Lease renewals involve creating a new contract. This is unlike lease extensions, which involve maintaining the same contract but lengthening the term. In a renewal, both parties have the ability to choose to sign a new contract or end the lease with the original term.
Municipalities must know that since a lease renewal involves a new contract, the lessor can alter the new lease’s terms. This can allow municipalities to potentially negotiate more favorable lease terms. At the same time, the lessor also has room to negotiate during lease renewal.
For example, the lessee may try to negotiate lower payments and termination options. Meanwhile, the lessor may try to negotiate higher payments.
Also, lease renewals create a “legal instant in time” that occurs between the original lease’s expiration date and the start date of the new lease.
Example:
A municipality leases a piece of equipment from a lessor for five years with no extension options.
As the lease term ends, the municipality decides it still needs to use the equipment. Since there is no extension option, the lessor offers to renew the lease by creating a new contract. Both parties may renegotiate terms for the new lease.
Under an extension agreement, there is no cessation between the end of the original lease agreement because there is no new lease. Municipalities must be aware that since a lease renewal involves a new contract, there is a potential for new terms and payment amounts.