite everyone’s best intentions at the commencement of the lease.

Given neither party may want to commit to a future rental 5 years down the line, it is however possible for rental to be determined later. The lease terms should include a clear mechanism for doing so, for example, referring to market-related rent as determined by an independent valuer, or escalating the existing rent by a fixed rate or even including a hybrid of these two options such that the rental will increase by no less and no more than a certain percentage based on the current market at the time of renewal.

When Tenants Forget to Exercise the Option

One of the most common disputes we deal with involves tenants who forget or delay exercising their option and then try to enforce it retrospectively.

Unfortunately for them, unless the landlord expressly (and in writing) waives the deadline or has acted in a way that could clearly be interpreted as acceptance of a new agreement, the tenant may have lost their right to renew.

On the other side, we’ve seen landlords lose development or sale opportunities because they inadvertently locked themselves into renewed leases often by failing to monitor notice periods or by casually confirming an extension over email, creating a binding renewal.

The key takeaway: both parties need systems in place to track renewal timelines and to approach the renewal mechanism deliberately and in writing.

Should Landlords Offer Renewal Options at All?

There is no one-size-fits-all answer.

In many cases, offering a right of renewal is a commercial necessity particularly for anchor tenants or long-term occupants making significant fit-out investments. It provides comfort, supports tenant retention and may assist with financing.

But landlords need to balance this with flexibility. A long option period may block a redevelopment, frustrate a future sale or limit the ability to refresh the tenant mix. If you’re going to offer a renewal, make sure:

• It’s conditional on the tenant not being in breach at the time of exercise;
• The renewal rental is either fixed, escalated or objectively determinable (by using independent valuers);
• The option lapses if the property is sold or rezoned (if redevelopment is on the horizon).

Do Renewal Rights Bind a Purchaser of a Property?

It’s important to note that options to renew are personal rights, not real rights.

This means that if a property is sold, the purchaser is not necessarily bound to honour the tenant’s option, unless the lease is specifically assigned (which is the default in the leases that our clients use) or the sale agreement makes provision for it.

In practice, most leases and sale agreements will provide that all tenant rights are transferred, but it’s a crucial detail that must be addressed during due diligence and negotiation, especially in deals involving income-producing commercial properties.

Drafting Renewal Clauses That Actually Work

To avoid disputes, renewal clauses should be:

• Clear on timing – e.g., “Tenant must notify the Landlord in writing no later than 6 (six) months before the lease expiry”;
• Clear on rental – fixed, formula-based or objectively determinable;
• Clear on terms – does the renewal replicate all other terms, or are certain clauses renegotiated?;
• Subject to compliance – e.g., “Tenant must not be in breach at the time of exercising the option”;
• Linked to asset planning – consider adding redevelopment or sale termination carve-outs.

Conclusion

Renewal clauses aren’t filler text, they are legally and commercially significant provisions that can shape the value, flexibility and longevity of your property income.

Whether you’re a landlord looking to protect your asset, or a tenant planning for long-term commitment, the right lease language exercised at the right time can make all the difference.

Avoid future disputes by ensuring that your lease agreements clearly and correctly record the options to renew, understand your rights as landlord or tenant and enforce them accordingly, whichever side of the table you sit on.

As always, if you are unsure on drafting the relevant clause or require input on your particular position, our team of Property Law Specialists thrive on adding value by providing practical input and assistance.