Negotiating renewal options in a commercial lease agreement
Commercial leases tend to be for longer periods than other landlord-tenant agreements. It is therefore easy for a tenant to overlook renewal options during a commercial lease negotiation. This is a mistake; forgetting or underestimating the importance of a renewal option can backfire on a tenant.
A good renewal option on an initial lease can reduce negotiation time when the initial lease is up and provide savings to the tenant. Landlords, on the other hand, will want renewal options that are easy to invalidate based on minor breaches of contract and allow for significant rent increases.
Tenants, therefore, must keep in mind two important items when negotiating lease renewal options:
- A lease can always be renegotiated, but an advantageous renewal option provides a very good fallback option for the tenant.
- Rent increases are not set in stone, but a renewal option that favors the landlord puts the tenant in a bad position to negotiate.
Renewal terms can vary
Generally, renewal options include the same terms and conditions as the original lease agreement, except for rent, financial incentives and the renewal clause itself.
Many tenants approach a lease renewal as the only option to continue to stay in the same location. Yet this is not the case. Well-informed tenants may want to begin completely renegotiating the terms of the lease well in advance of the lease’s expiration. In this situation, a tenant can view a lease renewal option as a safety net of sorts. If all else fails, they can receive similar terms to the lease agreement, absent rent. Unsurprisingly, landlords will likely try to increase rent after the initial lease is up.
However, that is not to say that a rent increase is inevitable. Depending on market circumstances, a rent decrease may be appropriate. In fact, it is not unheard of for a landlord to provide renewal incentives to existing tenants in order to keep a solid tenant from leaving.
Options for renewal depend on circumstances
Negotiating a commercial lease is highly dependent on the circumstances. For example, if a tenant must make significant improvements to commercial property, it may make sense to negotiate a long-term lease, rather than a short-term lease, which can mean rent increases and less money available for improvements.
However, a long-term option that is in the best interests of the tenant may be the exception rather than the rule. Many tenants favor a short-term lease in order to provide flexibility and avoid becoming overburdened by a lease agreement. A short-term lease makes having a favorable renewal option all the more important to a tenant, however.
Experienced representation helps
For commercial tenants, running the day-to-day operations of the business often leaves little time to consider all of the options available in a lease renewal. The experienced commercial real estate attorneys at The Weaver Law Firm can help commercial tenants avoid common pitfalls in lease agreements, provide favorable terms and ensure that the tenant can focus on what they do well – running a business.