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LEASE EXTENSION ADDENDUM
Tenants who get benefits from renting a property will usually request an extension on their lease when it expires. For instance, the property is in a safe neighborhood it’s close to their place of work or the school where their children study. For this, they have to inform you as the landlord of their desire to extend their lease so that you can prepare a lease extension addendum.
What is a lease extension addendum?
A lease extension addendum is a document that extends the terms of an existing lease agreement further. The addendum simply establishes a new termination date for the lease that you and your tenant agree upon.
Aside from extending the length of the existing lease, the addendum could also include changes in the price of rent for the extension. Changes in the existing rent amount are common in these documents, especially if the extension involves a shorter time period.
Specify this amount in the document while all other terms and conditions from the existing lease remain the same. It is a requirement that the lease extension has your signature as the landlord and the signature of your tenant. After affixing your signatures, you will add the addendum to the existing lease.
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What is the process for extending a lease?
A lease extension form allows you and your tenant to extend a lease. Unless amended accordingly, the other terms and conditions of the existing lease will remain. Moreover, you may increase the rent each month along with leasehold extensions depending on the current economic conditions.
You can use this document to extend a lease that’s expiring so that you can retain a tenant. Apart from making a lease extension addendum, here are the steps for extending a lease:
- Refer to the existing lease
Find the existing lease to check when the lease will end. Usually, the most common modification in an extension is the amount of rent your tenant will pay each month. You and your tenant can negotiate whether to lower or increase the rent for the extension. - Speak with your tenant
Either party can contact the other to find out if they have any intention of extending the lease under new terms or existing ones. You can do this either by email, phone, or face-to-face.
Sometimes, property managers send a letter asking the tenant if they want to stay in the property for an extended period of time. The letter includes the property manager’s contact details to make it easier for the tenant to contact them. - Send the addendum
In case your tenant decides to stay, you should send the addendum to your tenant. You can add this addendum to the existing lease. It may contain changes like the extension period and a new amount of rent. The remaining portion of the lease remains the same unless you have listed other changes. - Sign the addendum
After you and your tenant agree on the terms of the addendum, you can meet in an agreed-upon venue to sign the document. You can also send the addendum to your tenant through email and ask them to affix an electronic signature.
Reasons for extending a lease
It is always good practice for tenants to check the current unexpired terms on the lease. Generally, it is now accepted by the renting industry that if a lease goes beyond eighty-two years, the tenant will be on the “safe side.”
This means that they can continue occupying the property without losing value because of a short lease. But in cases when the lease is already too close to the eighty-year mark, the tenant should think about requesting a lease extension agreement.
If you give your tenant a lease extension addendum before the lease falls below eighty years, they can save a lot of money. The length of the lease, however, is often overlooked.
This situation can be financially dangerous because extending a flat leasehold lease will significantly be more expensive when compared to the cost of creating a lease renewal agreement or extending a lease that’s beyond eighty years. Here are some of the most practical reasons for extending a lease:
- To eliminate ground rent
When you extend the lease on the statutory process, this removes ground rent payments. Extending your property lease on statutory terms can eliminate ground rents forever.
This means that the lease that is newly extended will be equal to zero. This, however, doesn’t always apply and the savings your tenant might make can be very low as this depends on the lease structure type that exists. - To allow a competition of sale
There are many homeowners who struggle to sell their property because of short leases. One way or another, some issues might emerge during the sale process that can either prevent or delay the sale.
This predicament specifically applies if you have a buyer who uses a traditional homeowner’s mortgage to buy the property from you. The lenders of this buyer might not feel too keen on lending on a leasehold property with a short lease. - For the purpose of mortgage
A leasehold interest gets created for a set time period and when a lease term reaches eighty years, this can start to affect the value of your property. It’s suggested that you extend the lease before it falls below eighty years, preferably earlier than, until it reaches eighty-two years.
Moreover, this can also have an impact on the interest rates you might receive along with the value to loan ratio. This means you may have to pay a bigger deposit to access the mortgage or have a higher income to afford mortgage payments. As such, it becomes important to consider extending your lease as soon as possible to avoid such a scenario. - To increase the value of your property
A property with a short lease is usually worth less than a property with a long lease. This, of course, is just hypothetical. Usually, premiums might not necessarily get doubled as this depends on the location of your property and the terms of your lease.
A premium increase may occur because of a special formula known as the “marriage value.” In essence, this is the difference between the property values of a short lease and a long lease. You would then divide the difference equally between you and your tenant and your share will become part of the premium value of the lease extension.
When do you need a lease extension addendum?
Aside from the common situation when the lease agreement expires, there are also other situations that will need a lease extension addendum rather than a lease renewal. These are all situational and they typically require an agreement between you and your tenant. The common situations when you might need a lease extension form include:
- In the case where your tenant has upheld their part of the agreement. This can include maintaining the place well, paying rents on time, and having had a good relationship with you throughout their lease.
A new lease entails additional bureaucracy, administrative formalities, and paperwork. Instead, you can make a lease extension agreement with simple revisions then add this to the original agreement to make the process easier for you and your tenant. - There are cases when your tenant might request a shorter lease. This situation usually happens when a tenant is in the process of finding a new place or moving, but still needs to extend their lease for a short period of time – usually a couple of months.
In such a scenario, with your approval, they might agree to a lease extension that is much more suitable for them rather than signing a lease extension that lasts for one year. There can also be monthly extensions but this usually depends on the specifics of your tenant’s situation. You and your tenant should first reach an agreement then sign an extension based on the terms you have agreed upon. - Always remember that without a lease extension, your tenant will enter into a somewhat unpredictable situation. Without reaching an agreement, your tenant who has originally agreed to stay on a monthly basis will become what’s known as a “holdover tenant.”
This situation gives your tenant very little legal protection. This is the reason why an extension becomes necessary and a huge convenience, especially for short-term extensions.
How do you write an addendum to a lease?
You can use a lease extension addendum to make small changes to the terms and conditions of an existing lease like the length of the new lease, a change in the amount of the rent, and other modifications.
Lease extensions differ from lease renewals in the sense that they simply continue the original lease without interruption. The addendum must include the following information:
- Your complete name as the landlord
- Your tenant’s complete name
- The address of the property
- The date of the addendum
- The lease extension’s effective date
- The lease extension’s end date
- A statement of disclosure of any consequences for breaking or violating the terms of the extension
- The new rent amount for the duration of the extension
- An additional deposit (if applicable)
- The tenant’s responsibilities in terms of property care
- The tenant’s signature with a date
- Your signature as the landlord with a date
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