As tenants consider a new commercial lease, several benefits are worth noting. The location, facility upgrades, signage rights and even building efficiencies are often heavily weighted in a lease decision. However, another benefit should not be overlooked as negotiations take place: the renewal option.
While the majority of commercial office leases are long term — ranging from five to 10 years — they usually also contain guidelines for extending the lease beyond its initial terms. This renewal option allows the tenant to decide whether to continue leasing the space, and may also give the tenant unique leverage in renewal negotiations. Because it limits landlord flexibility in marketing the space, some commercial property owners may be hesitant to grant renewal options. That said, many consider it a necessary evil, as the majority of prospective tenants will require it.
The final agreement should outline several key points that will help a potential tenant weigh the value of the renewal option and ensure a favorable outcome:
Not only should the clause specify the notice period for the tenant to exercise his or her right to renew, it should also indicate the term of the renewed lease. In both cases, tenants should work to include as much flexibility as possible. By outlining a longer term to give notice of renewal, tenants give themselves a chance to investigate other options within the market. What’s more, a flexible renewal term — one that lets tenants choose how many years will be added onto the lease — may help a business ride out tight market conditions.
A renewal clause will occasionally include predetermined rent increases. If this is the case, tenants may end up paying a premium. A better approach is often tied to the fair market value of the property and lease terms. While this method of negotiation leaves some factors undetermined, a tenant can protect his or her interests by clearly outlining the definition of “fair market value.” Does it include tenant improvement allowances or other concessions? A minimum and maximum rent amount? As tenants secure these details, they position themselves for a fair outcome.
The future of the commercial real estate market can be difficult to predict, but a well-negotiated renewal option protects tenant’s rights and offers valuable negotiation leverage. Because of it’s impact on any business, this contract element is a crucial one that may be best handled by a tenant’s agent. Contact Intelica Commercial Real Estate to consult with one of our commercial real estate professionals about your lease renewal.