Renewal option strategical negotiation most likely wasn’t the most important topic you negotiated your original lease with your present landlord. However you now are looking at the end of your lease term and you need to know the best way to take advantage of your renewal option. he renewal clause gives you the opportunity to decide if you want to extend your original lease before your present lease expires.
The catch is that you have to follow the requirements of the renewal clause precisely or a tenant may loos e their opportunity to exercise their right to renew. This is why it is important to consider the renewal option before you sign the original lease. The terms and conditions expressed in the renewal clause are set once the original lease is signed.
Renewal Option Key Elements
They key elements of the renewal option strategical negation are usually defined by terms in the lease. Some of these terms are fair market value, notice period, rental rate, improvement allowance and term.
Fair Market Value: In many landlord leases they will state that the rental rate at the time lease option is exercised the new rental rate will be at fair market value. This is a very loose definition and needs to be more specific. You want to have a little to the landlords decision as to what fair market value is when the option is exercised. I often like to use language that specifies the addresses of comparable buildings that indicated the most recent lease terms on leases completed in the past six months define fair market vale. You can also use leases completed in the landlord’s buildings over the past six months. In the event that both parties cannot agree on fair market value there should be a mechanism for arbitration inserted into the renewal option clause.
Notice Period: Two points to be discussed regarding the notice period. First as a tenant you want to have as much time as possible to evaluate your options so you want a long notice period. A twelve month period is an excellent option. Additionally the tenant has a responsibility to give notice to the landlord that they are going to exercise their option. Don’t forget to give your landlord notice before the timeline expires.
Rental Rate: If you negotiate a lease with a renewal option that has a predetermined rental rate negotiated into the option. This is not something that happens very often.
Improvement Allowance: When a new lease is negotiated it usually has new office space and amenities. At the end of a seven year term the walls scuffed and carpet worn. You may even want to change some of the offices sizes. Therefor it is important that the renewal option clause also has conditions to address a new construction allowance. You can tie the allowance to what your negotiated in the original lease with an CPI increase or base it upon what your landlord has offered to tenant over the past six months with proration of the allowance based upon the term of the renewal compared to the term of the offer made to others.
Term: this addresses the length of the renewal period. It is typical to get a three, five or ten year period based upon the type of business. A doctor usually would like a longer term and a new business may want a three year term.
While negotiating the renewal option remember that the only party that benefits from the renewal option is the Tenant. There really isn’t a benefit to the landlord because it encumbers his property. He has to hold the space until the notice period expires because he doesn’t know if the tenant will exercise the option or not.
This clause doesn’t appear to be important during the excitement of negotiating a lease in a new space. However it could have a big impact upon your business when the lease is ready to expire. Don’t overlook the importance of properly negotiating the renewal option clause.
A professional tenant representative and attorney can help you insure that this clause is properly negotiated and documented in your lease. This is just one of the many services offered in our tenant representation service.