If negotiated property your lease should contain a renewal option which is a section in your commercial lease that gives you the power of deciding whether or not you want to extend your lease beyond the initial term. This is a benefit to you as it gives you control over the space and the landlord cannot lease it out from under you.
Landlords don’t just give away renewal options because it limits their ability to lease the space to other tenants. You have to negotiate this up front, and landlords will give you this option if they think it will seal the deal. The renewal option will typically outline the lease term of the renewal, when you are required to exercise it, and either the lese rate amount or method for calculating it. Below are a few points to consider when negotiating the renewal option in your commercial lease.
Renewal Notice – This will typically be 6-12 months before your existing lease expires. You want this period to be as long as possible so you and your agent have time to evaluate other options, get proposals, and compare the alternatives to your existing space.
Lease Term – Try to ask for a renewal term with a range of time frames. For example 3-5 years. This gives you more options.
Base Year – If your lease is a base year lease now is the time to reestablish that, especially if taxes have significantly increased since you initially signed your lease.
Lease Rate – In some cases it’s smart to establish a ceiling (specific lease rate) in the renewal option so they can protect themselves in the event lease rates continue to increase. If you do keep in mind that you don’t have to stick with that. If market rates go lower than what is stated in your renewal option then you would essentially renegotiate the lease rate. In other cases it’s best to just negotiate the lease rate during your renewal option negotiations. It will typically be at market value or what other similar buildings are getting during that specific market.
Renewal Options Protect You! What if another tenant was willing to pay more than you for a space, or a larger tenant wanted to expand, or you spent a huge amount of capital on tenant improvements? If you didn’t have a renewal option then you don’t have any rights to remain in the space. The landlord could simply lease it to someone else………regardless if you just sunk $200,000 into it.
Personal Guarantees – If you had to sign a personal guarantee for the initial lease term and you have paid rent on time every since then, NOW is the time to renegotiate the personal guarantee. Get Yourself OFF the personal guarantee!!
Other items – Now is the time to really think about your current and future needs and ask for those items up front. If there were things in the original lease negotiations that you did not like, now is the time to renegotiate those items. Ask for them!!