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X. Renewal matters

Supposing that an existing tenancy is about to expire, the landlord and the tenant can commence their negotiation on whether to renew the tenancy.

In the past, a landlord was in most cases bound to renew a tenancy for a domestic property with an existing tenant. However, the law on this issue underwent a substantial change on 9 July 2004. In essence, the landlord is not bound to renew a tenancy with the same tenant unless there is a written agreement to the contrary. This applies to both domestic and non-domestic properties.

However, if a tenancy document (whenever created and whether domestic or non-domestic) contains an "option to renew" clause, then the tenant will be entitled to a right to renew the tenancy.

A tenancy document may provide an option for the tenant to renew an existing tenancy. The option is an offer by the landlord to grant a further tenancy upon expiry of the existing tenancy. For the option to come into effect, there must be acceptance on the part of the tenant. The clause in the contract usually requires the tenant to give a written notice to the landlord not later than a date specified in the contract. The clause may also contain reference to the terms of the new tenancy document, such as on the same terms as the existing tenancy.

Subject to the agreement between the parties, an "option to renew" clause may look like this (for reference only):

    It is hereby agreed that if the Tenant wishes to take a further term of two years from the expiration of the Term and at least six months prior to such expiration gives the Landlord written notice to that effect and has paid the rent and all monies hereby reserved and reasonably performed and observed the terms and conditions on its part herein contained up to the expiration of the Term, then the Landlord will let the Property to the Tenant for a further term of two years from such expiration at a new monthly rent and subject to the same terms and conditions as are herein contained except this clause for renewal.

1. What is the difference between an "option to renew" and a "break clause"?

An option to renew confers on the tenant a right to continue to rent the property after the expiry of the current term, i.e. to renew the existing tenancy. With an option to renew, the tenant obtains a security of tenure and the landlord is somewhat secured with continual rental income. As an option to renew represents a legal interest in land and affects the principles of notice and priority, the relevant tenancy document should be registered even if the tenancy period does not exceed 3 years.

A break clause , in contrast, confers rights to a party to prematurely terminate a tenancy after a certain period has elapsed or upon the occurrence of certain incidents. That is to say, a party is allowed to break the agreement before the expiry of the original term.

2. A landlord and a tenant intend to renew an existing tenancy. Except the rent, all of the terms are agreed. Is there any way that the parties can resolve the problem amicably?

The concept of “prevailing market rent” may be helpful under such circumstances. To find out the prevailing market rent of a property, the parties can jointly appoint an independent professional valuation surveyor to do the job, the decision of whom will be final and binding on the parties. The major advantage of this exercise is that the issue can be resolved amicably without endless and unfruitful negotiation. In practice, of course it will only be worthwhile to retain a professional valuation surveyor if the property has a substantial rental value.

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