Understanding Lease-Renewal Options

Landlords and leasing agents typically want tenants to sign long-term leases. This type of lease, which may extend over many years, guarantees the landlord a reliable stream of rental income and allows

them to avoid the hassle and expense of re-leasing the space. But if your business is growing and you don't want to lock into a five- or 10-year lease, consider a short-term lease with renewal options.

A renewal clause in a real estate lease allows a tenant to decide whether or not to extend the lease once the initial lease term expires. You may, for example, negotiate a two-year lease with four two-year renewal options, rather than a fixed 10-year lease.

When you discuss renewal options with a landlord, try to negotiate a series of predetermined rent increases for each renewal term. Renewal options that allow a landlord to raise rents based on fair-market rates can result in large rent increases — especially if your business operates in a booming area where commercial space is in demand.