Term, Renewal and Extension
In general, lease-to-own refers to methods by which a lease contract provides for the tenant to eventually purchase the property. One common lease-to-own strategy is to include an “option to purchase” provision in the lease. This clause states that the tenant may purchase the leased premises during a particular time period and according to terms specified in the lease. Another is with a “right of first refusal (ROFR)” written into the lease. With a ROFR, the tenant has an exclusive opportunity to make an offer on the property before it is offered to others. A third method that is sometimes seen as a lease-to-own method is a land contract. See our fact sheet Lease to Own.
“Evergreen lease” and “rolling lease” describe ways that the term (the period of time the lease is in effect) is treated in a lease. See our fact sheet “About the Term.” These names do not have precise, fixed legal definitions, and sometimes they are used interchangeably. Therefore, it’s important for the lease language to define the meaning, rather than to rely on the name of the tool itself.
“Evergreen lease” is most commonly used to describe a lease that automatically renews at the end of the original lease term for another term of the same length, or on a month-to-month basis; without any action by the parties.
A “rolling lease” usually means the term automatically extends at the end of each year for another full term. For example, in a three-year lease, at the end of the first year the lease term is another three years, therefore pushing forward the end date of the lease.
Short-term typically describes a term of 1-2 years, sometimes up to 5 years. A long-term lease can be 10, 20, or 50 years, for example. Leases can be for up to 99 years; there are examples of leases for longer than that. Some states limit the term of an agricultural lease by statute. Typically, longer-term leases are more complex.
A trial period in a lease is an initial short term of, say 1-2 years during which the parties decide whether to continue. The lease may allow either party to terminate without penalty during the trial period. A lease with a trial period should also specify what happens at the end of the trial to extend the term, or make a new lease. The end of a trial period is also a good time to modify any provisions of the lease.
A “holdover” occurs when a tenant continues to occupy and use the premises after the term of the lease ends. If the landowner continues to accept rent payments, the holdover tenant can continue to legally occupy the premises. If this occurs, and if a new lease is not developed, the length of the new rental term is then dependent on each state’s laws and any relevant court decisions. If the landowner does not accept continued payments, eviction proceedings can occur.
Options to extend or renew a lease are essentially the same. They give the tenant the ability, prior to the conclusion of the lease term, to continue leasing the premises. An option to renew or extend the lease means that upon the tenant’s exercise of the option (choice), the provisions of the agreed-upon option are adopted for another defined term. The terms of the option can include the length of the new term, a change in rent, and other modifications. If the option rests with the tenant to ask for a renewal, the landlord is obligated to agree under the terms of the option. If there is no option to renew in the agreement, then there is no obligation for either party to renew the lease.
The option typically delineates the timing of notification for extension, what the rent will be under the extension or how it will be negotiated, the number of permissible extensions, how long each extension will be, and which, if any, of the original terms of the lease will be excluded from the extension.