What is a Renewal Option?

Malcolm Tatum

Also known as an option to renew or a right of renewal, a renewal option is a condition found in the provisions of many types of business contracts. Essentially, this option or clause provides the option for the parties participating in the agreement to renegotiate those terms once the expiration date for the contract approaches. That renegotiation may be in the form of simply renewing the same provisions for another period of time, or taking the opportunity to negotiate new terms, with the business relationship continuing while that negotiation is taking place.

Improvements to a property may be part of a renewal option negotiation.
Improvements to a property may be part of a renewal option negotiation.

One of the most common examples of the use of a renewal option is in rental contracts. With both commercial and residential real estate, it is often in the best interests of both parties for a contract to be renewed as easily as possible. For example, a tenant who is happy living in his or her current apartment can exercise the option to renew the lease for another year, rather than having to negotiate a new contract with the landlord. At the same time, a landlord who wishes to continue the business relationship with the tenant may exercise this option and offer the tenant the opportunity to renew the contract at the same monthly rental as the previous contract, or at a modest increase for the next term. While in negotiations, the tenant remains in possession of the apartment and continues to pay rent at the original rates.

A common use of the renewal option is in a rental contract.
A common use of the renewal option is in a rental contract.

Service contracts also often include a renewal option. With a telecommunications contract, this option makes it possible for vendors to assume that customers wish to renew the terms of the current contract for another term once the contract expires. Sometimes called an automatic renewal option, the customer must notify the vendor within a specified time frame in advance of the expiration date if the intention is to not renew the contract. Without the notification, the contract automatically renews at the same rates.

Often, a renewal option is a feature that offers convenience for both parties involved in a business contract. Assuming both parties wish to continue their relationship, this option makes it possible to roll into a new contract with the same terms and provisions, or to maintain the current provisions while the two parties come to terms on new provisions. In either situation, the supplier maintains the revenue generated from the relationship, and the buyer continues to enjoy the benefits and amenities supplied in the past without interruption.

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