The Option to Extend: Leverage in a Soft Market, Protection in a Tight Market

When market conditions are soft and favor tenants, an extension option in your lease establishes a baseline for renewal/renegotiation discussions with your landlord.  Additionally, a tenant-favorable provision can serve not only as a bargaining chip in negotiations with your current landlord, it can also provide you with price leverage to be used against landlords of competing properties. 

Alternatively, when the market is tight and your landlord has the upper hand, a well-structured option to extend can offer you price protection and serve as a ceiling on the rent for the new lease term.  It can also preserve your tenancy rights and prevent the landlord from leasing your space out from out under you to a larger tenant or to another tenant willing to pay a higher rent.

Checklist for negotiating an option to extend

  • Number of options to extend and the term of each extension period?  If multiple options, may they be exercised simultaneously?  Is the length of each extension period fixed, or may you specify from pre-determined alternative lengths (e.g., 3 or 5 years)?
  • How much prior notice in advance of the option exercise date are you required to provide the landlord?  Are you limited as to how early you give notice?  Is the landlord required to give you a ″reminder notice″ if you’ve failed to timely provide notice to the landlord?
  • Pre-negotiated ″maintenance/repair″ allowance due from the landlord upon exercise of renewal option?  If the allowance is unused, is it available as a rent credit?
  • Extension term rent at lesser of __% of prevailing ″market rate″ or $__ per rentable square foot?  Is extension term rent capped?  If the extension option includes an expansion component, is there a free rent period for the design and build-out of any additional space taken?
  • Is the ″market rate″ linked to comparable transactions for new, non-renewal tenants?  Are the comparable transactions to be in comparable buildings, for comparable space, with tenants of comparable creditworthiness, and for a comparable lease term? 
  • Is the landlord to provide its ″good faith″ estimate of the prevailing ″market rate″ within __ days after receipt of your notice?  
  • If the landlord and you are unable to agree upon the prevailing ″market rate″ within __ days, may you elect to either submit the dispute to expedited arbitration or rescind your exercise of the extension option?
  • Are the selected arbitrator(s) required to be neutral and not have worked with either party within the prior __ years?
  • If you object to the arbitrator(s)’ final determination of the ″market rate,″ may you rescind your exercise of the extension option?
  • So long as you continue to lease at least __% of the original Premises, do you retain your Option to Extend despite having previously sublet/assigned a portion of the Premises?
  • May you exercise your Option to Extend as to either all or any portion of the then-leased Premises (including any space added to the Premises pursuant to your expansion rights)?
  • So long as there is no material “Tenant Default” that has occurred and continued beyond any applicable notice and grace period, do you retain your Option to Extend?
  • In those states retaining the common law distinction between an Option to Extend and an Option to Renew, is the correct term used and the required lease terms sufficiently definite?
  • Has the landlord granted other rights to other tenants that will be superior to your right to extend the lease term?
  • May your assignee or subtenant exercise the options to extend or are they personal to you?

Don Wenig
Blackacre Advisors LLC

DISCLAIMER.   Our writings are from a real estate transaction perspective and for informational purposes only. Nothing herein shall be considered legal, accounting, tax, or architectural advice. Please consult with the appropriate professional(s).

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