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Tenants Can Utilize a Renewal Option as an Alternative to a Lengthier Commercial Lease Term

By Dolores R. Roberts

A renewal option contained in a lease agreement can be a vital provision for the success of a business owner.   When negotiating a commercial lease, it is essential that a tenant take into consideration various factors when determining the term of the lease such as the nature of the business, the rent amount and the length of time the business has been operating.  Perhaps the most important factor to consider is the location of the leased premises, which will invariably dictate whether the lease is long term or short term.  If the location is favorable for a particular type of business, a business owner may still be hesitant to enter into a long term lease.  As an alternative, the tenant can negotiate a renewal option, which would give the tenant the option to renew the lease agreement for a specific term by providing notice to the landlord of the intent to exercise the option prior to the end of the initial lease term. 
   

A renewal option may provide a tenant with leverage upon the renewal that is not otherwise available during the initial negotiation of a lease, particularly if the tenant has proven that it is a viable operation that will be a good long term tenant.  Landlords are going to be more willing to make concessions for a good tenant.   The terms of the renewal may be laid out in advance in the initial lease, and the renewal may call for an increase in rental based on the Consumer Price Index, a percentage of the rent, or fair market value of the premises.   If the parties use the fair market value, or a percentage thereof, then the method of determining the fair market value should be drafted into the initial lease.  This will avoid an unnecessary dispute at the time of renewal.  In addition, the timing, who hires the appraiser, and who pays for the appraiser should be specified in the initial lease.   It is also advisable to include what factors may be considered in the appraisal.  For example, a tenant should seek to exclude its installations and fixtures that are to be removed at the end of the lease term from being considered in the appraisal.

When carefully drafted, a renewal option can provide a tenant with flexibility, rather than putting the tenant in a position where the business is incurring the financial risk of a long term lease during uncertain economic times.  Moreover, landlords are typically willing to include a renewal option in a lease, and the renewal may provide the tenant with a method to renegotiate more favorable lease terms.

Full post as published by New Jersey Law Blog on September 08, 2010 (boomark / email).