Options in Commercial Real Estate Leases

When you negotiate your real estate lease there are several options to include. The most common is the option to renew. Since landlords will want to raise the rent at the end of the initial agreed period, this will need to be addressed in advance. If you can get an option to renew at a predetermined fixed price, as opposed to renewing at the fair market price, you will likely save money when the initial term of the lease ends, especially if office rents have escalated.

A short lease with one or more options to renew gives you some flexibility. Typically, you have a certain time period before the end of the initial lease term in which you can notify the landlord in writing that you want to renew the lease at the predetermined amount. There may be an additional fee, also agreed upon in the initial lease for exercising your right to stay. Generally, with the exception of the increase in rent, other terms of the initial lease will carry over into the renewal period.

Another option you might include is the option for additional space. Being able to expand is key for a growing business. A landlord who sees the potential of having an important tenant that may attract other businesses, especially in a mall or similar retail situation, may be more inclined to grant you an option for additional space. You will need to examine and negotiate the terms for renting such extra space and make sure the space is suitable to your business needs.

The option for additional space may state that you will expand at the same per square foot rate that you are currently paying, at a fixed rate of increase or at the fair market rate at the time of the expansion. This will need to be determined when working out the initial option agreement. Such an option can only be included if the landlord can reserve or make such space available. A landlord may counter by offering you a right of first refusal, meaning you have first choice on any empty space at the same rental rate that any other tenant will pay. Again, it is a matter of which one of you is in the stronger position.

Also, becoming more common in commercial leases is the option to terminate the lease early. Landlords may offer such clauses to higher profile businesses to entice them to sign longer-term leases and help draw other established tenants into the facility. The landlord will receive some form of compensation if the tenant exercises the option to leave early. In the case of retail leases, particularly at malls, landlords may guarantee a level of occupancy among surrounding storefronts. If that level, for example 75 percent occupancy, is not met by a certain date, the tenant then has the option to terminate the lease.