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When To Exercise a Lease Option

September 7, 2007

Lease options come in many flavors; a tenant can have an option to renew, an option to expand, an option to terminate, or an option to purchase just to name some of the more common options which are negotiated into deals. Options also exist as first rights to negotiate or first rights of refusal.

For the purpose of this post we’ll focus on options to renew and when tenants should exercise them. When a lease option is negotiated, the language in the lease most often is generally centered around giving the tenant the right to continue or extend their lease at either a pre-determined rate or at a rate adjusted for fair market value. These options often must be exercised months (and in some cases more than a year for large users) in advance.

If a tenant fails to exercise their option then the Landlord has gained a significant advantage in negotiations. As a result it is wise to never let the option period come close to expiring before opening negotiations with a landlord. The difference between having the option to fall back on and not can be significant. By opening negotiations early on tenants can begin to negotiate not only the rental rate (if the option period rent is pegged to market value), but at that point in time essentially everything is negotiable or in play. Tenants can more easily visit tenant improvements, free rent, readjustment of the base year expenses, and perhaps most importantly, the granting of additional options.

Furthermore, it is also important that tenants seriously consider retaining a commercial broker when renegotiating their lease. In fact, landlords often times will pay the broker’s fee so that the broker’s services are free to the tenant. A broker can not only provide market data and present and negotiate alternatives so tenants have a clear picture of the marketplace and the alternatives, but by retaining a broker, a tenant lets the landlord know that they are well-informed tenant and that they have a broker which is likely presenting alternatives leading the landlord to be more reasonable in negotiations.

If all goes well then a tenant and their broker should be able to negotiate an aggressive lease extension which addresses some of the tenant’s other concerns as well (new options, tenant improvements, and so on). In the event that a landlord and tenant are unable to come to terms then a tenant has its option to fall back on so that its tenancy is for the most part ensured.

It is therefore always wise for tenants to consider the many advantages of retaining a broker and to open renewal negotiations far in advance of when the tenant’s option to renew might be expiring.

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