Option to Renew

By Randolph T. Mason, CCIM, SIOR, Partner, Commercial Realty Specialists: It is not uncommon for commercial tenants to routinely request one or more options to extend their lease term in order to ensure they can remain in the space after spending so much time and energy moving into it.

Randy_Mason_480x270It is not uncommon for commercial tenants to routinely request one or more options to extend their lease term so that they can be sure that they can occupy the space that they spend so much time and energy moving into. There are also benefits for landlords when a tenant renews, as their releasing expenses are far less expensive to keep existing tenants, the landlord does not have any down time, limited tenant improvement dollars and generally lower brokerage commissions.

Should the landlord and tenant want to decide on the renewal rental amount in the future, it is important to have an apparent way to calculate the renewal rent. Options have been found unenforceable because there was no standard specific measurement in the lease on how to determine what the future rent would be.
It makes a lot of sense for both the tenant and the landlord to have option language that requires the tenant to provide notice to the landlord many months before the lease expires. In the event the option rent cannot be agreed upon, the tenant would have ample time to relocate, and the landlord will have ample time to market the property.
There should be an obvious way to determine the future fair market rent, be it being determined by arbitration or appraisal, or by a reference to similar properties in the area. It should not be left to a mutually agreed upon number, as that could be a recipe for litigation should a number not be “mutually agreed upon.”
When written correctly, an option to renew can benefit both the tenant and landlord.