A renewal option is a common contract in the real estate business, usually involving atters in the rental lease agreements.
Check out the link below if you want to find more on the types of lease agreements, and what can you expect in all of them.
LINK: 3 Types of Commercial Real Estate Leases
Although renewal options of the lease apply to a specified time period, leases can be extended for another term – if the participating parties agree with it.
Renewal options usually come with certain specifications or conditions. Some basic ones are when the lessee must let the landlord know if they want to renew the place.
But there’s much more to that…
Renewal Option Definition
A renewal option is a financial agreement clause that outlines the terms for renewing or even extending an original lease agreement.
The renewal option agreement provides specifications under which the entities (tenants) can renew or extend the original terms for an additional.
A renewal option allows the lessee to apply for these additional options, for a specified time period, but only if agreed upon by all the participating partakers.
A renewal options agreement usually comes with specifications or conditions. Some of them are when the lessee must inform the landlord of the future renewal.
(Lease) Renewal Options From a Landlord’s Perspective
Most landlords prefer to avoid renewal options and extend the term of a lease. But – renewal options can be a valuable inducement to tenants, so landlords will frequently agree to grant them.
Now, from the landlord’s perspective, how to evaluate and craft a renewal option to extend?
Use Term “To Extend” (Avoid “To Renew”)
There are differences between an extension option and a renewal option. Renewal options usually create a new leasehold estate, surrendering the original lease.
Landlords might end up exposing themselves to an argument where the lease repeats all of the landlord’s lease concessions.
Stick with the “extension option” language (and stay away from the “renewal options” language). This will help you continue the existing leasehold of the estate.
Questions to Ask As The Landlord
Before drafting a renewal option agreement – or, as we’ve said – an extension option agreement to extend provision for a lease, all the involved parties should be able to answer the following questions/concerns. This also applies to the letter of intent.
- The number of extension periods for the tenant and how long will each period last? (Bothe preferably limited)
- Timetable for notifying the landlord of the renewal options: Landlords need time to find new tenants if the existing one does not agree with the renewal options.
- How will the tenant’s notice be provided? Must be in writing.
- What terms of the initial lease will be excluded from the renewal options? Avoid repeating rent discounts and construction build-out requirements.
- Determining the rent amount. Stay away from expressions such as “to be agreed upon”.
- Conditions on tenant’s right to exert renewal options in the lease term. Tenants should not have renewal/extension rights if they’re not under the lease.
- How will an extension/renewal option affect other lease provisions in the agreement? Do not overlook the notice, assignment/sublet, successors, alterations, security deposit, and rent clauses, etc. in the lease.
Hopefully, this article will help identify and evaluate all the issues once you as the landlord agree to grant a renewal option and extend the term of a lease.
Before drafting a lease or letter of intent, feel free to contact the IPG team for any questions, help and contract drafting. We know exactly how many issues can emerge and should be considered during renewal options.
Armed with more than the ideas described above, we are in a better position to address all the interested parties’ respective rights and obligations, and achieve mutually agreeable and practical solutions for renewal options.