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The Option to Renew: An Critical Term for Tenants Negotiating a Commercial Lease

by Mihkel Holmberg on Sep. 12, 2018

Real Estate Landlord-Tenant Real Estate 

Summary: The Option to Renew: An Critical Term for Tenants Negotiating a Commercial Lease

When negotiating a commercial lease, it is essential for tenants to understand how an option to renew can affect their rights. The renewal clause is a crucial term in any commercial lease. The clause gives a tenant the right, but not the obligation, to renew or extend the term of the lease when it expires. If it is exercised, the landlord and tenant create an extended term that begins on the expiry date of the original lease. While many tenants accept a landlord’s standard lease, a smart tenant will negotiate a well-drafted renewal clause.

Why is a Renewal Option Important to a Tenant?

With rising rents and demand for commercial spaces, the option to renew a favorable lease is a big win for a business owner. The requirement to suddenly vacate a property when a lease ends can be a costly disturbance to a growing business. A renewal option allows tenants the opportunity to keep running their business without interruption when their lease expires. Additionally, if a tenant is selling their business and can transfer their lease to a buyer, a renewal option makes the business more attractive to the buyer.

Watch Out: Issues to be Aware of When Negotiating an Option to Renew

In negotiating an option to renew, a tenant should consider certain issues that will affect their rights:

1. What are the conditions on the option to renew?

2. How will rent be determined?

3. Is an option to extend preferable?

1. What are the Conditions on the Option to Renew?

Landlords can place conditions on an option to renew. Most options to renew cannot be exercised by tenants that are in default at the time that the option arises. Some landlords go further, requiring tenants to make substantial renovations of leased premises in order to renew their leases. A wise tenant should negotiate reasonable conditions on the renewal option.

2. How will Rent be Determined?

Renewal options often state that the rent under the renewed lease is to be set ‘by mutual agreement’ of landlord and tenant. This is not enforceable, and effectively negates the option. Tenants should insist on setting a number ahead of time or, at least, agreeing on a clear method of determining rent. For example, rent could be based on a market value for comparable premises to be agreed upon, but failing agreement, will be determined by arbitration.

Conclusion

The option to renew is a crucial aspect of a tenant’s commercial lease. A poorly negotiated renewal option can lead to the loss of the business, expensive moving costs, or expensive litigation. However, with the help of an rental agreement lawyer, a renewal option can protect a tenant’s rights and the stability of their business going forward.

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