The Basics of Pro-Landlord Renewal Options
Tenants invariably ask for options to extend when they negotiate their leases; if they have sufficient leverage, they get them. Since options only benefit the tenant (especially fixed rent options), landlords are wise to use tightly drafted clauses which limit the circumstances permitting exercise by the tenant and specify in detail the business terms for the option period and the manner of exercise.
Of course, the tenant also wants the business terms be clearly stated. Beyond that, the tenant wants the option clause short and sweet, without extensive contractual requirements concerning exercise and without conditions that must be met to permit exercise.
The well-drafted pro-landlord option clause includes the following:
- Obviously, the number of option periods.
- The exercise dates by which the tenant must give notice to the landlord of its intent to exercise the option. Often, option clauses will specify a “window” for exercise by the tenant (e.g., not sooner than twelve months before the expiration of the term and not later than six months prior to the expiration of the term). A “not sooner than” date may be especially important if rent is set at the market as of the date of exercise or soon after (unless the clause otherwise covers the issue). Ordinarily, the “not later than” date must give the landlord enough time to find an alternate tenant and negotiate a new lease if the option is not exercised. It is crucial to include at least a “not later than” date for exercise, since without such a provision the tenant can generally exercise at any time prior to the expiration of the initial term.
- The manner of exercise. Almost always, the exercise notice must be in writing; usually it must be delivered or sent to the landlord in accordance with the notice clause in the lease. Often, the clause will specify that strict compliance with the manner specified for exercise is required in order for the notice to be effective.
- The rent during the option periods. The rent can be specified in a number of ways. It can be fixed or stepped up over the option periods. It can be set by an index (e.g., the Consumer Price Index). It can be set by the market. Or it can be set by agreement of the parties or by appraisal. If the option rent is to be set by appraisal, then it is important to specify if the tenant will be allowed to terminate in the event the rental exceeds a certain amount after it is determined.
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