This post is the fifth installment in our series on commercial real estate leases entitled “The ABCs of Commercial Real Estate Leases”. We’re going to continue our discussion on Lease Options, which we started in our last post. In this post, we’re going to cover one of the more common Lease Options, the Renewal Option, also know as an Extension Option.

What Exactly Is A Renewal or Extension Option?

A Renewal/Extension Option is an option granted to a tenant allowing it to lengthen the lease term at a pre‐defined rental rate. The rate may be a specified dollar amount or quoted as a specified percentage of the market rental for the geographical market in which the property is located. A Renewal/Extension Option typically must be exercised by the provision of notice from the tenant to the landlord within a pre‐ defined time period prior to the expiration of the original lease term.

An Example of A Renewal/Extension Option

The following example of an Extension Option was taken from an actual lease:

Term Extension Option. 8.1 Tenant shall have one (1) option to extend the Term for two (2) years (the “Term Extension Option”, the term of the Term Extension Option shall be referred to as the “Term Extension Period”), upon the terms and conditions contained herein, including without limitation the payment of Tenant’s Proportionate Share of Direct Expenses determined on the same basis as set forth in Article 4 of the Lease except that the Annual Rent for such Term Extension Option shall be at the then‐fair market rate for the Term Extension Period as reasonably determined by Landlord including fair market concessions (e.g., Annual Rent abatement, tenant improvements, etc.), (the “Fair Market Rent”) as set forth below.

8.2 Tenant shall provide notice to Landlord (“Term Extension Notice”) of Tenant’s exercise of the Term Extension Option no later than the sixth (6th) month prior to the expiration of the Initial Term and no earlier than nine (9) months prior to the end of the Initial Term. The Fair Market Rate is the rental rate then being charged by landlords (including Landlord) in the central business district to tenants of a similar credit quality to Tenant for space of similar quality and size as the Premises, taking into account, all relevant factors, including without limitation age, extent and quality of tenant improvements, length of term, amenities of the Building and the Project, location and/or floor height and definition of net rentable area, reasonable projections of Annual Rent, annual Direct Expenses and allowances or concessions that have been granted such as abatements, lease assumptions and existing conditions of leasehold improvement and moving allowances.

8.3 Within thirty (30) days after receipt of the Term Extension Notice, Landlord will advise Tenant of Landlord’s determination of the Fair Market Rate and Tenant reserves the right to rescind its Term Extension Notice by notifying Landlord in writing within ten (10) days after receipt of Landlord’s determination. If Tenant does not timely rescind its Term Extension Notice, Tenant shall be deemed to have exercised the Term Extension Option.

8.4 Tenant may not exercise the Term Extension Option if on the date Tenant attempts to exercise such Term Extension Option or as of the beginning of the Term Extension Period (a) Tenant is in default under the Lease beyond any applicable notice and cure period, or (b) the Lease or Tenant’s right of possession has been terminated, or (c) the Lease is not in full force and effect on said date, or (d) Tenant has assigned the Lease or sublet all or any portion of the Premises.

8.5 Following exercise by Tenant of the Term Extension Option, at the request of either party hereto and within thirty (30) days after such request, Landlord and Tenant shall enter into an amendment to the Lease confirming the terms, conditions and provisions applicable to the Term Extension Period as determined in accordance herewith.

Breaking Down Renewal/Extension Options

When reviewing or abstracting a Renewal or Extension Option, some of the more important elements to look for are (using the above example):

  • Renewal term: Two (2) years
  • Notice Dates: No later than 6 months and no earlier than 9 months prior to the end of the Initial Term
  • Renewal Rent: Fair Market Rent as defined in Section 8.2, including fair market concessions
  • Actions or conditions that nullify the option: (a) Tenant is in default; (b) Lease/Tenant’s right of possession has been terminated; (c) Lease is not in full force and effect; (d) Tenant has assigned/sublet
  • Is Landlord required to provide Tenant the market rent within a specified time period?: Within 30 days of receipt of Tenant Notice
  • Does the option provide for a Tenant Improvement Allowance?: Fair Market Rent is to include fair market concessions but no specific TI Allowance noted.
  • Other: Tenant has a right to rescind its Term Extension Notice within 10 days after receipt of Landlord’s determination of Fair Market Rent.

More On Commercial Real Estate Lease Options

If you’d like to learn more about commercial real estate Lease Options, be sure to read our previous post on the subject and watch for our upcoming posts. You can also download a copy of our comprehensive primer on commercial real estate leases called “The ABCs of Commercial Real Estate Leases” from our Library.

By Terry Banike, Marketing Manager, Realogic